Nature-related risk and opportunity management and disclosure

The Taskforce on Nature-related Financial Disclosures (TNFD) has launched the second version of its beta framework for nature-related risk and opportunity management and disclosure.

The first iteration of the beta framework released in March has generated an overwhelmingly positive response from market participants with over 500 feedback contributions received from more than 130 market participants and stakeholders across 37 countries/jurisdictions and all five continents.

While the TNFD draft disclosure recommendations, core concepts and the LEAP (Locate Evaluate Assess Prepare) assessment approach in March have not been significantly changed, this second iteration of the framework includes several enhancements and additional elements, including:

• A draft architecture for metrics and targets and an illustrative set of assessment metrics to support pilot testers;
• Further guidance on how to undertake dependency and impact evaluation as well as the identification of priority locations as part of the LEAP approach;
• An overview of the Taskforce’s approach to the future development of additional guidance for market participants, including sector classifications aligned with the approach taken by the International Sustainability Standards Board (ISSB);
• Enhancements to the LEAP approach for financial institutions (LEAP FI) first released in March; and
• Additional practical guidance for market participants interested in starting to pilot test the beta framework from 1 July 2022 to 1 June 2023.

There are due to be two further beta drafts to be launched in October 2022 and February 2023 ahead of the TNFD’s planned final recommendations in September 2023.

The Taskforce’s approach to measurement of nature-related dependencies, impacts, risks and opportunities seeks to strike a balance between the complexity of the science, and the needs of the market participants for clear, simple and comparable information to inform strategy, governance, risk management and capital allocation decisions.

The proposed approach in the v0.2 update release distinguishes between assessment metrics and disclosure metrics, recognizing that, as with mainstream financial management and reporting, what gets disclosed to report users is only a sub-set of what gets analyzed internally to inform risk management and decision-making.

Like the TCFD, the TNFD has also focused its attention initially on a cross-sector approach to metrics. The Taskforce will develop additional sector-specific metrics as part of specific guidance in future releases. The Taskforce will not make final decisions on ‘core’ and ‘additional’ disclosure metrics until the final release in September 2023.

The v0.2 release also includes a set of illustrative assessment metrics for dependencies and impacts on nature. These are drawn from existing metrics in use in the market today as recommended by standards and scientific bodies, including the TNFD’s 16 Knowledge Partners. These have been set out by the Taskforce to support pilot testers with dependency and impact analysis aligned with the LEAP approach. The set of illustrative metrics will be expanded to include risk, opportunity, and response assessment metrics as well as disclosure metrics in future releases.

Recognizing that the landscape for metrics and target setting involves many other actors whose work is also still under development, the TNFD has also recommended a review process as part of its overall approach to help ensure that changes in data and measurement technology, investor expectations and regulatory requirements can be accommodated over time.

It is the intention of the Taskforce to learn from pilot testing and feedback over the next 12 months to arrive at a manageable set of disclosure metrics for nature-related dependencies, impacts, risks and opportunities by the time the Taskforce publishes its final recommendation in September 2023.

Conceptually, metrics and targets (and data) need to line up at three different levels – global (the level of coordinated international policy), national (the level of national regulation and law) and local (the ecosystem level where business interface with nature).

With respect to the global action on climate change, this ‘architecture for action’ is fully developed. But for coordinated global action to tackle nature loss and achieve global targets that address nature loss, the architecture for action is largely incomplete. The TNFD is engaging with international actors developing nature-related targets at the global, national and local level to encourage coordinated action.

At the global level, the TNFD seeks to align with the environment-related Sustainable Development Goals and the post-2020 Global Biodiversity Framework currently being negotiated through the UN Convention on Biological Diversity (CBD) COP 15 process. At the organizational level, the TNFD also seeks to align with the corporate target-setting approach developed by the Science-Based Targets for Nature (SBTN).

One area of feedback since the March release is that nature and nature-related risk and opportunity assessment is new and unfamiliar to most market participants and that additional detailed guidance from the TNFD would be helpful. This update of the TNFD beta framework therefore includes additional guidance, including on the LEAP approach and additional guidance on pilot testing for those corporates and financial services organizations interested in testing the potential application of the framework in more detail.

Further sector-specific guidance and guidance on the use of scenarios is under development and will be provided in draft form for consultation in subsequent releases in November 2022 and February 2023. The specific guidance the TNFD develops will be designed to be interoperable with different sectors and industry classification schemes. For the financial sector, the TNFD will organize guidance into the four major financial services industries identified and defined by the TCFD (banks, insurance companies, asset managers, asset owners), with the addition of Development Finance Institutions, given their important role in nature-related financing in emerging markets, including in many nature hotspots.

While the TNFD recognizes that every non-financial sector is affected by nature-related risks and opportunities, the Taskforce has developed an initial list of eight thematic non-financial priority sectors, which it considers to be priorities for the development of additional guidance, these including food and beverage, consumer goods, renewable resource and alternative energy, infrastructure, extractives and mineral processing, health care, resource transformation and transportation.

TNFD’s LEAP approach, released as part of the first release in March, has generated a lot of interest, support, and feedback from a wide range of market participants. While the draft disclosure recommendations and core LEAP approach is sector-agnostic and has not been updated in this release, the TNFD’s recognizes the unique needs of the financial services sector. A first attempt at providing specific guidance based on distinct characteristics of an organization, was the development and refinement of a LEAP approach for financial institutions (LEAP FI), clarifying different entry points for financial institutions based on the nature of their business and their investment or credit portfolios. The LEAP FI is designed to enable financial institutions to progress to the ‘Locate’ or ‘Evaluate’ phase of LEAP, as appropriate for their specific business activities, the type of asset classes and the appropriate level of aggregation and scale in their portfolio. Pilot testing of the framework should help to inform further iterative development and improvement of the LEAP approach.

Get in touch with a KPMG professional for further insights on how they can help support your organization to pilot the TNFD framework and manage nature-related risks and opportunities.