The heat is rising, both globally and on corporations to make robust climate and biodiversity related risk disclosures. Over the past year Australian corporate regulators have begun to enforce robust reporting on climate change related risks. Failing to comply with disclosure obligations will place company directors at risk of offending the requirements of the Corporations Act 2001 (Cth), namely sections 180(1), 181(1) and 299A(1)(c).
Now, the 'over the horizon' prospect of mandatory biodiversity loss risk disclosures is likewise approaching with greater velocity, particularly given the creation of the Task Force on Nature-Related Financial Disclosures (TNFD) which will release its biodiversity loss risk reporting framework in the second half of 2023.
This framework is anticipated to be used to inform biodiversity loss risk disclosures in the same way that the Task Force on Climate-Related Financial Disclosures (TCFD) framework informs climate change risk disclosures.
Trends indicate Australian corporations will be required to make disclosures in accordance with the TNFD framework, once it has been released. Boards should begin preparing themselves for the impending reality of being required to disclose biodiversity loss risk in the next two to three years.
Good board oversight mandates that directors implement a process for identifying developments in this area, and revisit the topic periodically to remain abreast of changing and increasing obligations.
Further, it is prudent for boards to explore at this early stage how biodiversity loss risk could be integrated into existing ESG frameworks and how it might align with climate change disclosures.
This Insight explores how boards can prepare themselves to disclose and financially account for biodiversity loss risk. The key takeaways are:
- The TNFD framework will incorporate the concept of double
materiality, meaning corporations will need to report on their
short, medium and long-term biodiversity impacts and
- Key aspects of the TCFD framework and anticipated TFND
framework have already been proactively incorporated into financial
institutions, banking and corporate sustainability reporting
requirements in the European Union.
- To be ready to adapt to this new standard of disclosure,
Australian corporations will need to investigate the current
biodiversity impacts and dependencies in their value chain, and
begin to consider appropriate metrics, targets, internal reporting
mechanisms and viable risk mitigation strategies. The disclosure
regime is likely to be inherently complex and will require a deep
dive into all parts of the organisation and supply chains.
- The boards of Australian corporations that choose to commence
exploring this issue now will be 'ahead of the pack' and
will benefit from the insights and development of frameworks,
metrics and tools currently occurring in Europe.
- Becoming biodiversity-literate and facilitating reporting mechanisms for biodiversity loss risk will be increasingly vital to managing stakeholder pressures to report, securing finance, predicting threats to liquidity, avoiding class actions and meeting investor expectations.
Biodiversity loss risk and the TNFD
The new ESG 'frontier' was canvassed in the first Corrs' Insight in this series, which discussed the meaning of biodiversity loss risk and international developments including crucially, the establishment of the TNFD. The TNFD has caught the attention of French President Macron, who stated:
"With the Task Force on Climate-related Financial Disclosures, TCFD, we managed to shift private finance and we need to do the same with TNFD."
Put simply, the objective of biodiversity loss risk disclosure is to financially account for biodiversity-related impacts or dependencies of businesses.
How that financial accounting will look in reality will be influenced significantly by the TNFD. The TNFD's recommendations are due to be released in the second half of 2023.
The anticipated TNFD framework - what do we know so far?
The TNFD Informal Working Group has provided preliminary guidance regarding what the biodiversity-related risk reporting framework will look like. It has prioritised maintaining compatibility with the TCFD Framework, released in 2017:
". the TNFD has adopted the same four pillared framework as the TCFD.
We are very aware that it will be the same teams within businesses and financial institutions that will work at implementing both in practice, and so we must be mindful to make it as easy as possible to operationalise tackling nature and climate-related risks simultaneously."
France's Article 29 has also been influential; in its analysis of the new legislative provision, the TNFD announced that it would mirror the French framework by including:
". disclosure recommendations for both impacts and dependencies on nature. This is a departure from the TCFD, which only requires financial institutions to disclose dependency-related risks."
Shape of prospective reporting framework
The TNFD has already indicated it will adopt the concept of double materiality incorporated into Article 29.
Double materiality is the notion of reporting bi-directionally on both 'dependencies' and 'impacts'. In the context of biodiversity loss risk, it would take the form of corporations reporting on both:
- Financial materiality - the impact of
biodiversity-related dependencies and biodiversity loss risk on the
company's financial position and ability to realise its
- Environmental and social materiality - the impact of the company's activities on global biodiversity.
Double materiality has also been incorporated into the EU Guidelines on Reporting Climate-Related Information (2019) and the EU Biodiversity Strategy for 2030.
TCFD as a base
Having a working understanding of both the climate-risk reporting framework established by the TCFD, and the operation of Article 29, would stand boards and directors in good stead in preparing for the introduction of biodiversity loss risk reporting as a component of financial disclosure.
The TCFD Framework sets out four categories of disclosure regarding climate-related risks:
- Risk Management; and
- Metrics and Targets
Disclosure under this framework is increasingly being enforced by ASIC and the ASX Corporate Governance Council as an aspect of directors' duties under sections 180(1), 181(1) and 299A(1)(c) of the Corporations Act 2001 (Cth). This was discussed in detail in a recent Corrs' Insight. Biodiversity-related risk disclosure may gain the attention of ASIC and ASX in the same way.
Extrapolating from the provisions of the TCFD Framework, a biodiversity loss risk reporting framework may take shape as follows:
- Which processes does the board follow to remain informed on the
company's biodiversity loss risk exposure and biodiversity loss
- What is the role of biodiversity related considerations in the
company's business plans, and strategic and management
- How are biodiversity related responsibilities integrated into
the duties of senior management level positions?
- How have internal monitoring and reporting mechanisms been implemented?
- What are the short, medium and long-term biodiversity loss risks and biodiversity related dependencies for the business? Identifying biodiversity loss risks and knowing where to start is not an easy task. The impacts of some business activities are obvious and can be both positive and negative. For example, the taking of water from a natural water source under licence for an industrial activity. Assuming appropriate licences are in place, the taking of water could still impact the natural water sources and ecosystems which in turn, threatens the water sources long term viability.
Biodiversity impacts may also happen in the supply chain and these will need to be identified. Examples of biodiversity impacts are pollution, resource exploitation, land degradation, invasive species and climate change. Biodiversity dependencies may also be difficult to identify, for example, market volatility as a result of ecosystem collapse or stranding of agricultural assets as a result of water pollution.
- What are the actual or projected impacts of biodiversity loss
risks for the company? Consider in relation to factors such as:
products and services; supply chain and/or value chain; adaptation
and mitigation activities; investment in research and development;
operations; operating costs and revenues; capital expenditure and
capital allocation; and access to capital.
- Biodiversity loss risk is intrinsically related to climate
change. Resilience testing would likely be required for the
company's biodiversity strategy including in the context of two
hypothetical global scenarios:
- Successful transition to lower-carbon economy (conceptualised
as a Paris Agreement, 2°C or lower scenario); and
- Unsuccessful global transition to a lower-carbon economy i.e. continued progression of global warming at present or accelerated rate.
- Successful transition to lower-carbon economy (conceptualised as a Paris Agreement, 2°C or lower scenario); and
- Which processes have been used to define, conceptualise,
identify and classify biodiversity-related risks within the
company? As identified above in 'Strategy', this is for
some businesses, not an easy task.
- Which decision-making frameworks have been utilised to mitigate
and address biodiversity-related risks, and to make materiality
- How have biodiversity loss risk considerations been integrated into the company's overall risk management protocol?
Metrics and Targets
- Which key metrics were/will be utilised to quantify
biodiversity related risks? Currently, there are a variety
of tools, metrics and assessment methodologies available. As
biodiversity loss risk reporting in Europe begins to develop and is
tested by financial institutions and large corporations, it is
anticipated that it will become clearer what will be the most
appropriate to implement and use for various businesses in
- What are the company's key biodiversity-related targets?
Specify the time frame and performance indicators applicable for
each target. These targets are likely to be refined as
international targets are set and adopted at a domestic
- How have biodiversity-related targets been incorporated into performance and remuneration policies?
Where does this leave us?
While biodiversity-related risk reporting has been positioned as the next layer of financial disclosure, there remains a lack of robust, standardised metrics and targets for measuring biodiversity impacts. As a consequence, there is a lack of data that can be properly utilised for decision making in a corporate environment.
Significant data gaps can make it difficult for corporations to accurately and adequately assess their biodiversity-related risks and impacts.
This has been acknowledged by the TNFD:
". to integrate nature-related risks in their decision-making, financial and corporates need decision-grade data, and right now, that's not available. To close the data gap, both corporates and financial institutions must measure, track and disclose their impacts and dependencies on nature."
In terms of tangible targets, while a corporation could adopt its own targets, as noted above, we think that it is likely that in the near future international biodiversity targets will be adopted which will guide domestic policy. The outcomes of the UN Biodiversity Conference (COP 15) in Kunming, China in October 2021 will provide significant direction on the international front where it is anticipated that new targets will be set.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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