Head of ESG Rachel Richardson, investment management partner Lora Froud and trainee solicitor Ashley Mount have written the below article for Law 360. This was first published on 24 October 2023.
The Taskforce on Nature-related Financial Disclosures, or TNFD, is a task force made up of 40 senior executives, established in 2021 in response to the need to factor nature-related risks and opportunities into financial and business decisions.
The task force has produced a risk management and disclosure framework that was first published in September1, having been preceded by four beta releases, and is now in its final form.
The task force is structured as a framework of recommendations for business and financial institutions but can also be used as a guideline in a variety of sectors and in organizations of any size. It sets out to provide principles-based guidance for how nature information should be structured. This can be differentiated to the reporting standards, such as the International Sustainability Standards Board, which is a disclosure standard providing specific and detailed requirements for what should be reported.
In this article we provide answers to some of the key questions asset managers have been asking, including the relationship between the TNFD, the Task Force on Climate-Related Financial Disclosures and the Sustainability Standards Board, if or when the TNFD recommendations will become mandatory and what managers can do to prepare for nature reporting2.
Will the TNFD Recommendations Become Mandatory?
At this point in time there is no law or regulation requiring mandatory TNFD reporting.
However, the U.K. government agreed in Target 15 of the Global Biodiversity Framework at COP 15 of the United Nations Convention on Biological Diversity in Montreal in December 2022 that they would "take legal... measures to encourage and enable businesses, and in particular to ensure that large... financial institutions... regularly monitor, assess and transparently disclose their risks, dependencies and impacts on biodiversity... financial institutions along their operations, supply and value chains and portfolios"3.
In April, the U.K.'s updated Green Finance Strategy stated the U.K. government's intention to implement the TNFD recommendations in the annual reports and accounts of central government4. Currently, it is expected that this will be done by way of a three-year phased implementation and should be completed by 2026. They will also explore how best to incorporate more broadly the final TNFD recommendations into U.K. policy and legislative architecture.
This is a good indication that TNFD reporting will become mandatory for certain types of entities in the UK, however given the length of time legal and regulatory change takes and the requirement for testing of the disclosure framework, we would expect that mandatory TNFD reporting is unlikely to arrive in the next two years.
When or if TNFD reporting is made mandatory, from an asset manager perspective, the dates for such reporting requirements are likely to be determined by a manager's structure and assets under management.
How does the TNFD relate to the TCFD and the Sustainability Standards Board?
The climate-related financial disclosures task force was established in 2015 and the two disclosure frameworks share common themes and complement each other. Many of the TNFD task force members were members of the climate-related financial disclosures task force and the TNFD is described as taking inspiration from the climate-related financial disclosures task force.
Both initiatives seek to use the power of risk management and disclosure framework from companies to investors and lenders to shift capital flows to more sustainable outcomes.
For example, both frameworks and the Sustainability Standards Board use the four pillars of:
- Governance;
- Strategy;
- Risk and impact management; and
- Metrics and targets.
While the climate-related financial disclosures task force relates to climate, the TNFD specifically relates to nature-related dependencies, impacts, risks and opportunities and therefore does not have the advantage of a single accessible data point with a clear methodology for calculation i.e., carbon and greenhouse gas equivalents using the Greenhouse Gas Protocol utilized in climate-related financial disclosures task force reporting.
The TNFD recommendations have aimed to use language, structure and concepts that are aligned with those of the climate-related financial disclosures task force and the Sustainability Standards Board to facilitate the reporting and disclosure obligations of adopting entities. The TNFD has also tracked across the climate-related financial disclosures task force's nature-related recommended disclosures, only including further recommendations where necessary5.
Where to Make Disclosures
Organizations that register their intention to adopt the TNFD recommendations should publish their disclosures together with their financial statements as part of the same annual reporting package. This is consistent with the Sustainability Standards Board approach and other regulatory requirements.
Selecting Data
The framework sets out a leading indicators approach to reporting, which is partially made up of profit and loss accounts, a balance sheet, and cash flow statements, similar to that used in mainstream financial reporting. There are also elements of macroeconomic reporting incorporated that concentrate on factors such as gross domestic product, unemployment and inflation.
The general requirements listed go further than those given by the Sustainability Standards Board and are to be applied by all adopting entities to ensure consistency across the frameworks. These requirements describe:
- The application of materiality;
- The scope of disclosures;
- The location of nature-related issues;
- Integration with other sustainability-related disclosures;
- The time horizons considered; and
- The engagements of indigenous peoples, local communities and affected stakeholders in the identification and assessment of the organization's nature-related issues.
The TNFD suggests a variety of indicators on which adopting entities should report for each of the 14 recommended disclosures. The potential number of such indicators was 3,000 in Beta versions of the TNFD. The appendices of the published framework set out the indicators and metrics in more detail so as to provide more information about the data that should be selected and reported on.
What Asset Managers Can Do to Prepare
Asset managers can prepare to disclose against the TNFD framework using the first published edition of the recommendations and related guidance on getting started with making disclosures.
A starting point would be for asset managers to familiarize themselves with the concepts in the TNFD and then move on to apply the LEAP approach to their funds, considering different fund strategies, asset classes and geographies.
Ideally this would also include a breakdown of biomes and ecosystems. The LEAP approach requires asset managers in respect of their funds to:
- Locate their interfaces with nature;
- Evaluate their dependencies and impacts on nature;
- Assess their risks and opportunities; and
- Prepare to respond and report.
The TNFD also released additional guidance in September for financial institutions that anticipates asset managers following some of the recommendations contained in the International Financial Reporting Standards' S2 climate-related disclosures, e.g., the breakdown of reporting into sectors and use of the Global Industry Classification Standard for presenting the information. Sectors in similar geographies will often be affected by nature loss in a similar way. The guidance also includes links to some examples of practical application6.
Challenges
Scenario Analysis
This is more challenging with respect of nature. The TNFD recommends scenario analysis is performed at each stage of the LEAP process, although the scenarios themselves are less clear for nature. For example, for climate, scenarios can be linked to a specific rise in global temperatures.
However, with respect to nature, the TNFD notes that plausible futures could be used as the scaffolding for effective scenario analysis, although, what those scenarios actually are is in the hands of the entity preparing the report. The TNFD has issued its critical uncertainties matrix, which includes four possible narratives of plausible futures to assist reporting entities.
Data
While there is much that an asset manager can do to prepare for nature reporting, the TNFD recognizes that the lack of data currently provided by investees and clients adds complexity for financial institutions to the task of assessing and disclosing the dependencies and impacts on nature of their financed activities7.
There is also considerable thought still being given to nature-related data and metrics. Financial institutions can trial these new tools and datasets as part of their assessment and disclosure activities however these are still in the very early stages of their use.
Conclusion
It is doubtful that regulation requiring mandatory nature reporting will come into force within the next 24 months, however it is likely that investors will begin to use the TNFD as a tool to assess their nature-related risks and opportunities in the near future and request asset managers begin to follow suit to assist them in their own reporting.
As such it would be prudent for asset managers to apply the LEAP tool to their fund strategies and consider how the four plausible nature futures provided by the TNFD may affect their portfolios8.
Footnotes
1. Recommendations_of_the_Taskforce_on_Nature-related_Financial_Disclosures_September_2023.pdf (tnfd.global).
2. https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/
3. 221219-CBD-PressRelease-COP15-Final_0.pdf.
4. Mobilising Green Investment - 2023 Green Finance Strategy (publishing.service.gov.uk).
5. https://www.macfarlanes.com/what-we-think/in-depth/2023/tcfd-reporting-for-asset-managers
6. https://tnfd.global/publication/additional-disclosure-guidance-for-financial-institutions
7. Guidance_for_Financial_Institutions_v1.pdf (tnfd.global).
8. https://www.macfarlanes.com/what-we-think/in-depth/2023/the-30x30-commitment-cop-15; https://blog.macfarlanes.com/post/102h3d7/a-natural-next-step-quantifying-and-addressing-the-impact-of-asset-management-on
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