The Taskforce on Nature-related Financial Disclosures ("TNFD") released its final framework (the "TNFD Framework") on September 18. The TNFD Framework encourages organisations to integrate nature into decision-making and supports a shift in financial flows away from nature-negative outcomes but does not impose legal obligations. The release of the TNFD Framework follows (i) the December 2022 Kunming-Montreal Global Biodiversity Framework,1 which aims to halt and reverse biodiversity loss by 2030, and (ii) increasing concern about consequences associated with biodiversity loss.2 Eight key things that organisations should know about the TNFD Framework are set out below.
1. The TNFD Framework promotes the integration of nature into strategic and capital allocation decision making
The TNFD Framework seeks to provide organisations and financial institutions with a risk management and disclosure framework to identify, assess, manage and report on nature-related dependencies, impacts, risks and opportunities ("nature-related issues"), encouraging organisations to integrate nature into strategic and capital allocation decision making.
The TNFD Framework is built around the same four pillars as the framework of the Task Force on Climate-related Financial Disclosures ("TCFD"):
- Governance (including the board’s oversight of, and management’s role in, assessing and managing nature-related issues, and its human rights policies and engagement activities with respect to indigenous peoples and local communities affected by nature-related issues);
- Strategy (including nature-related issues that the organisation has identified over the short, medium and long term, as well as their effect on the business model, value chain, financial or transition planning, and strategy, and the resilience of the strategy against such issues);
- Risk & impact management (including processes for identifying and managing nature-related issues in direct operations, upstream and downstream value chain(s), and how processes for identifying and managing such risks are integrated into, and inform, overall risk management processes); and
- Metrics & targets (including the metrics used to assess and manage material nature-related issues, and the targets and goals used to manage and track performance against such issues).
2. Considerations of biodiversity, climate change and human rights impacts are built into the architecture of the TNFD
The TNFD Framework integrates all 11 TCFD-recommended disclosures by broadly substituting references to ‘climate’ with ‘nature’. In addition, the TNFD Framework provides three new disclosures centred around: (i) stakeholder rights and engagement; (ii) priority locations to accommodate specific considerations arising from regional differences; and (iii) upstream and downstream value-chain risk and impact management.
Specifically on stakeholder rights and engagement, a premise of the TNFD Framework is an interconnection between human rights and nature. The TNFD Framework recommends that organisations provide summaries of their:
- commitment to the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct and the UN General Assembly Resolution 76/300 on the right to a healthy environment;
- human rights due diligence processes;
- involvement in cases before the National Contact Points under the OECD Guidelines;
- stakeholder engagement processes;3 and
- approach to informing the board and senior management about engagement processes and their results,4 together with guidance on engaging meaningfully with indigenous peoples, local communities and affected shareholders when identifying and assessing nature-related issues.5
3. TNFD provides that reporting entities should be guided by the “LEAP” approach and supporting tools
To promote voluntary adoption of the TNFD recommended disclosures, the TNFD produced additional guidance on how to identify, assess and report on nature-related issues, called the LEAP approach:
- Locate the interfaces with nature across geographies, sectors and value chains;
- Evaluate dependencies and impacts on nature;
- Assess nature-related risks and opportunities to your organisation; and
- Prepare to respond to nature-related risks and opportunities, including reporting on material nature-related issues to the primary users of financial reports and other stakeholders, which disclosure should be aligned with the TNFD Framework.
The LEAP approach has been pilot tested by over 200 organisations across sectors, geographies and biomes globally, and will continue to evolve based on market feedback.6
4. The TNFD is closely aligned with the TCFD and ISSB
The TNFD Framework was designed to complement, and build on the structure of, the existing disclosure framework developed by the TCFD. The TCFD recommendations provide a framework for organisations to disclose climate-related risks, opportunities and financial impacts. They have been adopted into the domestic laws of countries such as the UK7 and New Zealand,8 and also feature in the regulatory regimes of the EU, Japan, Canada,9 Singapore10 and South Africa.11 In addition, some financial institutions and other investors and stakeholders have been requiring or requesting organisations and financial institutions to provide disclosure in line with TCFD and certain US governmental authorities have proposed or passed rules requiring disclosure in line with the TCFD framework.12
During the summer of 2023, the TCFD recommendations were fully incorporated into the Sustainability Disclosure Standards ("SDS") published by the International Sustainability Standards Board ("ISSB"); IFRS S1 (General Requirements) and IFRS S2 (Climate-related disclosures). Certain major markets have already announced plans to adopt or align domestic frameworks with the ISSB’s SDS. These include the UK, the EU (by way of close alignment with the European Sustainability Reporting Standards ("ESRS")), Singapore, Australia, Nigeria, Canada, Brazil and South Korea.
The TNFD Framework is designed to be interoperable with the ISSB’s SDS. After the launch of the TNFD Framework, the ISSB applauded the high level of consistency reached between the TNFD Framework and the ISSB’s SDS, both sets of which incorporate the architecture of the TCFD recommendations.13
While the TNFD Framework has been structured to build on the framework and standards of the TCFD and ISSB, it should be noted that there are other frameworks for assessing nature-related financial risks that operate alongside the TNFD Framework. For example, the OECD recently released its own supervisory framework for assessing nature-related financial risks, intended to help central and commercial banks assess nature-related issues in the financial sector. The OECD confirms that its proposed methodological framework builds upon the TNFD Framework, with a view to "align[ing] to existing methodologies and current global practices to ensure synergies and avoid overlaps".14 The OECD framework also encourages financial authorities in the short term to refer to the additional resources provided by the TNFD to help them identify relevant data and metrics.
5. The TNFD Framework provides a flexible approach with regard to materiality
Materiality is one of the key concepts underpinning the TNFD Framework: it recommends disclosure regarding nature-related issues only to the extent that such are material to the reporting entity. The TNFD recommends that reporting entities use their jurisdiction’s regulatory approach to materiality.15 In the absence of such guidance, the TNFD recommends that reporting entities use ISSB’s definition of materiality, which requires entities to provide information that would be considered material from the perspective of primary users of general-purpose financial reports (sometimes known as "financial materiality"). Alternatively, the TNFD provides flexibility for reporting entities to provide information consistent with a broader materiality approach. This could include reporting against the "impact materiality" approach of the Global Reporting Initiative, which covers information representing the entity’s most significant impacts on the economy, environment and people, including human rights impacts.16
6. The TNFD Framework covers nature-related reporting in relation to both the upstream and downstream value chain
The TNFD Framework recommends disclosures in respect of nature-related issues occurring across the value chain, whether they occur upstream or downstream of an organisation’s direct operations. At the same time, the TNFD acknowledges the challenges associated with nature-related reporting across the value chain, in particular challenges relating to the provision of data by suppliers, and recognises that it will take time for organisations to conduct an analysis in relation to their whole value chains.17 For financial institutions, whose nature-related impacts and dependencies are primarily generated through their investment portfolios rather than their direct operations, the TNFD has published an additional sector-specific guidance framework to guide financial institutions’ reporting on nature-related issues in line with the TNFD Framework.18
7. The TNFD Framework is expected to be incorporated into domestic regulatory regimes
Much like the frameworks and standards of the TCFD and ISSB, the TNFD Framework is expected to be incorporated into regulatory frameworks in the coming years.
A number of governments have signaled their support and intention to consider adopting the TNFD Framework through domestic regulation. For example, in its Green Finance Strategy published in March 2023, the UK Government reasserted its commitment to supporting the work of the TNFD and to exploring how the final framework should be incorporated into UK policy and legislative architecture, in line with Target 15 of the Global Biodiversity Framework.19
At a regional level, the EU has also integrated aspects of the TNFD guidance into its regulatory reporting regime – specifically, the Corporate Sustainability Reporting Directive ("CSRD"), which requires in-scope entities to provide corporate disclosures in line with the ESRS (see White & Case client alert here). The European Commission recently adopted its first set of ESRS, which integrate the TNFD’s guiding LEAP approach into the materiality assessments required under ESRS E2 (Pollution), ESRS E3 (Water and marine resources), ESRS E4 (Biodiversity and ecosystems) and ESRS E5 (Resource use and circular economy).20
Until mandatory TNFD reporting is incorporated into regulation, the TNFD has committed to tracking voluntary market adoption on an annual basis and will publish an annual status update report beginning in 2024.
8. Nature-related reporting poses unique risks for organisations
The TNFD represents a significant development for nature-related reporting but has received some criticism. NGOs and environmental conservation groups have raised concerns that the framework could give rise to corporate greenwashing, or that reporting is not strict enough in certain respects (such as with regard to reporting on the location of the entity’s operations and suppliers, or the disclosure of nature-related grievances filed against the entity).21
One of the key challenges arising in respect of nature-related reporting is the inherent difficulty of measuring nature-related impacts. There is no commonly agreed metric for quantifying nature-related impacts.22 This creates significant risks that organisations seeking to record progress against nature-related targets may be accused of overstating the positive impact that they are having on nature due to uncertainties in the relevant metrics or indicators that are adopted. Such risks are particularly acute when organisations communicate nature-related claims to consumers or in compliance with a mandatory reporting regime and could deter voluntary reporting under the TNFD Framework.
To mitigate these risks, organisations reporting under the TNFD Framework should ensure that nature-related disclosures are clear, complete and fully substantiated. Organisations should be transparent as to the scope of their disclosures, including the approach to materiality, the scope of the value chain and geographic locations, and the relevant time horizons that are covered.23 Organisations may also consider getting their nature-related targets independently certified, for example under the framework for science-based nature targets being developed by the SBTN.24 The TNFD also recommends that organisations adopt SBTN’s "mitigation hierarchy", which sets out the sequence of actions to anticipate, avoid or minimise biodiversity-related risks and impacts on affected communities and the environment.25
1 The Kunming-Montreal Global Biodiversity Framework was adopted at the fifteenth meeting of the Conference of the Parties to the United Nations Convention on Biological Diversity (aka COP15), see Convention on Biological Diversity, 2030 Targets (with Guidance Notes), 21 September 2023, available here.
2 World Economic Forum, “The Global Risks Report 2023”, 18th edition, available here.
3 Summaries of stakeholder engagement processes are recommended to include a description of those engaged, the purpose of the engagement, the approach to and process of engagement, and whether engagement has been based on free, prior and informed consultation and participation and how free, prior and informed consent has been obtained.
4 TNFD Framework, pp. 49-50. The TNFD Framework also recommends that organisations report on the proportion of “priority locations” identified that actively engage with indigenous peoples and local communities on nature-related issues. “Priority locations” refer to either “material locations” or “sensitive locations”. “Material locations” refer to locations where an organisation has identified material nature-related issues in its direct operations and upstream/downstream value chain(s)). “Sensitive locations” refer to locations where the assets and/or activities in an organisation’s direct operations or value chain(s) interface with nature in areas of: importance for biodiversity, high ecosystem integrity, rapid decline in ecosystem integrity, high physical water risks or importance for ecosystem service provision, including benefits to indigenous peoples and local communities.
5 TNFD, “Guidance on engagement with Indigenous Peoples, Local Communities and affected stakeholders”, September 2023, available here.
6 Additional “how to” guidance has also been produced for reporting entities on: (i) tackling biome-specific and sector-specific aspects of the LEAP approach (currently in draft form for priority sectors, with additional bespoke guidance for the financial institutions sector); (ii) conducting scenario analysis workshops; (iii) setting targets in line with Science Based Targets Network (“SBTN”) methods; and (iv) engaging meaningfully with indigenous peoples, local communities and affected shareholders when identifying and assessing nature-related issues. These documents will be revised periodically to account for user feedback, and additional guidance may be developed on further topics of interest.
7 See TCFD’s 2023 Status Report: Table D1 entitled “TCFD-Aligned Disclosure Requirements in Select Jurisdictions”, available here.
8 See New Zealand’s Ministry of Business, Innovation & Employment webpage entitled, “Mandatory climate-related disclosures”, available here.
9 For EU, Japan and Canada, see TCFD’s 2023 Status Report: Table D1 entitled “TCFD-Aligned Disclosure Requirements in Select Jurisdictions”, available here.
10 See SGX’s webpage entitled “Sustainability Reporting”, available here.
11 See South Africa’s Climate Risk Forum Disclosure Working Group’s paper entitled “Principles and Guidance for Minimum Disclosure of Climate Related Risks and Opportunities”, available here.
12 See California Bills to Require Greenhouse Gas Emissions Reporting From Companies Doing Business in the State | White & Case LLP (whitecase.com) and SEC Proposes Long-Awaited Climate Change Disclosure Rules | White & Case LLP (whitecase.com).
13 The TNFD Framework and the ISSB standards are expected to continue to reinforce each other, following the ISSB’s commitment to drawing on the work of the TFND as and when the ISSB will develop specific nature-related disclosure standards. Reciprocally, the TNFD proclaims that it “stands ready to support the ISSB in its future efforts on nature-related disclosure standards”. Since the TNFD Framework’s launch, the ISSB announced its intention to publish guidance by the end of 2023 on how the IFRS S2 standard can help address nature loss, further to the ISSB’s recent consultation on future research projects, in response to which several stakeholders (including the UK’s FCA, ESMA, GFANZ and Sustainalytics) called for a focus on biodiversity, ecosystems and ecosystem services (BEES). See TNFD, p. 20; also see IFRS, “ISSB congratulates Task Force on Nature-related Financial Disclosures on finalised recommendations”, 19 September 2023, available here.
14 OECD, “A supervisory framework for assessing nature-related financial risks”, 28 September 2023, available here.
15 For an EU-based reporting entity, this would mean adopting the “double materiality” approach envisaged under the ESRS. Under a double materiality approach, entities report on the financial impact of nature-related issues on the business, as well as the impact of the business on nature-related issues.
16 To ensure clarity and transparency for primary users of general-purpose financial reports and other stakeholders, the TNFD recommends that the organisation should clearly state the materiality approach taken in its reporting.
17 TNFD Framework, Section 3.3, pp. 46-60.
18 TNFD, “Additional Guidance for Financial Institutions”, September 2023, available here.
19 The UK Government also indicates that “the TNFD provides the main method of operationalising Target 15 [and] welcomes closer integration with the ISSB to build a global baseline on sustainability reporting”. See UK Green Finance Strategy 2023 available here. The UK’s Sustainability Disclosure Technical Advisory Committee has already started to consult, and has called for evidence, with respect to the UK Government’s endorsement of the ISSB SDS, available here.
20 See, Annex to the Commission Delegated Regulation supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards, 31 July 2023, available here.
21 The TNFD Framework recognises that, like climate-related reporting, nature-related reporting under the TNFD Framework will improve, and disclosure ambition will increase over time. For example, organisations are encouraged to improve the level of geolocation precision over time as data and traceability improve, and to report on any improvements made to data quality since the previous disclosure period.
22 A survey conducted by the TNFD on existing nature-related indicators and metrics in use for corporate reporting revealed over 3,000 unique metrics, with different definitions used for similar indicators, inconsistencies and uneven coverage across nature-related issues, and a focus on negative impact drivers. See TNFD Framework, Section 4,
23 TNFD Framework, Section 3.2, pp. 43-45.
24 SBTN, The first science-based targets for nature, available here.
25 For a summary of SBTN’s mitigation hierarchy see, TNFD Framework, Section 2.3, pp. 33-38.
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