The Rising Importance of Nature Disclosures for Financial Institutions

Why do nature risks matter?

The world is awakening to the critical state of our environment, recognising that our reliance on nature for our health, welfare and economic prosperity makes the escalating loss of nature a major concern. Nature loss (encompassing biodiversity loss) refers the gradual decline in Earth’s ecosystems and species diversity, largely due to human activities such as habitat destruction. Given that $44 trillion GDP¹, more than half of the global GDP, relies on nature and its resources to a moderate or high degree, we should advocate for sustainable practices in order to safeguard the environment.

Financial institutions can play a critical role in addressing the degree of nature loss. They have the capability to allocate funds to nature-friendly projects, incentivise sustainable practices among clients and integrate environmental risk assessments into their decision-making process, effectively contributing to nature preservation and the mitigation of the financial risks associated with ecosystem degradation. 

Placing Nature at the Core: Reporting’s Vital Role in Disclosing Nature-Related Risks

To enhance the recognition of nature loss in decision-making processes, accurate disclosures regarding nature-related risks are necessary. Furthermore, accurate reporting plays a pivotal role in maintaining the trust and support of stakeholders, such as investors. Both disclosing nature-related risks and developing effective reporting tools with which to do so are essential in understanding the true impact of our actions and could help identify ways for preserving nature and our way of life.

Nature-related reporting can be divided into mandatory and voluntary disclosures. General mandatory disclosures on an EU level consist of the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD). The CSRD requires the companies within its scope to use the European Sustainability Reporting Standards (ESRS) to specify the content and the structure of the information to be reported. Within the ESRS, the standard on biodiversity and ecosystems (E4) particularly focuses on disclosures related to nature risks. This standard covers the diversity of living organisms across various sources – such as terrestrial, freshwater, and marine ecosystems – and the ecological systems in which they exist. To help navigate and standardise nature-related reporting, there are voluntary disclosure and risk management frameworks in place. An example of such a framework is the recently published Taskforce on Nature-related Financial Disclosures (TNFD) framework.

Double clicking on voluntary nature-related disclosures: TNFD

The TNFD is an international, market-based initiative that aims to support a ‘shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes’. To achieve this goal, the TNFD aligns with other global reporting standards on nature and encourages early action in the form of disclosure of nature-related issues.

In particular, the TNFD framework builds on the approach of the Task Force on Climate-related Financial Disclosures (TCFD) and adapts all 11 TCFD disclosures for nature, adding three more that cover engagement with indigenous people, local communities and affected stakeholders. The final version (v1.0) of the TNFD framework was released in September 2023. The framework is structured in three layers.

The Inner Layer is where the core essentials reside. There are three key elements within the inner layer:

1. Recommended disclosures offer practical guidance on nature-related reporting. The recommendations consist of a set of 14 disclosure recommendations with implementation guidance (for ‘All sectors’), which are structured into four pillars. These pillars are aligned with the TCFD, covering the topics of governance, strategy, risk management, and metrics and targets.
2. The LEAP approach supports organisations in assessing nature-related risks and opportunities. This approach has four phases that cover locating, evaluating, assessing and preparing for these risks and opportunities.
3. The language section defines the core concepts and definitions used within the framework.

The Middle Layer is the analytical centre of the TNFD. This layer discloses data, metrics, targets and scenario guidance – providing the tools needed to measure and plan for nature-related impacts. This layer is also aligned with the phases within the LEAP approach.

The Outer Layer consists of tailored advice for different industries. It recognises the uniqueness of different industries and business models, as well as the characteristics of different biomes. This layer also provides additional disclosure guidance to financial institutions, helping them navigate the framework effectively.

Looking ahead – perspective from financial institutions

Numerous financial institutions are currently incorporating climate-related risks into their disclosures and risk management practices as they are subject to the EU Taxonomy and ECB expectations regarding climate-related risks and environmental risks respectively. Looking ahead, it is expected that reporting on nature and biodiversity will gain similar attention and prioritisation. For example, the ECB has found that nearly 75% of all bank loans in the euro area are to companies that are highly dependent on biodiversity.² While it is important to assess and report on the impact that nature has on banks, it is also vital to look at how banks affect nature. Therefore, according to the ECB, there is an urgent need for additional initiatives based on the double materiality principle.³

Banks are among the most important players when it comes to slowing down nature loss as they have the capability to invest in and lend money to undertakings with nature-positive impacts. However, banks face the question of how they can prioritise their allocation of capital. Nature loss is progressing rapidly; however, the timeline and severeness of its impacts remain unknown. Therefore, banks could prepare for various situations by working with scenarios in order to better understand the impact of different assumptions and situations; nature-related scenarios are already under development.⁴ This is challenging as financial models are often built on historical data and it is difficult to accurately consider aspects that have never happened before. Therefore, estimations and enrichments are often needed where accurate data is unavailable. Lessons from the integration of climate-related risks could be leveraged to expedite methodology development.

Even for risks that are known, banks often have limited data. Given the current data gaps, there is a likelihood that environmental risks are underpriced in the market. Recent research⁵ has confirmed that certain risks might not be priced at all. To address this, data providers are making concerted efforts to close the data gaps.

To conclude, banks can expect an increase in mandatory and voluntary nature-related disclosures in the months to come. This creates the need for obtaining and establishing more accurate data. To combat the loss of nature, it is imperative for banks to strategically invest time and resources into areas and initiatives to support solving this broader challenge. To drive the market forward in addressing nature loss, the identification, sourcing and utilisation of new nature-related data offer a promising starting point.

1. Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy | World Economic Forum (weforum.org)

2. The economy and banks need nature to survive (europa.eu)

3. Guide on climate-related and environmental risks (europa.eu)

4. ngfs_conceptual-framework-on-nature-related-risks.pdf

5. What is special about climate-related and environmental risks? (europa.eu) / Is Physical Climate Risk Priced? Evidence from Regional Variation in Exposure to Heat Stress (nber.org)