TNFD v1.0: The (r)evolution of nature-related risk management and reporting 

At a glance

• On September 18th 2023, the TNFD released its complete disclosure recommendations, alongside several guidance documents covering its nature-related risk management and disclosure framework – collectively referred to as v1.0 of the TNFD framework.
• This blog focuses on the key components of the v1.0 framework and its alignment with global sustainability reporting standards. The key points include:    
  • Organisations have the option to use different materiality assessment approaches, but are recommended by TNFD to use the ISSB’s definition of materiality as a baseline.
  • The TNFD has provided accompanying guidance on how organisations can assess and manage nature-related issues via a LEAP approach, as well as which disclosure indicators and metrics companies should disclose and how organisations can conduct scenario analysis.
  • We think the TNFD will provide the market with an instrument to respond to growing expectations in global (mandatory) nature reporting.
• The blog also provides an overview of the initial steps that organisations – companies and financial institutions – can take. Early action, catalysed by the release of the TNFD framework, can result in benefits for organisations.
• This article is relevant to the C-level executives, Sustainability Officers and risk, reporting and sustainability professionals (report preparers or users).
   

What is the TNFD and why is it important?

Governments, companies and financial institutions increasingly recognise and understand the critical role that nature plays in our economy, and in turn the various dependencies, impacts and risks and opportunities nature poses to organisations (‘nature-related issues’). The TNFD – a global, market-led initiative - developed a risk management and disclosure framework for organisations to report and act on evolving nature-related issues. The ultimate goal of the TNFD framework is to support a “shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes.”

To achieve this global impact, the TNFD framework will align with other global reporting standards on nature and encourage 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). Both frameworks adopt disclosure recommendations structured around the pillars of governance, strategy, risk management, and metrics and targets. All 11 of the TCFD’s recommended disclosures have been modified in the TNFD framework to nature-related issues, with three additional recommendations on engagement aspects, locations of assets and the echelons in the value chain. The TNFD framework also introduces a new “language system” for nature, specifying relevant concepts and definitions. It also introduces six general disclosure requirements that support a common approach to nature-related disclosure. These cover, for example, location specificity of nature-related issues and stakeholder engagement. The architecture of the TNFD is in that way also consistent with the approach of the International Sustainability Standard Board (ISSB).

The v1.0 framework is the outcome of a two-year framework design and development phase, including a pilot with over 200 organisations of their LEAP (Locate, Evaluate, Assess, Prepare) approach. To read more about each of TNFD’s prior releases consult our blogs on v0.1, v0.2. v0.3 and v0.4.
 

Highlighted components from v1.0

The TNFD September release includes disclosure recommendations and additional guidance, such as scenario analysis and specific sector guidance. In this blog we focus on what we see as the three most important components of the TNFD package: materiality, highlighted additional guidance, and alignment with other standards. These are the factors highlighted in green, in figure 1 below.

Figure 1: Components of TNFD v1.0 package. The items in green are the key components addressed in this blog, with materiality as general disclosure requirement. Source: TNFD v1.0

1. Materiality

Regulatory authorities across the world are increasingly adopting the concept of materiality in sustainability reporting. As different jurisdictions are applying diverse approaches to materiality, organisations using the TNFD may choose which definitional guidance they would like to use. However, the TNFD recommends organisations to use the following definition of material information adopted by the ISSB about sustainability-related risks and opportunities as a baseline:

“information is material if omitting, obscuring or misstating could reasonably be expected to influence decisions that primary users of the disclosures make on the basis of those reports...”

Additionally, organisations may decide to use an impact materiality approach, such as set out in the Global Reporting Initiative (GRI) or the EU’s Corporate Sustainability Reporting Directive (CSRD), that also specifies the use of double materiality. Under the European Sustainability Reporting Standards (ESRS), a sustainability topic is material from an impact perspective if it has actual or potential significant impacts on people or the environment, including those which are directly linked to its own operations, products, or services through its business relationships. To find out more about the concept of impact materiality and double materiality, see our recent blog on materiality assessments.

The opportunity to use different materiality assessment approaches offers flexibility in anticipation of greater alignment between global reporting standards in the future. For example the ISSB and GRI are currently coordinating their work to determine an interconnected approach on sustainability reporting. Irrespective of what approach an organisation takes to materiality, the TNFD recommends that all four types of nature-related issues (dependencies, impacts, risks and opportunities) should be at least identified and assessed.
 

2. Highlighted TNFD-issued guidance

Following a pilot and market feedback, the TNFD has developed a wide range of useful guidance, leading organisations through the processes of identifying, evaluating, assessing, and managing nature-related issues. Below we discuss the most significant guidance, namely the integrated LEAP approach, disclosure metrics, and scenario analysis.

a.  LEAP Approach

The guidance for assessing and managing nature-related issues includes an integrated step-by-step approach called LEAP. This comprises of the following four phases:

• Locate: Identification of the organisation's interaction with nature
• Evaluate: Evaluation of nature-related dependencies and impacts
• Assess: Assessment of nature-related risks and opportunities
• Prepare: Formulation of the organisation's response to material nature-related issues and reporting

Each phase includes questions supported by interpretation guidance, such as anticipated outcomes. For example, the question L1 "What are our organisation's activities by sector and value chain? Where are our direct operations?" offers three supporting questions on the sectors, value chains and geographies. An anticipated outcome could be a list and/or map of ecologically sensitive locations within the organisation's operational scope.

LEAP is designed as an iterative and ongoing process that aligns with an organisation’s risk management practices and its reporting cycles. We expect the LEAP approach to be mostly practical as an application to organisations’ existing risk management processes. Variations in business models, and differences across sectors and locations mean that there is a no one-size-fits-all solution for organisations to identify nature-related risks and opportunities. Thus, there is flexibility for organisations that already have an equivalent process. In such cases, the LEAP approach can be used as a checklist to ensure existing internal processes adequately address nature-related risks and opportunities. Organisations can apply their existing Enterprise Risk Management framework, processes, and tools as LEAP is aligned with COSO and ISO 31000. Similar to climate-related implementation, modifications can be made, if required, to aspects such as the temporal considerations for the assessment and risk tolerance criteria.

b. Disclosure indicators and metrics

The TNFD recommends disclosure indicators and metrics, with an indicator being a variable that provides a means to measure nature-related issues (e.g., plastic pollution) and a metric being the more granular standard of measurement (e.g., total weight of plastics used or sold). The recommended disclosure metrics are divided into core global sector (published on a comply or explain basis) and additional (recommended but not required). One example of a core global indicator is the wastewater discharged, which can be measured by the volume of water discharged (total, freshwater or other), including concentrations of key pollutants. An additional metric could be the total volume of wastewater that is reduced, reused or recycled by the organisation.

The inclusion of nature-related targets is an essential aspect of a complete disclosure, but target setting in this area will be challenging for many entities, especially in the absence of global targets, such as GBF and the Science Based Targets Network (SBTN).

We recommend to look out for more guidance for adopters in early 2024. The TNFD is undertaking an extended consultation period for the metrics and is also working with SBTN on target setting. We also recommend that organisations consider the targets they are committed to or required to meet (organisational or policy-related targets) when choosing their metrics. As the metrics will align with leading standards and guidance, and many organisations will find they have been reporting on some of the metrics already.

c. Scenario analysis

Scenario analysis assists organisations in examining the potential evolution of their nature-related risks and opportunities by developing forward-looking scenarios. This also includes evaluating and testing the robustness of their business strategy and financial planning in response to them.

Organisations are increasingly incorporating climate scenarios into their strategic planning and decision-making processes. The TNFD highlights that one of the key differences between nature and climate scenarios is that nature-related issues are location specific. For example, the impact of business activities is higher for ecologically sensitive locations, whereas the impact of omitting greenhouse gas emissions is irrelevant of the location. The TNFD identifies four tailored nature scenarios utilising a two-axis approach that is closely linked to physical and transition risks scenarios (see figure 2):
 

Figure 2: TNFD recommended scenario analyses approach. Source: TNFD v1.0

Market ready quantitative nature scenarios, comparable to existing climate scenarios, are (during the v1.0 release) still in development. The integration of the Global Biodiversity Framework (GBF) targets into scenario analyses is currently in its initial phase. The TNFD therefore recommends starting with participatory workshops with subject matter experts to shape first exercises. The scenario guidance gives a step-by-step approach to conduct this exercise.

It would be beneficial for organisations to get started with these steps, recognise what lessons can be learned from their climate scenario analysis and keep track of the publication of future nature scenarios, such as the ones from the Network for Greening the Financial System (NGFS) expected in Q4 2024.
 

3. Alignment with other standards

The main market feedback during TNFD’s consultation stage was on the number of different disclosure frameworks and standards on nature. The TNFD has therefore worked (and will continue to work) with other standards-setting bodies, including ISSB, GRI, EFRAG, and CDP, to ensure that its disclosure recommendations are interoperable with existing standards. The ISSB could draw on the TNFD in any future development of specific nature-related disclosure standards, also considering the TNFD is available to support the ISSB herein.

We think it is important that TNFD continues to play a central role in supporting and accelerating the move towards global sustainability standards on nature-related disclosures.

Looking ahead

Following the release of v1.0. the TNFD will focus on capacity building initiatives with a range of partners, with the aim of scaling voluntary market adoption. This will include the development of additional technical guidance, in particular on quantitative methodologies for scenario analysis. It will also undertake outreach to spread awareness of the TNFD recommendations and undergo an evaluation process of its recommendations. Governments are required to deliver on GBF’s Target 15, putting in place nature-related disclosures. The TNFD could be used as a framework for these disclosure requirements.