What is the TNFD Framework?
The Taskforce on Nature-related Financial Disclosures (TNFD) is a framework for nature-related risk management and disclosure. It was designed to help organizations act and report on nature-related risks relevant to their direct and indirect (Scopes 1, 2, and 3) operations. Established in 2021, the TNFD aims to assist in shifting the global financial system from one that exploits nature to one that supports and nourishes it.
The Taskforce has 34 members from large financial institutions and corporations with over $18 trillion in assets. The group consists of a cross-sector alliance from 16 countries. Members include companies such as the steel manufacturer Tata Steel, food and beverage company Nestle, and Bank of America.
More than 50% of global GDP depends on nature. By 2030, the loss of key ecosystem services such as pollinators and timber could result in a decline in global GDP of $2.7 trillion annually. For these reasons, regulators and investors are asking businesses to assess and disclose their nature-related risks and opportunities.
The TNFD’s work is built on seven principles to ensure the framework enables businesses to integrate nature-related risks into business decisions: market usability, science-based, nature-related risks, purpose-driven, integrated & adaptive, climate-nature nexus, and globally inclusive.
We’ll take an in-depth look into how the TNFD aims to fulfill its mission of integrating nature-related risks into companies’ decision-making processes.
TNFD Definitions
To help businesses understand what it means by nature-related risks and opportunities, TNFD outlines a series of definitions on critical and frequently used terms:
Nature
- Nature relates to the natural world with an emphasis on biodiversity species and the interactions between them and the environment. The natural world can be broken down into four distinct realms: Land, Ocean, Freshwater, and Atmosphere. Humanity both depends on and affects these.
- The TNFD describes five main drivers of human-driven nature change: climate change; resource exploitation; land and sea use change; pollution; and invasive alien species.
Dependencies and impacts
- Dependencies are the ecosystem services companies rely on to run their operations. These can include the dependency on pollinators for food companies, the dependency on running clean water, and natural flood and fire prevention. Analysis of these dependencies is important for companies as it gives them an understanding of the effects of any negative changes to these ecosystem services.
- Impacts are the changes in nature, either positive or negative, that can occur as a result of the actions of an organization. Impacts include impact drivers, which are specific outputs from activities e.g., emissions, inputs from natural resources e.g., water, and pathways, which describe the way in which impacts affect nature and subsequently, business.
Risks
Similar to the Task Force on Climate-related Financial Disclosure (TCFD), the TNFD puts nature-related risks into three categories:
- Physical risks: the risks associated with the dependencies and impacts of an organization on nature.
- Transitional risks: the regulatory, reputational, and legal risks related to the developments aimed at stopping or reversing damage to nature.
- Systemic risks: those that result from the breakdown of entire systems, with the cumulative impact of multiple failures in transitional and physical risks happening simultaneously.
Opportunities
- The positive nature-related outcomes from a companies’ activities, either for nature or the company. Nature-related opportunities occur when companies mitigate risk or adapt products and services to halt or reverse the loss of nature.
TNFD Recommendations
The recommendations of the TNFD framework are designed to help companies build actionable strategies to reduce their nature-related risks, allow financial institutions to make more informed investment decisions, and provide an understanding of the concentrations of nature-related risks and opportunities.
The TNFD’s disclosure recommendations follow the TCFD’s four pillars: governance, strategy, risk management, and metrics and targets. The key area of divergence from the TCFD lies with metrics and targets.
Because an assessment of nature-related risks can take in thousands of metrics from biodiversity, deforestation, water uses, and many more, companies need the TNFD to give a transparent, standardized approach to assessing the metrics and targets of nature. The TNFD aims to achieve this in its draft period through an iterative approach of feedback from users in the pilot scheme.
To help companies with the assessment process for nature-related risks and opportunities, the TNFD created the “LEAP” risk assessment approach:
- Locate your interface with nature
- Evaluate your dependencies and impacts
- Assess your risks and opportunities
- Prepare to respond to nature-related risks and opportunities and report
The TNFD advises companies to measure their impacts across all realms and assess which metrics to use for each impact using the indicator illustrative assessment criteria.
Additionally, measuring and reporting on nature-related risks and opportunities is a net new activity for many companies. So the TNFD was requested to provide sector, realm, and biome-specific guidance. The TNFD identified 19 sectors to give sector-specific guidance and will provide in-depth recommendations for certain nature-related risks and realms for each sector.
Nature-related Risk and Opportunity Assessment Approach – LEAP
The LEAP approach (Locate, Evaluate, Assess, and Provide) was developed by the TNFD as a simple way for companies to assess their nature-related risks and opportunities. It was designed to be an iterative approach for both corporates and financial institutions on how to report each of the four pillars of the TNFD. It identifies the key stakeholders (governance), nature-related risks, and metrics and targets to collect, informing a strategy to mitigate risks and identify opportunities.
The LEAP system walks users through the process of evaluating the scope of their assessment to help them understand their location-specific nature-related risks, how they may change over time, and how to conduct different scenario analyses.
TNFD vs TCFD
Climate and nature-related risks are interrelated. While the protection of forestry and other ecosystem services is an opportunity to mitigate both climate and nature risk, the release of greenhouse gasses into the atmosphere negatively affects both the climate and nature. However, nature is much wider than just the climate, and needs a distinct methodology for companies to measure and report its impacts.
Although it’s built on the principles and inspired by the TCFD, including the same four pillars of recommendations, the TNFD captures areas not covered by the TCFD, such as soil erosion, ocean plastics, biodiversity, and much more. While closely aligned, the TCFD and TNFD differ in their assessments of everything except nature-related risks, which the TNFD points to the TCFD, to avoid duplicate recommendations.
With clear synergies, as climate affects nature and vice versa, the TNFD recommends that companies use both for a comprehensive perspective on climate and nature-related financial risks and opportunities.
The TNFD Beta Framework
In March 2022, the TNFD released its first beta version commencing 18 months of consultation with the market to receive feedback and develop the final framework. In June 2022, they released the v0.2 beta version ahead of two other iterations, v0.3 in October 2022 and v0.4 in February 2023. The beta period will culminate in the final set of recommendations from the TNFD (v1.0) in September 2023.
Organizations can review the beta frameworks and provide comments or pilot the standard by applying it to their organization. The TNFD would like to see a broad spectrum of sectors and geographies take up the pilot scheme to get a better understanding of how the framework works in each sector and geography and how it can improve before general release.
Throughout the beta framework, the UN Environmental Programme Financial Initiative is heading a pilot program for the TNFD to get the financial sector’s perspective on any recommendations or insights gleaned from the beta series, which can be enacted in the final version of the framework.
Because nature-related risks and climate change are so inextricably linked, a good place to start your assessment is by measuring your carbon footprint. Persefoni can help you with that process. Sign up here, to schedule a demo today.
