The Next Disclosure Frontier To Keep On Your Radar: TNFD
Taking the reins as guest editors for the following two weeks are fellow Persefonites, Anissa Vasquez and Kevin Stephen. This week, I’m at the 2022 Oxford Sustainable Finance Summit. I look forward to having productive conversations with leaders in the field as we discuss the latest in the world of sustainable finance and investment.
This week, the physical effects of climate change have been felt around the world. Europe has hit record high temperatures (40.2 degrees Celsius, 104.4 Fahrenheit) as a heatwave engulfs the continent, and wildfires have forced tens of thousands of people to flee from Spain, Portugal, and Greece.
It brings some relief to know that the global climate crisis has been getting corporate and regulatory attention with the establishment of net zero targets and the introduction of proposed climate disclosures, most of which were aligned with the Task Force on Climate-related Financial Disclosures (TCFD). Nature and global biodiversity loss, less recognized but hugely consequential aspects of climate change’s acceleration, are also getting the attention of disclosure bodies.
Last week, the Task Force on Nature-Related Disclosures (TNFD) released its second version (v0.2) of a management and disclosure framework on nature-related risks and opportunities. TNFD’s landscape assessment found that there are over 3,000 different nature-related metrics in use already today by standard bodies, regulatory and policy-making bodies, and major scientific reference reports. The staggering lack of standardization around nature-related risks and opportunities led TNFD to take a page out of TCFD’s book and create standardized recommendations and metrics with the “ultimate aim of supporting a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.”
The World Economic Forum’s 2022 Global Risk Report lists biodiversity loss and ecosystem collapse as a top significant global risk, saying there is a possibility of “irreversible consequences for the environment, humankind, and economic activity, and a permanent destruction of natural capital, as a result of species extinction and/ or reduction.” To be specific, one-third of plant and animal species could be extinct in 50 years and, luckily, the financial system and investors are paying attention.
The Finance for Biodiversity Pledge, launched in 2020, now convenes nearly 100 investors managing $14 trillion in assets in commitment to protecting and restoring biodiversity through collaboration, assessing impacts, setting targets and reporting publicly on these commitments before 2025. Investors are not only paying attention, but also putting pen to paper with their pledges. One can wonder if these signatories will begin to use the TNFD once able.
Still, questions remain on what the TNFD is asking organizations to do and how it is defining nature-related risks and opportunities. Whereas the first beta version of the TCFD focused on fundamental concepts, definitions, and draft disclosure recommendations, the v0.2 release presents a draft architecture for metrics, targets, dependency and impact metrics, and a proposed approach for specific guidance.
At this point, organizations should be aware that the TCFD does focus on target industries including food and beverage, renewable resource and alternative energy, infrastructure, extractives and mineral processing, health care, resource transformation, consumer goods, transportation as well as certain portions of the financial sector.
Also of note, the TNFD will include metrics for an integrated assessment on nature-related risks and opportunity management using their recommended LEAP approach- which will be for internal use and will not be required for disclosure. The assessment will examine dependencies and impacts on nature such as amount of natural resources used for business activity, dependence on ecosystem services, proportion of revenue aligned with nature-related opportunities, and more.
As of now TNFD’s cross-industry disclosure metrics are not included in v0.2, and will be finalized in later TNFD versions. However, we do know that the TNFD will closely reflect the TCFD in language and structure, including the 4 key pillars of governance, strategy, risk management, and metrics and targets. You can explore the draft disclosure recommendations proposed in V0.1 on the TNFD’s interactive framework explorer.
Participation in the process of finalizing the TNFD framework is encouraged- comments on v0.2 are open until September 28, 2022. The organization remains focused on improvement, most recently by organizing a “data catalyst” initiative to bring together parties across the nature-related data landscape to identify issues and shortcomings and opportunities for improvement in the framework’s proposed data and analytics.
This year has focused intensely on climate-related disclosures, and for good reason. Still, signals point to nature-related disclosures as the next set of “E” risks and opportunities for consideration.
Regulatory Developments of the Week:
Prep for SEC Climate Disclosure Starts
Since the comment period for the SEC’s Proposed Climate Disclosure rule ended in June, the SEC has moved into their next phase of reviewing comment letters and preparing the final rule– and they’re not the only ones preparing. A recent survey suggests that companies are getting ahead of the rule and preparing early for compliance. The assessment of 248 companies revealed that over 70% of companies had already started preparing and that the vast majority of companies had organization-wide support to comply with the proposal. Only 7% of respondents claimed their compliance was not fully supported.
The SEC’s climate disclosure proposal is just one part of a major push to reverse some of the Trump-era anti-sustainability policies. Most recently, the Commission voted 3-2 for a bill that enables clients of proxy advisor firms to receive guidance on how to vote in corporate elections. On the same day, they voted to limit the powers of companies to avoid shareholder votes on particular issues. Both of these bills will allow shareholders to enact more ESG measures within their companies with much less friction.
Biden Mulls Declaring Climate Emergency
Facing a series of setbacks on climate-related policies and regulations, the Biden administration’s climate goals and promises are believed by many to be as good as dead. The only thing that could save it is to do something quite drastic, which is what he may be planning with a declaration of a climate emergency.
The move could go one of two ways: it could enable Biden to enact more executive orders to get his climate agenda back on track, allowing him to halt crude oil exports or levy taxes on imports that encourage deforestation. Or, it could enrage those like Sen. Joe Manchin, who has held back progress on climate legislation since Biden’s inauguration, and could elicit legal challenges from the oil and gas industry. Either way, the Democrats won’t accept inaction and are encouraging the President to go “beast mode on climate.”
Demand for Natural Resources is Driving Deep-Sea Mining
Despite the warning of an environmental disaster, a UN-affiliated body is set to negotiate for allowing deep-sea mining to mitigate some of the rare earth metal shortages driven by the EV boom. The issue with deep-sea mines is that the environmental implications are yet unknown, but they are likely to cause noise pollution, which can be heard up to 500 KM away. This will inevitably disrupt deep-sea marine life and could come with unintended consequences.
Notwithstanding the hesitations, companies seem set to extract the possible trillions of dollars worth of Cobalt, Nickel, and other rare earth metals on the ocean bed as soon as 2024. That is unless countries can band together to put up enough of a fight to stop it, which Chile, Fiji and Palau have started to do.
Other Stories We’re Following:
The credibility of EFRAG’s sustainability reporting standards may be at risk, as some commentators have expressed concern over the process being used to select the new chair of EFRAG’s Sustainability Reporting Board (SRB). Writing for Forbes, Oxford Business School Professor Robert Eccles notes that criticism has also emerged around the speed at which EFRAG is developing and releasing its standards for the EU’s climate disclosure rules, which could jeopardize the credibility of the CSRD in Europe and the European Green New Deal. [Our take: Speed is key on climate regulations, and the EFRAG has been moving with impressive speed to deliver sustainability reporting standards to the European Commission. As the organization becomes more visible and open to scrutiny, though, we encourage EFRAG to have a firm and “auditable” process in place in selecting its new chair.]
The UK High Court ordered the British government to release a more detailed plan of how it will achieve country-level net-zero targets. A case argued and won by environmental advocacy groups like Friends of the Earth contended that the UK government’s current strategy leaves out key details about how carbon budgets will be hit in the UK. [Our take: This is a win for climate advocacy groups that points out the gap between targets and plans when it comes to net-zero–both for companies and governments.]
The City Parks Alliance non-profit focused on equity and climate resilience in its annual Greater and Greener conference, taking place in Philadelphia this week. Keynote speakers noted the vital importance of green space to urban communities and the threat they face from climate and nature-related impacts like hurricanes, flash floods, heat waves, and wildfires. [Our take: City parks are one reason why the Biden administration’s America the Beautiful plan to conserve 30% of the country’s lands and waters is critical and underappreciated. Coordinated conservation efforts will be more important than ever in the face of accelerating climate impacts.]
Discussions are off to a great start at the Oxford Sustainable Finance Summit 2022:
Photos by Philippa Tuck
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Wyatt joined Persefoni from the U.S. Securities & Exchange Commission (SEC), where she served as Senior Counsel for Climate & ESG to the Division of Corporate Finance, led the rulemaking team through drafting proposed climate disclosure regulations, and worked closely with the Office of International Affairs.
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Persefoni is the leading Climate Management & Accounting Platform (CMAP). The company’s Software-as-a-Service solutions enable enterprises and financial institutions to meet stakeholder and regulatory climate disclosure requirements with the highest degrees of trust, transparency, and ease. As the ERP of Carbon, the Persefoni platform provides users a single source of carbon truth across their organization, enabling them to manage their carbon transactions and inventory with the same rigor and confidence as their financial transactions.