Cautious optimism for TNFD despite challenges

Channels: ESG Data, Natural Capital, Policy

Companies: Task Force on Nature-related Financial Disclosures, Global Canopy, Task Force on Climate-related Financial Disclosures, Aviva Investors, Finance Earth, IFRS Foundation, IOSCO

People: Nicky Chambers, Steve Waygood, Jamie Mansfield

After the success of the TCFD in driving focus on climate-related disclosures, the mood is upbeat that the Task Force on Nature-related Financial Disclosures (TNFD) can do the same for natural capital – despite awareness of the additional challenges it faces. Ahren Lester reports

Nicky Chambers

There is cautious optimism that the Task Force on Nature-related Financial Disclosures (TNFD) can build on the success of its climate-related antecedent, despite the additional challenges of complexity and scope faced by the natural capital initiative.

Speaking at the Environmental Finance "Natural Capital Investment 2021" conference, Global Canopy programmes and impact director Nicky Chambers – who is also co-chair of the TNFD technical expert group (TEG), which was launched in August – said that the TNFD was "definitely inspired" by the Task Force on Climate-related Financial Disclosures (TCFD) and they intend for the new initiative to be familiar to those already engaging with the TCFD.

"There will certainly be linkages and similarities between them, but definitely the TNFD is going to be more complex."

"We are conscious also that it is really quite complex for various reasons," she said. "Not least because it is multiple issues with nature, it is not just carbon and climate – and carbon and climate is fairly complex anyway. When you look at nature, you have got different types of nature and you also have the challenge of geolocation and geospecificity – so the fact that a litre of water in Manchester is not the same as a litre of water in Madras."

The TCFD was launched in 2015 by the Financial Stability Board and published its final recommendations in 2017, it has since grown to be one of the more widely followed climate initiatives. As well as over 1,700 direct signatories, the TCFD is being actively backed by investor climate initiatives – including Climate Action 100+ (CA100+) – and regulators such as in the UK and Hong Kong.

The informal working group for the TNFD was launched in July 2020 with ten financial firms as members. The IWG has now grown to more than 70 members who will work towards getting a framework finalised that can be adopted by firms by the end of 2023, Chambers said.

Aviva Investors chief responsible investment officer Steve Waygood – who has previously worked with the TCFD – told Environmental Finance he had cautious hopes for what the TNFD can achieve for nature-related financial disclosures, but was concerned that the TNFD was beginning with a "weaker foundation" than TCFD did when it launched.

"The CDP had 15 years of data before the TCFD was created, we had the Greenhouse Gas (GHG) reporting protocol with Scope 1, 2 and 3 already defined," he said. "We do not have that equivalent with the TNFD."

No need to 'reinvent the wheel'

Although Chambers agrees that complexity is a major issue for the TNFD, she argued that there is a lot of data out there already – it just needs to be made more easily digestible for financial actors.

"There is a sense that, actually, there is a lot of data out there already but it is not in 'financialese' – it is not accessible and not fit for purpose for actually making finance-based decisions" – Nicky Chambers, Global Canopy

She said that whereas a lot of the data on climate is held in the private sector – by companies and financial institutions – for nature, some of these datasets are within the private sector, but also a lot of the data on the state of nature is held by governments and other organisations.

"There is a sense that, actually, there is a lot of data out there already but it is not in 'financialese' – it is not accessible and not fit for purpose for actually making finance-based decisions," she said.

One of the challenges for the TNFD, therefore, is to look at the nature-related metrics that will be required, identify the gaps and try to fill those gaps. Chambers emphasised, however, that the TNFD is not looking to "reinvent the wheel", as there is a lot of existing data that can be repurposed for the nature-related financial disclosure debate.

Double materiality

Nonetheless, there will be differences in the TNFD compared with the TCFD – in particular, Chambers indicated that the TNFD would actively look at 'double materiality'. The TCFD is currently focused solely on the financial materiality of climate-related impacts – put simply, the impact of climate change on a company or financial institution.

There will be differences in the TNFD compared with the TCFD – in particular, Chambers indicated that the TNFD would actively look at 'double materiality'

In contrast, Chambers said that the TNFD has adopted a 'double materiality' approach which looks at the two-way interaction with nature. This not only considers how nature impacts a company and its operations, but also how the operations of a company impact nature.

For climate-related disclosures, double materiality has become a hot topic of debate. In response to a consultation on its proposed Sustainability Standards Board (SSB), the IFRS Foundation found that financial sector respondents were split over its suggested "gradualist" approach towards adopting 'double materiality' into its sustainability reporting standards. Some argued double materiality was a crucial best practice, others doubted there were distinguishable types of materiality in the first place, and others worried that pursuing double materiality would be overly complex and politicise the work of the SSB.

Exciting prospects

Also speaking at the "Natural Capital Investment 2021" event, Finance Earth managing director Jamie Mansfield said that one of the key tasks for the TNFD will be to push companies, financial institutions, investors and other stakeholders to communicate the nature-related metrics and real risks they are seeing in their own supply chains.

"As that builds up, over time, you start to actually see what are the unified views across sectors as to what are the appropriate metrics that can be set up and how those can be then standardised and regulated," he said.

"We do need TNFD to start defining measures that are relatively straightforward for companies – so they are probably going to be around governance, policy and strategy rather than fundamental measures of biodiversity and the extent to which individual securities are impinging on the ecosystem" – Steve Waygood, Aviva Investors

Where this gets "very exciting", Mansfield said, is when we see this understanding of supply chain risks and the reliance on natural capital from corporates turning into on-the-ground projects that start to boost demand for natural capital solutions.

Aviva's Waygood believes that, as long as the TNFD can find a relatively straightforward way for companies to deal with the complexity of nature-related financial disclosures, pressure can build for them to be embedded into international accounting standards over time.

"In learning from the TCFD success, what I would love to see is [the TNFD] target IFRS trustees – who have said they will be updating the accounting standards framework this year," he said. "It would be good to have nature-based measures in there as well. Then it would be wonderful if that was also embedded by IOSCO [International Organisation of Securities Commissions] into listing rules."

"For that to happen we do need TNFD to start defining measures that are relatively straightforward for companies – so they are probably going to be around governance, policy and strategy rather than fundamental measures of biodiversity and the extent to which individual securities are impinging on the ecosystem," he said. "That is incredibly complicated, and we need to see some real measures evolving there before they can put them into accounting standards."