Nature-related disclosure requirements are quickly set to become the norm, catalysed by the TNFD, writes Rebecca Perlman
Businesses may soon be required to report on their nature-related financial risks and opportunities under the framework being developed by the Taskforce on Nature-related Financial Disclosures (TNFD).
The final version, due to be published in September, has been set up to address the information gap between organisations' interaction with nature and the impacts on financial performance and longer-term financial risks. Its significance in that regard is obvious and as such has been widely endorsed by corporates, financial institutions, governments, regulators and civil society.
With over half of the globe's total GDP moderately or highly dependent on nature, the TNFD's risk and opportunity management and disclosure framework is intended to enable the full array of market participants to incorporate nature-related risks and opportunities into their strategic planning, risk management and asset-allocation decisions.
Although a voluntary, market-led framework at present, business leaders should be under no illusion that it is likely to follow a similar trajectory to the Task Force on Climate-related Financial Disclosures (TCFD) framework, with regulatory adoption expected around the world.
Such adoption is likely to be accelerated in the case of the TNFD framework. The reason for this boils down to a number of factors, one of which is the close alignment between the TNFD and TCFD recommendations.
Many will already be familiar with, and reporting against, the TCFD's four pillars of governance, strategy, risk management, and metrics and targets, a structure that is carried over by the TNFD (with the addition of risk and impact management in the case of the latter).
Another factor is the increased regulatory focus on sustainability disclosures more broadly (that is, beyond climate disclosures), illustrated by the introduction the European Sustainability Reporting Standards under the EU's Corporate Sustainability Reporting Directive, and the International Sustainability Standard Board's sustainability disclosure standards.
Similarly, nature and biodiversity-specific laws and policies are emerging at a steady pace.
The UK's biodiversity net gain requirements under the Environment Act 2021 for new developments, the EU's Deforestation-free Products Regulation and the EU's 2030 Biodiversity Strategy all come to mind, as do international commitments made under the Kunming-Montreal Global Biodiversity Framework (GBF) and, in particular, Target 15 of the GBF – which says governments will take legal, administrative or policy measures to encourage and enable businesses to monitor, assess and disclose their dependencies, risks and impacts on biodiversity.
It should come as no surprise if nature-related disclosure requirements quickly become the norm.
Given the anticipated way forward, businesses may want to start making preparations for nature-related disclosures if they aren't already doing so.
These preparations might include a review of governance structures and arrangements, a review and refresh of business or investment strategies, an assessment of, and gap analysis against, new compliance frameworks, engagement with stakeholders, and the identification of risks, opportunities and impacts, among others.
Of course, those businesses that are not prepared may face nature-related risks. These might include risks to operations and supply chains due to dependencies on depleting resources, market and reputational risks stemming from technological advancements and shifts in consumer preferences, financial risks from higher insurance premiums and capital costs, transition risks from regulatory changes, or enforcement and litigation risks.
The TNFD framework will be an invaluable tool for businesses, but also governments and regulators
These risks are already materialising for some businesses with, for example, enforcement action in relation to greenwashing or litigation claims based on failure to exercise due diligence in the context of deforestation.
Others are looking to nature-related opportunities, such as improving brand value and accessing new markets, capital and revenue streams.
Either way, the TNFD framework will be an invaluable tool for businesses, but also governments and regulators seeking to drive economy-wide nature positive outcomes.
Rebecca Perlman is partner and head of ESG for the UK, US and Europe, Middle East and Africa at law firm Herbert Smith Freehills
People:Rebecca Perlman
