Introduction
On September 19th, 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) released its finalized recommendations as part of New York Climate Week. The TNFD’s recommendations, which provide guidance for companies to internally assess and disclose their nature-related risks, come amidst other recent developments in global environmental policy, including the adoption of the landmark Global Biodiversity Framework, billed as a “Paris-style” deal for biodiversity, in late 2022.
While it is generally accepted that TNFD disclosures will be a key part of the ESG disclosure ecosystem, less attention has been directed toward how this disclosure framework complements and challenges larger themes in ESG discourse and practice.
Key ESG Debates Sparked by the TNFD
1. DOUBLE MATERIALITY
As with climate change risks, risks associated with nature loss are systemic. While only some firms’ and industries’ direct operations create material nature-related risks, such as freshwater pollution, pollinator declines, and deforestation, the impacts of these activities directly and indirectly impact companies across different industries. As a result, these risks could trickle up to diversified portfolios. The extent to which the economy relies on a healthy biosphere – estimates suggest 50% of global GDP is moderately or highly-dependent on nature – and the ease with which the impacts of nature loss could flow through the economy, make nature-related risks difficult to hedge against.
As a result, companies’ ESG strategies should likely demonstrate that, in addition to shielding the firm from nature-related risks, the firm’s operational activities also do not create nature-related risks for other companies or add to portfolio-level biodiversity risks. By requiring respondents to disclose their impacts and dependencies on nature, the TNFD framework is alive to this concern. This emphasis on companies disclosing how their operations impact collective sustainability, as well as on how ESG risks impact individual companies, follows a double materiality approach to ESG practice.
While double materiality is not a new thematic issue for the ESG space, the TNFD’s framework is among the first leading investor-oriented disclosure frameworks that afford companies opportunities to complete double materiality reporting (if companies wish not to do so, they can still release single materiality TNFD reports). While the Taskforce itself has not taken a firm stance on whether TNFD is a single or double materiality framework, its emphasis on respondents disclosing their impacts and dependencies on nature creates space for such disclosures.
2. METRICS
For the purposes of sustainability reporting, companies aiming to report the total warming effect of the different greenhouse gases they emit benefit from being able to express them in a harmonized metric, CO2e. In contrast, biodiversity, which encompasses all life and ecosystems on Earth, and a company’s impact on biodiversity, is harder to measure with commensurate units of exchange. By extension, companies with biodiversity impacts in different geographies will not be able to compare these impacts in an apples-to-apples manner. The search for exchangeable biodiversity metrics, including metrics that express biodiversity’s value in economic terms, remains inconclusive.
In light of these measurement challenges, key biodiversity metrics for companies should revolve around the material and discrete company decisions that drive biodiversity loss. Examples of these metrics may include land use change implicated in company operations and value chains, water pollution caused by company production processes, or the quantity of waste materials a company generates. Companies should additionally prepare to leverage third-party datasets to disclose the presence of endangered species or protected areas situated close to their business operations. After working through these processes, companies will be better positioned to establish a nature-related risk management strategy aligned with KPIs used by the Science-based Targets for Nature’s approach to biodiversity target-setting.
3. SUPPLY CHAIN IMPACTS
Most of a company’s negative impacts on biodiversity are likely to be buried in its supply chain. A best-in-class TNFD report will eventually encompass this aspect of a firm’s business operations. While respondents’ initial TNFD reports may be restricted to operational impacts, companies should prepare to assess their value chains in full in order to comprehensively grasp their nature-related impacts, dependencies, and associated risks. This will also prepare companies to align their TNFD reports with part of the Global Biodiversity Framework, which requires signatory nations to ensure companies disclose their nature-related dependencies, impacts, risks, and opportunities across operations, value chains, and portfolios. Moreover, issuing TNFD reports that encompass company supply chains will also prepare firms to be compliant with new regulations on nature loss, such as the EU’s and New York State’s respective laws on deforestation-free products and procurement.
4. GREENWASHING AND REPUTATIONAL RISKS
“Nature positive” has emerged as a buzzword associated with biodiversity-related disclosures in the ESG space. Nature positivity refers to successful efforts to halt and reverse nature loss measured in 2030 against a 2020 baseline. However, the growing popularity of the term has resulted in it becoming a catch-all phrase for any action that may benefit nature, without regard for measuring actions’ net outcomes for the natural world by a certain date. As biodiversity becomes more strongly embedded in the ESG space, corporations’ use of this term without an ESG program that can monitor their conservation initiatives and impacts will expose them to new frontiers of greenwashing and reputational risks. The TNFD has described its framework as an enabler of the transition of capital away from nature-negative outcomes towards nature-positive ones. This tension between description and delivery may speak to scientists’ and journalists’ concerns about pre-empting the TNFD’s potential to positively impact global conservation efforts.
Conclusion
The economy relies on a healthy biosphere. The TNFD’s recommendations afford investors and investees an opportunity to identify, appraise, and manage how the private sector contributes to the biodiversity loss crisis. Future respondents can prepare to issue TNFD reports by consulting guidance released by the Taskforce.
While the TNFD launch is a landmark date for corporate biodiversity policy, it is likely the first among many initiatives intending to direct businesses toward limiting, and eventually eliminating, their contributions to biodiversity loss. As we have previously noted, the pursuit of global biodiversity conservation targets will present individual companies with transition and stranded asset risks. Potential regulations on landscape protection and natural resource use may restrict a business’ access to value creation linked to frontline biodiversity loss. However, the achievement of these targets, and the attendant nature-related transition risks their achievement will pose to companies, will depend on governments’ ability to issue clear regulations and lead financing for conservation policy in protected and unprotected landscapes.
The TNFD framework has been developed for easy adoption by companies and easy integration within the “alphabet soup” of ESG disclosure frameworks and assessments. While most of the ESG disclosure and risk management space revolves around a single materiality approach to corporate sustainability, the additional disclosure burden of a company’s direct and indirect biodiversity impacts and dependencies introduced by the TNFD establishes new incentives for improved corporate sustainability performance. This presents companies with new opportunities to establish themselves as ESG leaders and provides them with an additional didactic framework to assess a new category of ESG risks. Now that the framework has been released, its ultimate effect on the natural world and on ESG practice are in the hands of companies and their investors.