The Taskforce on Nature-related Financial Disclosures (TNFD) is the world’s latest effort to tackle the rapid loss of natural ecosystems. It aims to put nature at the center of business conduct and financial decision-making considerations. TNFD, initiated by some of the world’s largest companies, employs a market-led approach; it combines input from leading science and data bodies, and is designed to be easily adoptable for both businesses and financial institutions.
TNFD achieves its aim by leveraging the dependency businesses have on nature and facilitating the disclosure of these dependencies so that financial institutions can make nature-informed decisions. Over half of the world’s GDP is dependent on nature. Therefore, the deterioration of the natural world places large portions of our economy at risk. In order to assess these risks, businesses are obliged to understand their dependence and impact on the natural world.
On March 15, TNFD took an important first step towards the integration of nature considerations in business decisionmaking: the release of its first beta framework. It was their publication of the first version of their disclosure tool. In order to ensure that the framework can be implemented by the relevant stakeholders, TNFD simultaneously opened the framework for market participants.
“Involving market players from around the globe in reviewing and testing the prototypes of the TNFD framework at an early stage is critical, and we are pleased to already have several Chinese institutions participating in the consultative TNFD Forum,” Tony Goldner, TNFD Executive director stated. He went on to say that “Nature-related risk is a complex topic, and integrating input from the organizations and individuals that will ultimately apply the framework in practice will ensure the final version is usable and effective when it’s released next September.”
The framework is already well recognized and being utilized around the globe. According to TNFD, individuals from more than 65 countries and territories have begun to explore the first beta version of the framework via TNFD’s online platform. In addition, G7 Finance Ministers and the G20 Sustainable Finance Roadmap have endorsed TNFD. The framework is used to provide progress reports to the G20 Sustainable Finance Working Group.
David Craig, co-chair of TNFD, told the Nikkie ESG Forum, that “every company depends on nature for things such as raw materials and individual ingredients for food products. However, the current situation is that companies do not necessarily understand their actual exposure to financial risks associated with depending on nature and impacting nature.”
Even though some countries are participating in the green transition, the world’s natural environment is in rapid decline. The effects of a changing climate are evident, with the last seven years being the warmest years on record.
Interlinked with climate change and its consequences is the widespread destruction of ecosystems and biodiversity; the destruction of nature both fuels and is fueled by climate change, which creates a vicious cycle. The world’s rainforests, which are home to 50-80 percent of the world’s terrestrial animal and plant species, also store more than 500 billion tons of carbon. Human activities drive this climate change and decline of nature. Observing these impacts, one thing becomes crystal clear: we must change the way in which our economies interfere with the natural world, ultimately utilizing TNFD.
“The work of the TNFD is extremely important to help companies and financial institutions understand their impact and dependency on nature, as well as prevent the consequences of destroying it,” said Claudia Melim-McLeod, senior sustainable finance advisor at Rainforest Foundation Norway, which monitors the work of the TNFD from a civil society perspective. “Consider water scarcity, for example. Water is key for agriculture, textiles, construction, metallurgy and several other industrial sectors. In a warming world with increasing instances of drought, both governments and businesses need to ensure a predictable water supply. Rainforests absorb carbon and therefore rainforest protection is absolutely necessary to mitigate climate change and avoid water shortages. It is therefore in the interest of companies as well as governments to protect rainforests globally. Being market-led, the TNFD can complement government policies to address climate change and protect the environment in a way that is useful to private sector stakeholders, including insurance companies, banks and investors.”
The TNFD is one component in a large-scale shift in global financial markets, towards what is commonly known as ESG standards. The rising awareness of how the deterioration of our natural environment affects long-run economic stability is pushing ESG towards the top of investor agendas globally. Investors are increasing their reporting and disclosure expectations towards companies, and many have set net-zero or Paris alignment goals. We also see an increase in the number of initiatives aimed at improving sustainability in financial decision-making. For example, Finance for Biodiversity Pledge, the Science Based Targets Initiative, and the Taskforce on Climate-related Financial Disclosures (TCFD), which has served as a model for the TNFD.
Using the TNFD disclosure framework, a company would self-report high-level data on issues, such as water or deforestation, where it has its greatest biodiversity impact. The company then self-reports its impact each year on an aspect of biodiversity at a very high-level, such as giving a figure for its global water use not referring to individual projects or operations.
The TNFD is currently voluntary. The expectation is that eventually, regulators may require companies to produce a TNFD report each year. A report will need to cover different aspects: companies’ biggest risks and most relevant impact on biodiversity and nature, along with how biodiversity and nature impact their business financially.
The TCFD, which TNFD built its approach on, was launched in 2017 with the aim of changing the way businesses identified and managed their link to climate change and its impact, so that investors could take account when making financial decisions. At the core of TCFD lies an important approach; identifying risks in existing operations, but also finding new opportunities presented by the transition. As it stands TCFD, by lifting the relevance of climate change to new heights on the agendas of financial decisionmakers, has been a success.
Moreover, regulators in many countries are following suit with the financial sector, increasing the scrutiny of the environmental footprint of business conduct and setting stricter rules on imported goods. In November 2021, the EU proposed a new bill aiming to “minimize the consumption of products coming from supply chains associated with deforestation and forest degradation” by prohibiting the import of such products. The US saw similar proposals last year, with the FOREST Act seeking to prohibit goods that have been produced on illegally deforested land from entering its market. In addition, the states of New York and California proposed laws that require deforestation-free public procurement. Seen in conjuncture with the rise of ESG, these proposed regulations send strong signals on where the market is heading.
Financial risks of ‘nature negative’ investments
In response to specific financial risks from investments that have a negative impact on nature, TNFD provides useful guidance.
This year, in the area of biodiversity, a global biodiversity target is expected to be reached as the UN Conference of the Parties to the Convention on Biological Diversity (CBD) proceeds in Geneva and China. TNFD provides clear targets and practical indicators for portfolios with a “positive impact on nature”.
For a long time, financial investors such as banks have responded to natural risk information and ecological sustainability issues in a fragmented manner. The United Nations Environment Programme promoted the Principles for Responsible Banking to provide a coherent framework for a sustainable banking system. Over 270 banks worldwide have signed up to those Principles. For those signatory banks, biodiversity is identified as a major focus during the three steps of analyzing a bank’s current significant social, environmental and economic impact: setting and achieving measurable targets in a bank’s area of most significant impact, and publicly reporting on the progress towards implementing the Principles, being transparent about impacts and contributions.
Forests have traditionally gained the attention of investors because of the wide range of commercial products involved. But with the accelerating destruction of rainforests, the financial sector increasingly focuses on the financial risks of deforestation. In 2021, Nordea Asset Management sold off $45 million of its stake in JBS, Brazil’s largest food processing group, citing deforestation. In addition, several European banks have set strict policies on high-risk forest commodities such as palm oil, soy, beef and leather, timber and paper, to curb corporate destruction of forests.
In response to global climate change, companies, investors and governments are also working to achieve the net-zero greenhouse gas emissions targets set by the Paris Agreement. Nature-based climate solutions promote the consolidation or restoration of existing natural ecosystems, such as coastal mangroves, which not only absorb carbon dioxide but also protect the coast and reduce the impact of natural disasters. Restoring lakes and wetlands can conserve water resources and reduce flooding. These natural solutions can help pave the way for a net-zero economy transition, as well as profitability for banks, insurance, and other financial institutions to mitigate losses.
Financial investments involving the ocean, such as fisheries, seabed mining, and international shipping, are all closely linked to marine environments. In 2018, the European Commission, WWF, Prince of Wales International Sustainability Unit and the European Investment Bank jointly launched the Sustainable Blue Economy Finance Principles. In November 2020, the Bank of Qingdao became a signatory to the Principles, having been the first bank in China to join the initiative.
TNFD and China
China’s green transition has strong political backing from the very top. President Xi Jinping has pledged to work with the global community to tackle climate change and set clear carbon neutrality targets. In social aspects, TNFD’s disclosure guidance could help to improve its environmental and social risk management, with disclosures serving as a bridge for international business.
China uses environmental information disclosure to provide incentives for financial institutions and enterprises to pursue sustainable development goals. On Feb 8, China’s Ministry of Ecology and Environment (MEE) and China Securities Regulatory Commission (CSRC) jointly issued the Measures for the Administration of Legal Disclosure of Corporate Environmental Information. The internationally recognized standards of TNFD can help improve the natural risk management system of Chinese companies and draw attention to the natural risk aspect of environmental information disclosure. In addition, TNFD provides a global perspective on the negative impact of the global supply chain of Chinese businesses and examines their global environmental footprint.
As Chinese financial institutions and companies increase their overseas investments, conflicts can also arise. Many hot investment regions are also ecological hotspots, where natural systems are facing increased development activities. Chinese investors may struggle to get a true and timely picture of the on-the-ground situation. Natural risks are often a warning light for financial risks, and early recognition of natural risks can help to protect investors. With the help of the TNFD framework, investors can effectively identify the potential natural risks of their portfolio targets and combine them with other considerations in the ESG field to identify quality investment targets.
Another important significant aim of the TNFD framework is to expand the scope of China’s environmental disclosure platform. For the government to develop green finance and promote ecological civilization, it is important for them to promote a green economy strategy that includes biodiversity and nature conservation, understanding that ecosystems are all connected, rather than sticking only to carbon emission targets.
China’s progress in the ESG field can be reinforced through the TNFD system to direct capital flow to sustainable development projects that facilitate natural restoration and biodiversity conservation, which can be a gateway to international financial markets.
With growing environmental awareness among global investors and the promotion of TNFD disclosure, international financing will become more stringent in the assessment of indicators and disciplinary mechanisms for nature destruction. Due to a lack of TNFD disclosure, Chinese enterprises may stand to lose the support of green capital and the opportunity to explore emerging opportunities.
Erlend Trebbi serves as Sustainable Finance Advisor with the Drivers of Deforestation program for Rainforest Foundation Norway.
Wen Bo served as a council member of the World Economic Forum’s Global Agenda Council on Biodiversity & Natural Capital (2012-2014). He also worked as Program Director for the National Geographic Air and Water Conservation Fund and China Director for CDP.