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TNFD, or not TNFD? That is the question

Investment Responsible investment

It was William Shakespeare that famously wrote “there are more things in Heaven and Earth, Horatio, than are dreamt of in your philosophy”.

While his allusions were probably more towards the spiritual, his sentiment could equally be applied to the sheer abundance and variety of life that can be found on this planet. The finite, but metaphorically uncountable, number of species and their constant and evolving interactions prop up the natural world, the ecosystems within it and, ultimately, the economy.

In 2020, the World Economic Forum assessed that more than 50% of our economy is directly dependent on nature1. In the last 50 years alone, it is estimated that around two-thirds of global biodiversity has been lost as a direct result of human activity2, and this is accelerating. This nature loss, the rate at which this nature loss is happening, and the resultant reduction in biodiversity therefore has serious implications for everyone with a stake in the global economy’s health and prosperity.

It is now widely accepted that climate change is a financially material consideration that all investors should be taking into account. Being more temperate than a summer’s day is becoming a lower bar by the year, due to soaring global temperatures that are a direct result of human-caused climate change. There is growing appreciation that the reduction of biodiversity and the associated nature loss is also financially material. Furthermore, climate change and nature loss are inextricably linked: this is a marriage of two risks that further the effects of each other in a potentially catastrophic chain reaction. Alternatively, they can be addressed together to lead to a positive outcome for the planet, and investors. The argument is very clear: biodiversity should be considered by investors alongside climate change as another systemic, undiversifiable risk. Addressing temperature rises is futile if we remove the necessary biodiversity from the natural world that allows the planet to support human life. In this blog, I will talk about what the TNFD is and what it is recommending, and how real action is required to make a difference.

What is the TNFD?

Initiated in 2020, the Taskforce for Nature-related Financial Disclosures (TNFD) is a global, science-based and government-backed initiative. The TNFD’s framework – launched in September 2023 – is designed to help all organisations identify, assess, take action and report on nature-related issues. The TNFD builds on the approach of the Taskforce for Climate-related Financial Disclosures (TCFD), which provides a framework for considering and addressing climate risks and opportunities – the TNFD aims to be consistent in its language and structure. This should make adoption easier for those that are already well versed in the TCFD requirements.

The TNFD focusses on nature, biodiversity and the ecosystem services that are key to the economy. It defines an ecosystem as “a dynamic complex of plant, animal and microorganism communities and the non-living environment that interacts as a functional unit”, for example: tundra, coral reefs and savannas. Ecosystems produce flows of benefits to people and the economy, called ecosystem services. Ecosystem services form the basis for understanding corporate dependence on natural capital and are crucial for corporate risk management. Any depreciation in natural capital will have a negative effect on ecosystem services. We are already starting to see the effects of this, due to the sheer scale of nature lost in the last 50 years.

What is the TNFD proposing?

Similar to the approach from the TCFD, the TNFD framework is built upon four pillars, consistent with International Sustainability Standards Board’s Sustainability Disclosure Standards:

  • governance
  • strategy
  • risk and impact management
  • metrics and targets

These will each be considered within the context of the six overarching general principles:

  • materiality
  • scope
  • location
  • integration with other sustainability disclosures
  • time horizons
  • engagement of indigenous and local people and other affected stakeholders

The TNFD is still in its early stages however, and therefore the recommendations are still fairly open ended; it will be down to participants, through the principle of materiality, to decide what should and shouldn’t be disclosed. This could be viewed positively or negatively, depending on how one frames it – I believe it can be good if participants can use it to effectively develop their nature considerations, rather than as an excuse not to do anything.

TNFD encourages the consideration of both nature-related risks and opportunities. Opportunities are key, as these actions create positive outcomes, both financial and otherwise, for organisations and for nature through positive impacts, or through mitigation of negative impacts. Additionally, rather than just focussing on how nature affects our capital, the consideration of impacts and dependencies means the TNFD will also focus on how our capital affects nature, and the feedback loop that this creates. This is an important step on from the base consideration of risks and opportunities, as it allows us to “connect the dots” between the different moving parts of the system and understand how they are related. This is a positive development from the TCFD, where the impacts our capital has on the climate are not considered.

How does this translate into real change?

Critics of the TCFD may have similar views of the TNFD – why find an original critique when copy and paste uses less electricity? The cynics will say that already-burdened investors wasting more time understanding another framework will prevent actual change. There is certainly some merit to this argument: it is true that the early days of TCFD for pension schemes have not been plain sailing, with those involved often finding the framework and DWP’s requirements time-consuming, confusing and difficult. Claire Jones has written a blog on how DWP’s requirements could be improved going forwards to counter these issues; one would hope that the learnings from the early days of TCFD could be reflected in any future requirements for investors to adopt TNFD.

The TNFD does face arguably more of a challenge than the TCFD too. Nature is broad, complex and difficult to measure. Consequently, trying to find actionable, useful, and clear considerations in such a vast space that can be understood and used in a time-efficient manner will not be straightforward. It is also true, though, that nothing will come of nothing – once again the Bard was probably musing along more spiritual lines, but his words can be applied here. There is a real risk that TNFD becomes another box ticking exercise, completed for the sake of it, but too complex to use for anything productive. It is important that mandatory reporting requirements are not introduced too soon; instead the TNFD should be used initially as a framework to help corporates and investors build their understanding and develop the skills needed to manage their exposures to, and impacts on, nature. This can pave the way for actions that can have real benefits for this planet, the life on this planet, and the economy.

Some investors will have the resources to delve into the details of TNFD themselves, however many asset owners will prefer to wait until knowledge, data and tools are better developed. Even so, action is still required, even if it is in a slightly different way: owners should look to their investment managers to ensure they are appropriately considering nature in the way they invest. It is down to asset owners to make sure that their managers are doing enough, having defined what they believe enough looks like. Let it be known that you are not assuming your portfolio is safe, or diversified enough, or immune; these are systemic risks, they impact society and the economy as a whole and will impact everyone, everything, and every investment. If the natural world is the stage, then all of us in it are far more than just mere players.

For more on how real world investment actions can contribute to tackling climate change, watch out for Shyam Gharial’s Vista article.

For the full TNFD recommendations, see the full report here.

[1] https://www3.weforum.org/docs/WEF_New_Nature_Economy_Report_2020.pdf

[2] https://www3.weforum.org/docs/WEF_Global_Risk_Report_2020.pdf