Nature-Related Risks and Opportunities in Financial Disclosures

The past two years have made it clear that our societies and economies were not prepared to cope with the materialization of one global risk that did not even appear on the list of Top 10 risks in terms of likelihood, identified by The Global Risks Report in January 2020: “Spread of infectious diseases.” During the past decade, the global risks associated with the environment have been consistently appearing in the lists of the Top 5 risks in terms of likelihood and impact. Considering this, the pandemic should be seen as a warning that we cannot turn our eyes away from these risks and that we need to take action immediately to minimize their potential impact.

There are several initiatives that are looking to provide guidance on how to voluntarily identify and measure the financial impact these environmental risks could have on organizations and what they can do to manage them and reduce their exposure in case they materialize. The most relevant so far is the Task Force on Climate-Related Financial Disclosures (TCFD), which was created in 2015 by the G20 Financial Stability Board (FSB) and in 2017 issued its final recommendations to properly assess, measure and disclose climate-related risks and opportunities, in a consistent, comparable, and transparent manner. Since then, TCFD has guided the practices related to the disclosure of risks and opportunities related to climate change and received support from more than 3,400 companies in 95 countries and jurisdictions.

However, besides climate change, there are additional complex nature-related issues that can also have a significant impact on organizations and vice versa. In 2020, the World Economic Forum estimated that US$44 trillion of economic value generation is moderately or highly dependent on nature and its services. Acknowledging this and the need to consider nature in financial and business decisions, a new task force, similar to TCFD, was launched in September 2020 with the purpose of developing and implementing an integrative and adaptive reporting framework that reveals the financial risks and opportunities that arise from the relationship between nature and organizations. This initiative is the Taskforce on Nature-Related Financial Disclosures (TNFD) and is a global alliance of public, private, and international institutions and groups, supported by a consultative grouping of over 400 institutional supporters.

In March 2022, the TNFD released the first beta version of the framework for market consultation and it is expected to have the final version of the framework in 3Q23. The TNFD framework provides recommendations and guidance on nature-related risks and opportunities relevant to market participants, including corporate and financial institutions, regulators, stock exchanges, and accounting firms. Additionally, the TNFD builds upon the approach taken by the TCFD and aligns with the sustainability standards under development by the International Sustainability Standards Board (ISSB). The framework is being developed to be market-usable, science-based, and employing an integrated approach to climate- and nature-related risks.

The first beta version of the TNFD framework includes three core components: fundamentals for understanding nature, the TNFD Draft Disclosure Recommendations, and the LEAP (Locate, Evaluate, Assess, Prepare) Process for Nature-related Risk & Opportunity Assessment. The TNFD’s draft disclosure recommendations, the second core component of the beta version, follow the TCFD’s four pillars of disclosure: governance, strategy, risk management, and metrics and targets. In addition, it mentions that disclosures should be based on the assessment of nature-related dependencies and nature impacts, consideration of location and capabilities for nature-related risk and opportunity assessment and management, and a statement of the scope of disclosures and the covered elements in future disclosures.

Besides these voluntary disclosure initiatives, during the last two years, policies and regulations have been announced in various jurisdictions to make climate-related disclosure mandatory. The European Union, the United Kingdom, Japan and Singapore already have requirements or guidelines on the disclosure of climate-related information. Argentina, Brazil, Canada, China, Korea, Mexico, Russia, Switzerland and the US are planning to introduce requirements or guidelines related to assessing climate-related risks by financial institutions and promoting transparency. More recently, efforts to include biodiversity- and nature-related risks as part of mandated disclosures are being discussed and supported by regulators in Europe.

These developments show that regulation is just one source of pressure toward considering environmental risks as part of financial planning and disclosure by companies and financial institutions across the world. Leaving aside regulatory initiatives, the main pressure we have to act comes from the threat that climate change, nature loss and ecosystem degradation pose to the continuity of human existence. Both risks have to be analyzed as one if we want to minimize the systemic impacts that would arise from not taking enough and appropriate action during this decade.

At Carbon Trust, we work hand in hand with public and private sector stakeholders to embed climate- and nature-related thinking across their organizations, providing evidence-based analyses that help to identify, prioritize, and manage the associated risks. We are certain that these efforts are fundamental if we seek to drive the transition toward a sustainable, low carbon economy.