TNFD: where next for nature and biodiversity? Key differences with TCFD and 5 things you can do now to prepare for it

Lisa Maughan, Natalia Chance

The ESG and Responsible Investment landscape is shifting from voluntary adherence to mandatory disclosure. The Task Force on Climate-related Financial Disclosures (TCFD) sets out a voluntary framework for climate-related reporting. This has become mandatory in the UK for Asset Managers (including Wealth Managers) and Asset Owners, with the largest Asset Managers and Asset Owners issuing their first TCFD product-level and entity-level reports by 30th June 2023. Other jurisdictions are in the process of codifying the TCFD recommendations into law.

Whilst the TCFD Task Force is now being disbanded and oversight for ongoing TCFD reporting will be overseen by the International Sustainability Standards Board (ISSB), further potential regulation is on the horizon. The Taskforce on Nature-related Financial Disclosures (TNFD) seeks to inform how nature related risks, impacts, dependencies and opportunities are considered in investment selection. The UK Government is currently assessing how to incorporate TNFD into policy and legislation, which means we could see a similar pathway adopted for mandated nature-related disclosures. This should not come entirely as a surprise given the interconnectedness between nature and climate.

How does TNFD align to and differ from TCFD?

The learnings gained from TCFD provide a valuable foundation for TNFD as they share the same overarching objective, structure and disclosures, albeit focusing on a different topic of disclosure.

Source: Alpha

There are a number of key differences that make TNFD inherently more complex:

  1. Consideration of double materiality: TCFD mandates investment firms to assess climate-related risks and opportunities at a corporate level and through the investment process. TNFD expands on this requirement, prompting consideration not only of the nature-related risks and opportunities, but also of the impacts and dependencies on nature arising from their business and investment activities. Therefore, TNFD applies the concept of ‘double materiality,’ suggesting that companies should not just evaluate how environmental issues affect their financial performance as in TCFD, but also recognise the impact their operations have on nature. This will require Asset Managers and Asset Owners to look ‘outwardly’ and assess how investee companies impact ecosystems, in addition to evaluating whether the deterioration of ecosystem services impact portfolio values.
  2. Location specificity: The identification, assessment and management of nature-related issues inherently differs from climate considerations. Unlike climate change, which is a global phenomenon, nature-related issues are specific to locations, necessitating local, context-specific assessments and responses. Therefore, Asset Managers and Asset Owners will need to identify where their own and their portfolio companies’ interactions with nature occur, requiring the development of new complex methodologies. For example, Asset Managers and Asset Owners may need to utilise geospatial data to match where their value chain operations occur in, or close to areas of threatened nature and biodiversity.
  3. Increased metrics: Reflecting the more diverse and location-specific array of factors that fall under nature and biodiversity, TNFD has a substantial number of core and additional metrics covering land, oceans, freshwater and the atmosphere which are divided into dependencies, impacts, risks and opportunities. This is in contrast to TCFD, where fewer metrics are required to support the central, and globally agreed-upon objective to reduce greenhouse gas emissions.

As an Asset Manager or Asset Owner, what can you do to get ahead of TNFD?

  1. Assess your portfolios to understand which of your holdings are most exposed to nature-related risks, opportunities, dependencies and impacts, and the extent of that exposure or impact. Define parameters for your exposure and impact, and integrate this into your risk management processes and engagement programmes.
  1. Understand your clients’ needs and preferences on nature across your current and target client segments. Knowing which clients have signed up to TNFD or have made nature-related commitments will help you to align your activities with client expectations.
  2. Assign ownership for TNFD: TNFD impacts multiple functions, therefore having the right sponsorship and skillset is crucial to drive accountability and progress. Budgeting appropriately and thinking through the right resourcing will drive efficiencies in the long run.
  3. Define your data approach early: A lack of available data and metrics posed a significant challenge to Asset Managers and Asset Owners in their TCFD reporting. Given the location specificity and increased metrics, data challenges loom ahead for TNFD. Understanding what data is already available (testing of TNFD revealed that many firms had existing but often overlooked nature-related data) and where the gaps are, is key to combat the long data sourcing lead times and focus on the systemic build out of capabilities.
  4. Understand the full scope of business requirements beyond just the metrics is crucial to truly embed nature-related disclosures. For instance, Asset Managers and Asset Owners should fully consider strategy, governance, and risk framework requirements and embed them into an effective oversight framework.

If you would like to discuss how to kickstart your TNFD programme or what it means to your organisation, please reach out to us and we will be more than happy to help.

About the Authors

Lisa Maughan
Senior Manager

Lisa is a Senior Manager in Alpha’s ESG & Responsible Investment practice with over 9 years’ experience in financial services. She leads Alpha’s TNFD and Biodiversity proposition leveraging her experience of implementing TCFD at Asset Managers and Asset Owners. She has a regulatory background having worked for the FCA and French AMF.

Natalia Chance
Consultant

Natalia is a Consultant within Alpha's ESG & Responsible Investment practice. She is driving Alpha's TNFD & Biodiversity proposition and is the ESG & Responsible Investment practice Business Manager. Her experience includes working with Asset Managers on large-scale transformation, investments and regulatory programs.