TNFD framework prototype can unlock global system change

A prototype for the TNFD framework for nature-related risk management and disclosures, and TNFD’s initial landscape mapping of nature-related data, is a first step towards unlocking systemic change in the global financial system. Now, future prototypes must integrate social dimensions & regulators must prepare to mandate nature-related disclosures.

By Darren Mckenzie

Core Communications Lead

The Taskforce on Nature-related Financial Disclosures (TNFD) released a first beta version of their framework for nature-related risk management and disclosures for consultation in March. This is a first step towards more transparent and data-driven action on nature protection and restoration across the finance sector. Now, the focus must be on continuously improving and expanding the first prototype, especially by advancing data guidance and the inclusion of social aspects. Regulators should now consider the next steps towards mandating nature-related disclosures in line with the final recommendations from the TNFD, which are expected in Q3 next year.

The components of TNFD’s beta v0.1

The first prototype version of the TNFD framework includes three core components:

• Concepts and definitions for understanding nature and related financial risks. Importantly, TNFD defines nature-related risks to include risks arising from an organisation’s, and other organisations’, impacts on nature as well as their dependencies on nature.
• Draft recommendations for nature-related disclosures. The recommendations largely align with the climate-related disclosures recommended by the Task Force on Climate-related Financial Disclosures (TCFD), only adapted for nature. A key distinction is an additional ‘location-specific’ disclosure recommendation for financial institutions and companies to ‘describe the organisation’s interactions with low integrity ecosystems, high importance ecosystems or areas of water stress.’
• Prototype guidance for how companies and financial institutions can undertake internal assessments of nature-related risks and opportunities. The step-by-step guide to assessing risks and opportunities, dubbed the ‘LEAP approach’, includes pointers towards specific tools that can help companies and financial institutions get started. ENCORE, an online tool developed by Global Canopy, UNEP FI and UNEP WCMC, is one of the tools TNFD recommends organisations use to evaluate their dependencies on nature in particular.

Alongside the draft framework itself, TNFD released a discussion paper that assesses the current landscape of nature-related data. The paper highlights many data platforms and sources that can support financial institutions and companies in applying the TNFD’s proposed LEAP risk assessment process. Alongside ENCORE, the discussion paper also highlights Global Canopy’s Trase project, for assessing deforestation risks in particular.

TNFD highlights ENCORE and Trase as tools that can help organisations apply the TNFD framework in practice.

Testing the TNFD prototype: the palm oil pilot

TNFD is requesting feedback from market participants on the initial beta version of their framework. Global Canopy is responding by undertaking the first TNFD-supported sector-specific pilot test of the beta framework with a group of organisations operating in, or financing, palm oil supply chains. The palm oil pilot follows on from Global Canopy and UNEP FI’s nature-related reporting pilot project in soy supply chains that we began last year, the lessons from which fed into this first beta version of TNFD’s framework.

Global Canopy’s palm oil pilot is the first sector-specific pilot test of TNFD’s initial beta framework.

In addition to sector-wide pilots, financial institutions and corporates can begin individual pilot testing of the TNFD framework from June 2022 via the TNFD’s interactive online platform.

Looking ahead: progress expected on social dimensions & data

TNFD has set out a range of issues they plan to develop further for the forthcoming iterations of the framework. The current beta version is only the initial prototype. We consider the climate-nature nexus, social dimensions, and data as particularly key priorities for the TNFD to consider. Climate change, nature loss and associated human rights violations are three closely intertwined crises, and data, tools and frameworks should aim to facilitate an integrated response to simultaneously address all of them. Of the three areas, the first beta version of the framework is most advanced in integrating nature and climate, as the disclosure recommendations in particular align closely with the existing climate-related disclosure recommendations from TCFD.

For social dimensions, the first beta version of the TNFD framework specifies that ‘local communities and Indigenous peoples play a critical role in safeguarding nature, and protecting and restoring nature plays an essential role in safeguarding Indigenous peoples and local communities, as they depend on ecosystems for their livelihoods.’ TNFD now plans consultations with Indigenous peoples and local communities to ensure their insights and rights are represented in the final recommendations from the Taskforce. We look forward to seeing social dimensions integrated further into future iterations of the TNFD framework as a result. This could take the form of a recommendation to disclose how an organisation’s nature-related impacts and dependencies also impact or depend on Indigenous peoples and local communities, and what policies the organisation has in place for safeguarding against human rights abuses linked to nature loss. But ultimately, it is the consultation process with the people at the front line of nature loss that will, as it should, determine the specifics of how the social dimensions of nature loss are incorporated into the TNFD framework.

When it comes to data, the first beta version of the TNFD framework makes it clear that lack of nature-related data can no longer be an excuse for inaction by companies and financial institutions. While data gaps remain, especially when it comes to location-specific data, TNFD states that ‘organisations are already using – and can start working on – what is available today.’ Moving forward, TNFD will ‘engage the data community to encourage and facilitate development of data, analytics and tools to support the application of the emerging TNFD framework.’ As a data-driven not for profit, Global Canopy will continue to contribute to the development of tools, including ENCORE and Trase in particular.

Lack of nature-related data can no longer be an excuse for inaction by companies and financial institutions.

Regulatory push necessary for rapid implementation

Already now, while the TNFD framework remains under development, financial institutions should communicate to the companies they invest in and lend to that they expect them to disclose in alignment with TNFD’s final recommendations, once they are released next year.

By signalling this expectation to companies early on, financial institutions can spur capacity building on nature within organisations. But while voluntary action plays an important role, the extent and urgency of the global crisis of nature loss means change from only a small group of leading financial institutions and companies is insufficient.

Regulation that requires stronger nature-related disclosure and transparency must complement voluntary market-led action to create a rapid system-wide response.

In the climate space, we have seen an increasing number of financial regulators move towards mandatory disclosures of climate-related risks, including most recently the US Securities and Exchange Commission (SEC).

Nature-related disclosures should follow, as financial regulators are increasingly recognising that nature is as equally a significant financial issue as climate. Last week, the Network for Greening the Financial System, which counts more than 100 central banks and supervisors as members, announced they consider nature-related risks to be material to financial stability. They highlighted the importance of nature-related disclosures in tackling the financial risks linked to nature loss, and called out TNFD as an important initiative.

Mandating nature-related financial disclosures for companies and financial institutions in line with the emerging TNFD framework could shift financial flows by improving transparency and data availability.

Explore the TNFD framework in full via TNFD’s online platform: framework.tnfd.global