The TNFD has sought to maximise the consistency and language of its approach with existing climate-related disclosure recommendations from the TCFD.
The development of a set of disclosure recommendations for
The TNFD draft disclosure recommendations are designed to:
- help provide better information to support strategy and risk management at the board and management level, and ultimately improve capital allocation and asset valuation decisions by corporates;
- promote more informed investment, credit and insurance underwriting decisions by financial institutions; and
- enable a stronger understanding of the concentrations of nature-related risk and opportunities, based on insights into nature dependencies and impacts.
The TNFD draft disclosure recommendations may also be used by public authorities to assess and manage systemic nature-related risks and inform macro-prudential policies and responses.
The Taskforce is continuing to identify and shortlist the specific disclosure metrics to operationalise its draft disclosure recommendations and will release its proposed disclosure metrics in v0.4 of the framework in March 2023.
Key design considerations
Consistency with the emerging global baseline
Market participants have been clear that they are seeking an integrated and globally consistent baseline of sustainability disclosure requirements. The current prevalence of different approaches, voluntary standards and variable metrics imposes significant time burdens, transaction costs and interpretive uncertainty on preparers and users. With those considerations front and centre, the TNFD has sought to maximise the consistency and language of our approach with existing climate-related disclosure recommendations from the TCFD.
Throughout the TNFD’s consultation and iterative framework development phase, the Taskforce will continue to work closely with standards setters, such as the new ISSB and international and national regulators, including IOSCO, the SEC and the European Commission, as well as international accounting bodies. This will align the TNFD’s recommendations as closely as possible to the emerging global baseline for sustainability reporting.
Enabling integrated disclosures in mainstream financial reports
The TNFD supports moves towards sustainability disclosures that are fully integrated into the mainstream financial reports issued by preparers. The TNFD actively encourages moves towards an integrated approach as quickly as possible, and by aligning the TNFD’s recommended disclosures closely to those of the TCFD, the TNFD hopes to facilitate early adopters to move towards integrated disclosures.
Recognising the inseparable feedback loops between climate- and nature-related risks and the importance of an integrated approach to risk management and disclosure, the TNFD’s proposed draft disclosure recommendations refer to the TCFD for specifics on disclosure of climate-related risks and opportunities. In line with this approach, the TNFD’s recommendations do not include specific language related to greenhouse gas emissions, on the assumption that the TCFD or other relevant frameworks and standards will be used by preparers for those specific disclosures.
The importance of location in nature-related disclosures
A corporate or financial institution should undertake a location-based assessment of its dependencies on nature and nature impacts in order to identify its risks and opportunities, recognising that dependencies and impacts occur in specific locations. For financial institutions, it is not primarily their assets and operations, but their investments, loans and securities, that need to be informed by a location-based assessment.
Organisations will need to consider location in the full set of their material impacts and dependencies across their direct operations and related upstream and downstream activities when making disclosures. Location-based analysis is required for a robust identification of material nature-related risks and opportunities.
A focus on opportunities alongside risks
Nature-related opportunities are included in the TNFD framework alongside nature-related risks. While recognising that organisations have no obligation to disclose specific growth and investment opportunities related to sustaining or building their competitive advantage, the TNFD draft disclosure recommendations encourage preparers to describe the nature-related opportunities they have identified over the short, medium and long term, as well as the metrics and targets used to assess future performance in pursuing those opportunities. This approach aligns with that of the TCFD.
Approach to materiality
The TNFD expects organisations to disclose the full set of material risks and opportunities related to the impacts and dependencies of their operations and their upstream and downstream value chains. For financial institutions, this means both direct operations, on-balance-sheet financing (e.g. lending, investing, insuring) and other business activity (e.g. advisory). In all cases, disclosures should be guided by the concept of materiality, recognising the specific challenge for financial institutions in aggregating and consolidating across large portfolios.
The TNFD recommends that organisations follow an enterprise value approach aligned with the global baseline standards under development by the ISSB, and aligned with the relevant jurisdiction in which reporting is performed. The TNFD recommends that organisations consider medium-to long-term timeframes. Disclosing risks and opportunities across multiple time horizon requires organisations to consider a broader set of dependencies and impacts, as some that are not material in the short-term may lead to additional risks and opportunities that are material for enterprise value over time. Aligned with the time horizon of many institutional investors, a long-term perspective on enterprise value creation highlights that the value created, preserved or eroded by an organisation (and its providers of financial capital) is inextricably linked to other stakeholders, society and the natural environment.
Approach to timeframes and use of scenarios
The TNFD recommends that organisations disclose how they define short-, medium- and long-term time frames, and how those timeframes align with the organisation’s strategic planning horizons and capital allocation plans. As guidance, the TNFD recommends the use of the following time frames:
- short-term – less than 2 years;
- medium-term – 2-5 years; and
- long-term – more than 5 years.
If a preparer is using definitions of short-, medium- and long-term that differ from the time frames recommended by the TNFD, they should explain these definitions based on the time horizon over which nature-related risks or opportunities could reasonably be expected to have a financial effect on the organisation.
The TNFD recommends that preparers account for different long-term scenarios to ensure that their strategy, governance, risk management, capital allocation and decision making appropriately considers long-term trends and critical uncertainties relating to nature, including climate change, that are relevant to their organisation. In its further work on scenarios, drawing on related work by IPBES and the NGFS, the TNFD will issue further guidance on scenario analysis of nature-related risks and opportunities. (See Priority areas for future development for more details on the TNFD’s forthcoming work on scenarios.)
Communicating and staging the scope of disclosures
Preparers should be clear and transparent in communicating what has been included in the scope of their disclosures. Given that nature-related disclosures will be new to many organisations, it will be prudent in many cases to start with a narrow scope and then expand over time. Preparers may wish to prioritise their disclosures and focus on specific activities or business lines where nature-related risks and opportunities are most material. They may focus on priority locations, as defined in the TNFD disclosure recommendations and the LEAP approach (see glossary of terms), and/or on specific aspects of their value chain and specific dependencies and impacts. For financial institutions, scoping choices may involve focusing on certain asset classes or financing and advisory lines of business.
When disclosures are made, a statement should be provided outlining what further disclosures are planned in the future. Coverage should expand over time so that after no more than 5 years organisations are considering all material impacts and dependencies across their direct operations and related upstream and downstream activities. This proposed timeline aligns with the TCFD’s concept of a five-year pathway to full disclosure.
Characteristics of useful information
To encourage effective disclosure, the TNFD proposes to use and align with the qualitative characteristics of useful sustainability-related information set out in Appendix D of the International Sustainability Standards Board (ISSB) General Requirements for Disclosure of Sustainability-related Financial Information Prototype and in EFRAG documentation. This identifies the types of information that are likely to be most useful to existing and potential investors, lenders and other creditors to make decisions about the reporting organisation based on information in its sustainability-related financial disclosures.
These ‘characteristics’ set out that useful sustainability-related financial information must be relevant and material, and faithfully represent what it purports to represent. The usefulness is enhanced if it is comparable, verifiable, timely and understandable.Additional Content
Approach to disclosure
As outlined in earlier versions of the beta framework, the Taskforce’s approach to the design and development of the framework was to start by building on the disclosure approach and guidance already developed by the TCFD. Market participants have been clear in their feedback to the TNFD that consistency of approach and language is essential to support early market adoption of a risk management and disclosure framework for nature-related risks and to help move to integrated sustainability disclosures over time that cover both climate and nature.
As explained and reflected in v0.1 and v0.2 of the beta framework, the Taskforce has therefore worked ‘outwards’ from the TCFD guidance in a structured, sequential design and development approach with three guiding questions in mind:
- Which of the TCFD recommended disclosures apply well to the nature context and can carry over with minimal, if any, change in approach and language to maximise consistency and support integrated disclosures?
- Which of the TCFD recommended disclosures remain relevant but need some adaptation to the nature context?
- What additional disclosures might be warranted and should be considered by the TNFD, given the particular characteristics of nature-related impacts, dependencies, risks and opportunities?
As highlighted in v0.1 of the beta framework, the Taskforce determined that seven of the 11 TCFD disclosure recommendations should be carried over with minimal changes (green) and the remaining four required some level of reconsideration and adaptation from a climate to a nature context (blue) – see Figure.Additional Content
Approach to materiality
The TNFD’s approach to materiality has been a topic of significant ongoing interest among market participants and other stakeholders since the TNFD launched. While the ‘Nature in Scope’ document published by the TNFD Informal Working Group prior to the formation of the Taskforce itself recommended that ’organisations should disclose not just how nature may (positively or negatively) impact the organisation’s immediate financial performance (“outside in”), but also how the organisation (positively or negatively) impacts nature (“inside out”)’. The draft disclosure recommendations outlined in the first two versions of the beta framework referred to ‘risks and opportunities’, reflecting the Taskforce’s decisions to build from the approach and language of the TCFD. The Taskforce also indicated it would consider an appropriate adaptation of the TCFD Metrics & Target B disclosure, particularly given the need to identify ‘impacts on nature’ and the concept of ‘scopes’ in the nature context.
At the same time, there has been much ongoing debate among market participants, regulators and other stakeholders around the concept of materiality and its practical application in the context of sustainability standards and disclosure. Some of the most frequently cited materiality concepts under discussion are highlighted in Box 2. The TNFD is continuing to follow these debates closely.
To facilitate the applicability and uptake of the complete set of TNFD disclosure recommendations when released for market adoption in September 2023, the Taskforce is working on a mechanism to encourage the flexible application of the TNFD disclosure recommendations, so that market participants can start disclosing as soon as v1.0 of the framework is released for market adoption, and increase their disclosure ambition over time.
To do this, the Taskforce is exploring a flexible approach to the application of the framework that could be subject to independent audit. This will likely centre around distinguishing between:
- use of a ‘core’ set of TNFD disclosure requirements that constitute a baseline of TNFD adoption; and
- use of additional disclosure recommendations that would represent ‘enhanced’ disclosure, depending on the type and size of the disclosing organisation.
Over time, the TNFD would encourage all report preparers to increase disclosure ambition by moving from ‘core’ to ‘enhanced’ disclosures. Among other benefits, this flexible approach would provide flexibility among organisations with differing capacities, such as a globally significant financial institution or major global corporation and a small or medium size forestry enterprise in an emerging market economy.
The Taskforce is continuing to evaluate a flexible application approach to the use of its disclosure recommendations and will provide further details on the proposed approach in v0.4 of the beta framework in March 2023.
In short, the combination of a spectrum of recommended disclosures covering nature-related dependencies, impacts, risks and opportunities, and a flexible application approach, depending on the type and size of the disclosing organisation, will help to ensure the broad relevance and usability of the TNFD framework to corporates and financial institutions everywhere and accommodate their preferred or required approach to materiality.
Given the critical and urgent necessity for corporates and financial institutions to identify, assess, manage and disclose their nature-related dependencies, impacts, risks and opportunities, the TNFD prioritises enabling rapid and broad voluntary adoption.
Debates on materiality continue to evolve with a number of related definitions:
- ‘single materiality’ focused only on risk to the enterprise value of a business;
- ‘double materiality’ or ‘dual materiality’, as advanced by European policy makers and regulators, incorporating a focus on impacts and risks to climate and nature as well as the enterprise;
- ‘dynamic materiality’, referenced by a number of the standards bodies now incorporated into the International Sustainability Standards Board (ISSB), the World Economic Forum and others, emphasising that material issues are dynamic and change over time; and
- ‘societal materiality’ used by the Science Based Targets Network (SBTN), emphasising an obligation to contribute to social outcomes beyond what might be required by regulation.
As the developer of a framework for practical application by market participants, the Taskforce is guided by a core design principle and goal that the TNFD framework should be applicable to, and used by, corporates and financial institutions of different sizes, across sectors and jurisdictions, irrespective of their preferred or required approach to materiality. The modifications and additions included in this v0.3 update of the beta framework, including the new draft disclosures on dependencies and impacts on nature, are consistent with that approach. Together with the previously released draft disclosures on risks and opportunities aligned with the approach and language of TCFD, v0.3 of the TNFD beta framework now provides a complete spectrum of recommended disclosures to support the reporting preferences and compliance requirements of report users everywhere.
Revisions to draft disclosures in v0.3
Building on the 12 draft disclosure recommendations set out in v0.2 beta framework, this v0.3 release includes the following modifications and additions:
Modification/addition to disclosure recommendations
TNFD priorities for future work
Revised language for the third pillar of the TNFD disclosure recommendations to ‘Risk and Impact Management’ (changed from the initial TCFD language ‘‘Risk Management’).This revised language is being proposed by the TNFD to incorporate disclosure of nature-related impacts and dependencies, alongside the nature-related risks and opportunities that arise from those dependencies and impacts on nature.
|A new recommended disclosure on traceability under the ‘Risk and Impact Management’ pillar, which recommends that organisations ‘describe the organisation’s approach to locate the sources of inputs used to create value that may generate nature-related dependencies, impacts, risks and opportunities.’ Traceability refers to having transparent, accurate and complete data for the organisation to understand critical sourcing locations along the value chain in order to trace and manage nature related dependencies, impacts, risks and opportunities.||
|A new recommended disclosure on stakeholder, including rights-holder, engagement under the ‘Risk and Impact Management’ pillar, which recommends that organisations ‘describe how stakeholders, including rights-holders, are engaged by the organisation in its assessment and response to nature-related dependencies, impacts, risks and opportunities.’||
|Adaptation of the TCFD Metrics and Targets B disclosure (on emissions) to reflect impacts on nature, which recommends that organisations ‘describe the metrics used by the organisation to assess and manage direct, upstream and, if appropriate, downstream impacts on nature.’||
|A new recommended disclosure on the degree of alignment between an organisation’s climate and nature related targets , under the ‘Metrics and Targets’ pillar, which recommends that organisations ‘describe how targets on nature and climate contribute to each other, and any tradeoffs.’
This will help report users understand the robustness of an organisation’s integrated transition pathway and plan, aligned to both global net zero and nature positive goals.
High-level overview of disclosure recommendations
The draft disclosure recommendations for nature-related risks and opportunities in this beta version follow the TCFD’s four pillars of governance, strategy, risk management, and metrics and targets:
- Governance: the ways in which the organisation’s oversight and decision-making functions take nature-related risk and opportunities into account.
- Strategy: the integration of actual and potential effects of nature-related risks and opportunities on the organisation’s business model, strategy and financial planning.
- Risk & impact management: how the organisation integrates nature-related risks into its overall risk management approach.
- Metrics and targets: quantitative and qualitative performance indicators and aims related to nature-related risk and opportunities, based on nature dependencies and impacts.
These initial draft disclosure recommendations provide guidance for all sectors.
Preparers should apply four general requirements for the preparation of disclosures that cut across all four pillars of the disclosure recommendations:
- Identification of material nature-related risks and opportunities should be based on an assessment of nature-related dependencies and nature impacts;
- Consideration of the organisation’s interface with nature at specific locations should be integral to the assessment, recognising that nature-related dependencies and nature impacts occur in specific ecosystems;
- Consideration should be given to how the organisation ensures that the correct skills and competencies are available to assess nature-related risks and opportunities, and oversee strategies designed to respond to those risks and opportunities; and,
- A statement should be provided regarding the scope of current disclosures and what further disclosures are planned in the future.