Assess Material Risks and Opportunities

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ASSESS Material Risks and Opportunities

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Introduction

The TNFD recommends that organisations use the four components of the Assess phase of LEAP outlined below to assess the nature-related risks and opportunities to their organisation. The LEAP components adapt and build on the TCFD steps for assessing climate-related risks.[1] As with TCFD guidance, the Assess components also relate to integrating nature-related risks into existing enterprise and portfolio risk management processes.

Based on feedback from pilot testers, the Taskforce has decided to streamline the Assess phase by combining previous components A1 (risk identification) and A5 (opportunity identification) into one component, A1 (risk and opportunity identification), and incorporating ‘opportunities’ into components A2, A3 and A4 as well.

Before starting the Assess phase of LEAP, organisations should apply the Locate and Evaluate phases, referring to the TNFD framework online platform and the TNFD additional guidance on impact and dependency analysis and measurement.

Additional Content

Table: The Assess phase of LEAP – v0.3 update

Component of LEAP	Overarching question and supplemental guidance	Related TCFD Step
Assess (A1) Risk and Opportunity Identification	What are the corresponding risks and opportunities for our business? Based on the evaluation of dependencies and impacts on nature (the Evaluate phase of LEAP), identify the organisation’s nature-related risks and opportunities.	Not applicable for climate-related risks
ASSESS (A2) Existing Risk Mitigation and Risk and Opportunity Management	What existing risk mitigation and risk and opportunity management approaches are we already applying? Identify the specific risk mitigation and risk and opportunity management processes and elements that may need to be adjusted to integrate nature-related risks and opportunities, as well as the functions and departments responsible for those processes and elements.	TCFD Step 2
ASSESS (A3) Additional Risk Mitigation and Risk and Opportunity Management	What additional risk mitigation and risk and opportunity management actions should we consider? Incorporate nature-related risks and opportunities into the existing risk and opportunity taxonomy and inventory used by the organisation. This includes mapping nature-related risks to existing risk categories and types, referring to the TNFD risk and opportunity register as a useful resource.	TCFD Step 3
ASSESS (A4) Risk and opportunity Measurement & Materiality Assessment	Which risks and opportunities are material and should be prioritised? Adapt existing risk and opportunity management processes and key elements based on information gained in the previous components of LEAP, including prioritisation and measurement of risks and opportunities.	TCFD Step 4

Additional guidance on the Assess phase

v0.3 includes additional guidance on the Assess phase of the LEAP approach:

Guidance on assessing material nature-related risks and opportunities, following the components of the LEAP approach (see updates to the Assess phase);
Nature-related risks and opportunity registers;
Illustrative indicators for categories of nature-related risks and opportunities (Annex 3.2); and
Guidance on selecting metrics for nature-related risks and opportunities (updates to the Assess phase).

This is cross-sector guidance, rather than sector or biome guidance, which is still being developed by the TNFD.

Considerations for the TNFD’s draft guidance on the Assess phase of LEAP

In developing its draft guidance on assessment of nature-related risks and opportunities, the TNFD identified the need to:

Retain flexibility for organisations to integrate into their own risk and opportunity management processes: Corporates and financial institutions use a wide range of practices and techniques to assess and manage their risks and opportunities and are best positioned to determine their overall approach.[2] The TNFD’s approach to assessment of nature-related risks and opportunities can be integrated into existing enterprise risk and opportunity management processes.
Build towards an integrated approach that considers other environmental and social risks and opportunities: Consideration of environmental risks in existing risk management practice is currently largely focused on climate. The many connections between climate- and nature-related risks and opportunities[3] necessitates an integrated approach that builds on emerging best practice with climate risk assessment and management.
Recognise connections between nature-related risks and opportunities and impacts on nature and society: Nature provides ecosystem services upon which business and wider society relies, such as the provision of clean water, clean air and the absorption of carbon from the atmosphere. Business impacts on nature can have impacts on wider society, which can present transition risks, such as changes in consumer preferences and reputational and litigation risk, as well as systemic risks.[4]
Draw on existing frameworks and standards to create an integrated approach: The TNFD can build upon coverage, albeit limited, of the assessment of nature-related risks and opportunities in existing disclosure frameworks and standards. Some cover nature or biodiversity in an integrated fashion, but many focus on one biome such as forests or one driver of nature change such as pollution.[5]
Recognise and fill gaps where aspects of nature-related risk assessment are underdeveloped: A number of technical aspects of nature-related risk and opportunity assessment are underdeveloped and still emerging, including: 1) measurement of the exposure of corporates and portfolios to nature-related risks; 2) the assessment of financial implications on the balance sheets and profit and loss accounts of corporates and financial institutions; 3) metrics for risks related to degradation of specific ecosystem services or ecosystems; 4) links with scenario analysis[6]; 5) risk metrics that account for potential ecosystem tipping points and thresholds; and 6) metrics for nature-related opportunities, which currently largely focus on the mitigation of risks as opposed to the strategic transformation of business models and transition plans for nature-positive outcomes.

Additional Content

Figure: An integrated approach to risk and opportunity assessment

Guiding Questions

A1: Risk and opportunity identification – What are the corresponding risks and opportunities for our organisation?
A2: Existing risks mitigation and risk and opportunity management – What existing risk mitigation and opportunity management approaches are we already applying?
A3: Additional risk mitigation and risk and opportunity management – What additional risk mitigation and risk and opportunity management actions should we consider?
A4: Risk and opportunity materiality assessment – Which risks and opportunities are material and should be disclosed in line with the TNFD disclosure recommendations?

Internal and External Tools to Support your analysis

Tools for risk analysis such as COSO Enterprise Risk Management Framework, Enterprise Risk Management (CGMA), ISO 31000 Risk Management Standard
Risks and opportunities for the TNFD disclosure recommendations.

Additional Content

Annex 4: Nature-related risks and opportunities and their financial impact

	Nature-Related Risks	Financial Impact
Physical Risk	Acute Degradation of nature and loss of their natural protection (e.g. caused by vegetation clearance for initial clearing for mining sites) can exacerbate severity of damages from extreme weather events such as cyclones, droughts, flooding and storms Species loss and ecosystem degradation (e.g. loss of connectivity associated with species ranges, impacting flyways or marine migratory corridors) due to leaks or accidental discharges (e.g. oil) contaminating air, soil and water bodies by the organisation itself or by other stakeholders located in the same area Disease or pests affecting the species or variety of crop the organisation relies on, especially in the case of no or low genetic diversity	Increased natural hazard costs, for example, impaired assets due to damages resulting from floods or cyclones, not limited to the organisation’s property (e.g. the infrastructure it relies on) Reduced revenue and/or increased costs due to interruption of operations or interruption/ deterioration of supply chain because of uncertainty over natural inputs/raw material supply (e.g. loss of pollinators, pests, loss of fish stocks, water), or damage caused by natural hazards Increased insurance premiums and potential for reduced availability of insurance on assets Increased capital expenditure due to adaptation (e.g. mechanical pollination, protection against floods) Reduced productivity and consequent rethinking of production processes or timing (e.g. agricultural production) Write-offs, early retirement of existing assets and relocation of operations and suppliers, affecting the costs of raw materials (e.g. transport)
Physical Risk	Chronic Increasing scarcity of key natural inputs Ecosystem degradation due to operations leading to, for example, deforestation Ocean acidification Overfishing Land loss to desertification and soil degradation and consequent loss of soil fertility Species loss and degradation due to soil, water and ocean contamination caused by organisation itself or stakeholders in specific areas
Transition Risk	Policy and Legal Changes to existing regulation/new regulation aimed at achieving nature-positive outcomes and targets Tighter (emerging) legislation (e.g. trade restrictions or taxes) on activities, products and/or services that impact nature, and rights, permits and allocations on natural resources designated to alleviate pressure on nature or impacts on local communities Enhanced reporting obligations	Increased costs of operations and inputs Increased costs of personnel and monitoring of activities required for reporting Increased fines and penalties Increased capital costs or production losses due to permit denials or delays
	Market Shifting customer values or preferences to products (e.g. foods, textiles) with lower impacts on nature Volatility or increased costs of materials	Reduced demand for products and services- supply disruption Increased production costs Loss of market access Increased raw material costs
	Reputation Shifts in consumer sentiment towards the organisation/brand as a result of poor nature management and/or lack of stewardship activities	Reduced demand for products Decreased employee retention and worker strikes Reduced loyalty of suppliers or key stakeholders
	Technology Transition to more efficient and cleaner technologies (i.e. with lower impacts on nature) Lack of access to data or access to poor quality data that hamper nature-related assessments New monitoring technologies used by regulators	Increased expenditure for research & development of new and alternative technologies Increased costs of operations and raw materials required to achieve nature-related goals Lack of access to technology developed by competitors resulting in higher operational costs

Compiled from: CDSB (2021) CDSB Framework Application guidance for biodiversity-related disclosures, TCFD (2021) Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures and TNFD (2021) Nature in scope

Nature-Related Opportunity	Financial Impact
Resource Efficiency Transition to more efficient services and processes that require fewer natural resources, energy or impacts on nature Increased reuse and recycling of natural resources Reduced waste production	Reduced operation and compliance costs Reduced exposure to raw material and natural resource price volatility Reduced reliance on natural resources and increased resilience to potential shortages
Products/ Services Development of less natural resource-intensive products and services (e.g. regenerative agriculture that preserves and restores soil fertility and leads to a reduced use of fertilizers) Development of green solutions (e.g. nature-related insurance risk products) Diversify business activities (e.g. new business units on green infrastructures)	Increased resilience due to business diversification New revenue streams Reduced costs of raw materials and production inputs Better competitive position to reflect shifting consumer preferences
Markets Access to new markets Use of public-sector incentives Access to new assets and locations needing insurance coverage	Increased revenues through access to new and emerging markets Access to public sector incentives Increased diversification of financial assets
Resilience Diversification of nature-related resources (e.g. use of different plant species) and business activities (e.g. start a new business unit on nature restoration) Participation in programs and adoption of resource efficiency and circularity mechanisms that reduce impacts and dependencies on nature Improve nature-related monitoring and data availability Implement nature-based solutions Invest in green infrastructure (e.g. protection against natural hazards)	Increased business stability Business and supply chain continuity Reduced capital infrastructure costs and costs for damages Improved risk mitigation Increased resilience to natural disasters Improved readiness and response to regulatory changes Increased market valuation through resilience planning
Financial Incentives Access to nature-related and/or green funds, bonds, or loans Incentives for suppliers to improve their nature- and ecosystem management	Increased access to funds and loans Access to capital for high-risk projects
Reputation Collaborative engagement with stakeholders to tackle nature-related challenges Improve condition of nature the organisation relies on	Improved reputation among stakeholders located in different areas Improved stability of operations and working conditions, and ability to attract and retain employees Increased brand value Improved supply chain engagement Increased influence of government policy

Compiled from: CDSB (2021) CDSB Framework Application guidance for biodiversity-related disclosures and TCFD (2021) Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures

Suggested outputs from the ASSESS Phase

A ‘long list’ of relevant nature-related risks and opportunities the organisation should act on.
A matrix of material risks consistent with the enterprise management framework of the organisation (e.g. significance by sector, business line, location, value chain, etc).
Executive Committee and Board level guidance outlining the organisation’s proposed nature-related risk management strategy.
Executive Committee and Board level advice on ways to avoid, minimise and mitigate nature-related risks and identify nature-related opportunities for the organisation.

Metrics for the Assess phase of LEAP

In this v0.3 release, the Taskforce has given additional consideration to the approach to measurement required for the Assess phase of LEAP (see Annex 3.1). This approach introduces two types of assessment metrics:

Exposure metrics, based on nature-related dependencies and impacts identified in the Evaluate phase of LEAP (Evaluate priority dependencies and impacts);
Magnitude metrics, which can be used to assess the financial implications to the organisation of nature-related risks and opportunities. Magnitude metrics should be used as part of the criteria to prioritise nature-related risks and opportunities (as well as the other criteria outlined in Annex 3.1). As far as possible, magnitude metrics should quantify the financial value of nature-related risks and opportunities for the organisation.

Determining the financial implications of nature-related risks and opportunities generally involves an organisation assessing its:

potential for damages or benefits against identified risks and opportunities;
planned responses; and,
response effectiveness.

The table below provides an illustration of exposure and magnitude metrics using the example of acute physical risks. Annexes 3.1 and 3.2 contains illustrative examples of metrics for all categories of nature-related risks and opportunities.

Additional Content

Annex 3.1: Guidance on the Assess Phase of LEAP

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Additional Content

Annex 3.2: Illustrative Indicators for Nature-related Risks and Opportunities

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Type	Risk	Example	Exposure metrics	Magnitude metrics
Acute risk	Changes in the state (condition and/or extent) of ecosystems on which the organisation is dependent or has an impact, resulting in changes to the flow of ecosystem services	Degradation of freshwater habitat due to pollutants released by the organisation and other stakeholders	Quantity and concentration of pollutants emitted (impact driver)Change in mean species abundance in freshwater ecosystems (ecosystem condition) Concentration of pollutants in water (ecosystem condition)	Costs associated with the relocation of operations and suppliers Reduction in revenue due to interruption of operations/supply chain Increased costs due to interruption of operations/supply chain Restoration costs Value of assets/revenue dependent on area Number of locations/business lines/facilities exposed

Type

Risk

Example

Exposure metrics

Magnitude metrics

Physical risk

Acute risk

Changes in the state (condition and/or extent) of ecosystems on which the organisation is dependent or has an impact, resulting in changes to the flow of ecosystem services

Degradation of freshwater habitat due to pollutants released by the organisation and other stakeholders

Quantity and concentration of pollutants emitted (impact driver)Change in mean species abundance in freshwater ecosystems (ecosystem condition) Concentration of pollutants in water (ecosystem condition)

Costs associated with the relocation of operations and suppliers

Reduction in revenue due to interruption of operations/supply chain

Increased costs due to interruption of operations/supply chain

Restoration costs

Value of assets/revenue dependent on area

Number of locations/business lines/facilities exposed

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Footnotes

Task Force on Climate-related Financial Disclosures (2020) Guidance on Risk Management Integration and Disclosure
Task Force on Climate-related Financial Disclosures (2020) Guidance on Risk Management Integration and Disclosure
For example, climate-related risks associated with increased droughts, floods or storms are increased by degradation of ecosystems that provide climate regulation and hazard risk mitigation services. Further detail on the climate-nature nexus is provided at: https://framework.tnfd.global/priority-areas-for-further-development/
WEF (2020); Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy
For example, CDSB Biodiversity Application Guidance, European Sustainability Reporting Standards, CDP Forests, and World Benchmarking Alliance (WBA) Biodiversity Benchmark.
The TNFD Scenarios Discussion Paper published as part of the v0.3 beta release provides further details on how scenario analysis can inform assessment of nature-related risks.

Introduction

Additional guidance on the Assess phase

Guiding Questions

Internal and External Tools to Support your analysis

Acute

Chronic

Policy and Legal

Market

Reputation

Technology

Resource Efficiency

Products/ Services

Markets

Resilience

Financial Incentives

Reputation

Suggested outputs from the ASSESS Phase

Metrics for the Assess phase of LEAP