Based on the evaluation of dependencies and impacts on nature (the Evaluate phase of LEAP), organisations should identify nature-related risks and opportunities.
TNFD’s definitions of nature-related risks and opportunities
The TNFD has defined nature-related risks as potential threats posed to an organisation linked to its dependencies and wider society’s dependencies on nature and nature impacts. These can derive from physical, transition and systemic risks.
The TNFD has defined nature-related opportunities as activities that create positive outcomes for organisations and nature by creating positive impact on nature or mitigating negative impacts on nature.
Drivers of exposure to nature-related risks and opportunities
The exposure of the organisation to the nature-related risk or opportunity is driven by:
The presence of a corporate’s operations or value chain – or a financial institution’s deployed capital – in locations that meet the TNFD criteria for high-risk ecosystems (i.e. in areas of low ecosystem integrity, high biodiversity importance and/or area of water stress – the LOCATE phase of LEAP); and,
An organisation’s dependencies and impacts on nature (the EVALUATE phase of LEAP).
The identification of nature-related risks and opportunities can also be informed by an understanding of the wider context and driving forces affecting transition risks and nature-related opportunities, including but not limited to:
Local and international policy and regulatory contexts;
Changes in market dynamics; and
Changes in consumer preferences and demand.
Scenario analysis can support thinking on how these driving forces may evolve under plausible futures. For more on scenarios, see the TNFD discussion paper on its proposed approach to scenario analysis.
The link with dependencies and impacts on nature
Nature-related risks and opportunities arise from an organisation’s dependencies and impacts on nature, as illustrated in the figure below.
Nature-related risks can result from both dependencies and impacts on nature. Dependencies and impacts can lead to nature-related risks through:
Changes to the state of nature itself, caused by business impact drivers or external impacts/trends;
Changes to the flow of ecosystem services associated with the changes to the state of nature; and,
Impacts to society resulting from business impacts on nature that may affect the organisation, for example, through lack of access to land due to damaged stakeholder relations, or damage to reputation following the release of pollutants that affect the health of local communities.
Nature-related opportunities can occur:
When organisations avoid, reduce,mitigate or manage nature-related risks, for example, connected to the loss of nature and its associated ecosystem services that the organisation and society depend on; or
Through the strategic transformation of business models, products, services, markets and investments that actively work to halt or reverse the loss of nature, including by implementation of conservation, restoration and nature-based solutions (or support for them through financing or insurance).
While business opportunities can arise from restoring and mitigating existing damage through reconstructive or compensatory measures, business actions that avoid or minimise negative impacts on nature should be prioritised (following mitigation hierarchy principles or the SBTN AR3T framework)., Nevertheless, reducing negative impacts on nature does not equate to contributing to nature positive outcomes. Actions should ideally go beyond risk reduction and contribute to a nature-positive future by influencing the threats and pressures that drive nature loss and degradation globally. The TNFD’s categories of negative and positive impacts stemming from drivers of change in the state of nature illustrate these differences (see Evaluate phase guidance).
Financial implications for an organisation of nature-related risks and opportunities
Nature-related risks and opportunities have financial implications for an organisation through changes to its revenue streams, cost base and potentially cost of capital (through, for example, re-ratings of its credit risk or insurance premiums). In addition, they can change the valuation of assets and influence financing conditions. These transmission channels can have a positive or negative effect on credit, operational, market, liquidity, liability, reputational and strategic risk and opportunity. The figure below illustrates these links.
The TNFD nature-related risk and opportunity registers
Organisations can create a register of nature-related risk and opportunities most relevant to their business or portfolio (refer to the TNFD templates for nature-related risk and opportunity registers for examples of how this could look in practice).
For organisations that undertake scenario analysis to support their nature-related strategy and risk management decision making, a risk and opportunity register can usefully inform internal scenario thinking and be informed by it as relevant trends and critical uncertainties shift over time. For more on scenario analysis, see discussion paper on ‘The TNFD’s proposed approach to scenario analysis’.
Guiding principles for the preparation of the risk and opportunity register are as follows:
The risk and opportunity register should be completed for each stage of thevalue chain (upstream, downstream and direct operations). Where this is not possible, the area of the value chain with the greatest potential dependencies and impacts on nature should be prioritised in the first instance;
Where an organisation is unable to identify whether a risk exists, the impact on the organisation of the risk, or where significant assumptions have been made, for example, due to a lack of data, this risk should still be identified and assessed as far as possible as a precautionary measure;
To ensure a dynamic view of nature-related risks and opportunities, organisations should consider both current and future risks and opportunities. The risk management process should identify long-term risks, as well as short- and medium-term risks. Recognising that some nature-related risks may have implications beyond the timeframes typically used by organisations, the TNFD encourages organisations to consider the appropriate timeframe for identifying and assessing risks, including the risks that may arise in the long term. This should ideally involve the use of scenarios to explore how risks and opportunities (and the drivers of risks and opportunities) may change in the future.
Annex 3.2 provides illustrative nature-related risks and opportunities categories and indicators, building on the TNFD’s definitions and categories of nature-related risks and opportunities. Illustrative nature-related risk and opportunity risk registers are available on the TNFD online platform.
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