LEAP – the risk and opportunity assessment approach: P1: Strategy and resource allocations
LLocate The interface with nature
EEvaluate Priority dependencies and impacts
AAssess Material risks and opportunities
PPrepare To respond and report
P1: Strategy and resource allocations
Guiding Question: What risk management, strategy and resource allocation decisions should be made as a result of this analysis?
Management responses to organisation’s nature-related dependencies, impacts, risks and opportunities
The assessment of nature-related dependencies, impacts, risks and opportunities using the LEAP approach requires determining an organisation’s response to nature-related issues.
When considering effective business responses to nature-related issues, organisations should take into account both:
- Financially material nature-related risks and opportunities identified, based on exposure to dependencies and impacts on nature. Risks and opportunities identified as the highest importance using the prioritisation criteria in the Assess phase of LEAP should be addressed as a priority; and
- Significant impacts on nature that do not directly result in a financial risk or opportunity for the organization (in line with internationally accepted principles for responsible business conduct).
The frequency of review of business responses to nature-related impacts, dependencies, risks and opportunities may vary by organisation and should be determined by:
1) the frequency of the process for which the response is designed (e.g. reducing water consumption in a daily manufacturing process should be reviewed more frequently than that for an annual agricultural harvest as it may take multiple cycles); and
2) the timeline set to implement the response (e.g. addressing a short-term target will require more frequent reviews than long-term targets, in order to track progress and enable adaption of response where needed).
TNFD recommend responses to nature-related issues should be reviewed annually at a minimum.
Discuss the implications for strategy, resource deployment and capital allocation at a business unit and enterprise level
Based on the risk and opportunity assessments completed in the ‘A’ phase of the LEAP approach, senior management teams from across the business should discuss the implications for strategy, resource deployment and capital allocation at a business unit and enterprise level. These decisions should be framed within the broader strategy of the organisation and its financing envelope, taking into account short-, medium- and long-term considerations.
Key questions to help frame strategy and resource allocation discussions and decisions within the organisation might be:
- The integrity of our strategy: Does our understanding of the nature-related risks and opportunities facing our business now, and plausible changes over the medium to long term, require a fundamental rethink of our corporate or business unit strategy?
- Impact on intangibles: Beyond the implications for our core business processes generating cashflow, what are the implications of our assessment for the intangibles in our business, including customer loyalty, brand value and reputation?
- Regulatory considerations: What implications might changing regulation and government policy in the jurisdictions in which we have key business-nature interfaces – direct, upstream and downstream – change our ability to operate as a business, our cashflows, our profit margins or our enterprise value? What value might be at risk as a result of potentially higher impact mitigation costs and reporting compliance costs mandated by governments in our priority locations?
- Community engagement: What is the state of our relationship with local communities at our business-nature interface locations? How well are we engaging with local communities to shape and co-develop better risk management outcomes, and potentially natural capital solutions, for the ecosystem services on which we have a mutual dependence?
- Investor preferences: What are the attitudes and investment criteria of key capital providers to our organisation? What nature-related risks and opportunities are they assessing? How can we address their concerns and/or capitalise on their interest in financing nature positive outcomes in the locations, and across the value chains, in which we are active? What risks, if any, do we face of a sudden loss of investor confidence or interest as a result of our nature-related dependencies, impacts and risks?
Response metrics cover organisations’ actions, policies, commitments, plans and targets to manage nature-related dependencies, impacts, risks and opportunities. They should be:
- Directly linked to the dependency and impact assessment (the Evaluate phase of LEAP) and the risk and opportunity assessment (the Assess phase of LEAP), as illustrated in Table 1;
- Used to inform target setting and measurement of progress against targets, where appropriate (component P2 on target setting and performance measurement).
The TNFD defines the following categories of response indicators and metrics:
- Strategy; and
- Dependency, impact, risk and opportunity assessment and management.
Response indicators and metrics can be at the organisation level or can be product or service line-specific or location-specific. To ensure effective management of nature-related dependencies, impacts, risks and opportunities, organisations should ensure they are forming and assessing responses at all levels. The levels of indicators and metrics are nested (see Figure 1). Organisation level response indicators consider the overall performance objectives for risk management and ensure the right governance is in place to facilitate the management of more detailed product/service line risks, which then link to the most granular location-based indicators.Additional Content
Annex 4.7 of the v0.4 TNFD beta release contains illustrative indicators for each category of response metrics. Many responses will be specific to the sector and biome with which the organisation is interacting. Where this is the case, further indicators and metrics will be provided in TNFD sector and biome additional guidance.
Use of mitigation hierarchy
Organisations should adopt mitigation hierarchy principles when determining responses to identified nature-related issues. The TNFD aligns with SBTN’s Action Framework for the mitigation hierarchy, AR3T.Additional Content
This includes four types of actions that should be followed sequentially:
- Avoid: Prevent negative impacts from happening in the first place; eliminate negative impact entirely;
- Reduce: Minimise negative impacts that cannot be fully eliminated;
- Restore: Initiate or accelerate the recovery of an ecosystem with respect to its health, integrity and sustainability, with a focus on permanent changes in state; and
- Regenerate: Take actions designed within existing land/ocean/freshwater uses to increase the biophysical function and/or ecological productivity of an ecosystem or its components, often with a focus on a few specific ecosystem services. It further includes transformative action, which covers the ways companies can contribute to needed systemic change inside and outside their value chains. Examples of response metrics and their links to the mitigation hierarchy are outlined in Table 2