Overview

Introduction to the TNFD nature-related risk and opportunity assessment approach: LEAP

Since the launch of the TNFD, market participants have indicated that simple, accessible guidance on how to understand and respond to nature-related risks and opportunities would be a welcome complement to a set of disclosure recommendations. In response, the TNFD has developed a first beta version of an integrated assessment process for nature-related risk and opportunity management called LEAP.

  • Locate your interface with nature;
  • Evaluate your dependencies and impacts;
  • Assess your risks and opportunities; and
  • Prepare to respond to nature-related risks and opportunities and report.

The LEAP approach is voluntary guidance intended to support internal, nature-related risk and opportunity assessments within corporates and financial institutions to inform strategy, governance, capital allocation and risk management decisions, including disclosure decisions consistent with the TNFD’s draft disclosure recommendations.

This first beta release of the LEAP approach is an early prototype designed to stimulate feedback and input from market participants to help the Taskforce further develop this guidance.

LEAP has been designed and developed with three overarching considerations in mind:

  • The LEAP approach encourages users to carefully consider the scope of their assessment before commencing;
  • Analysts and preparers are encouraged to consult with relevant stakeholders as they work their way through the LEAP approach; and
  • LEAP is designed as an iterative process – across business locations, business lines for corporates, and across investment portfolios and asset classes for financial institutions – in line with enterprise risk management processes and reporting and disclosure cycles.

LEAP is not, in itself, a disclosure recommendation or a mandated process to adhere to the disclosure recommendations put forward by the TNFD. As such, not everything that is identified, assessed and evaluated using the LEAP approach needs to be disclosed.

Not everything that is identified, assessed and evaluated using the LEAP approach needs to be disclosed.

This early prototype of LEAP has been designed as a general approach for use by a wide range of corporates and financial institutions. The TNFD recognises that a general approach is difficult to develop, given variations in business models, sector-based market dynamics and the information needs of users. Financial institutions, in particular, have different decision making and information requirements to corporates; and there is significant difference among financial institutions.

This first beta release of the LEAP approach is an early prototype designed to stimulate feedback and input from market participants to help the Taskforce further develop this guidance. The Taskforce looks forward to feedback and suggestions from market participants to help with further iteration of LEAP for corporates and LEAP for financial institutions.

The TNFD also recognises that some organisations may already have an equivalent process built into their enterprise risk management framework. In such cases, the LEAP approach can be used as a checklist to ensure existing internal processes adequately address nature-related risks and opportunities. Critically, the TNFD believes that all aspects of the LEAP approach should be incorporated into any robust nature-related risk and opportunity assessment process.

LEAP approach for financial institutions (LEAP-FI)

With these complexities and nuances in mind, the TNFD has developed an extended LEAP approach for financial institutions (LEAP-FI). This early prototype of LEAP-FI focuses on the assessment of nature-related risks and opportunities in relation to financed activities (e.g. debt and equity investing, trading and insuring). Complex financial products such as derivatives are not included within the scope of the LEAP approach.

The TNFD believes that all aspects of the LEAP approach should be incorporated into any robust nature-related risk and opportunity assessment process.

Finally, in developing the LEAP approach, the Taskforce has built on and integrated existing, high-quality nature-related frameworks, tools, data sources and other guidance developed by a range of other organisations that are aligned with the TNFD’s principles and approach. The source frameworks and tools used are signposted throughout the phases of the LEAP approach, with descriptions of how they may be used by organisations. As new frameworks, tools, data sources and guidance are developed, the TNFD will add additional signposts into the LEAP approach.

The Taskforce welcomes feedback from all organisations, in particular financial institutions, as further iterative development of LEAP for corporates and LEAP for financial institutions is a key priority for the Taskforce.

Key design elements of the LEAP approach

The following key elements should be considered in the initial stages of identifying nature-related dependencies and nature impacts to inform an organisation’s analysis of risks and opportunities:

  • Location: Since nature-related dependencies and nature impacts are location-specific, understanding where the organisation, its operations and supply chains are located, and the specific nature context of that location (i.e. the biome and location-specific ecosystem), is essential to understanding actual, rather than potential, nature-related risks and opportunities.
  • Sector: The nature of the organisation’s business processes, products and services will similarly define its relationship with nature. Some sectors’ products and services will have a less or more significant impact on nature than others, depending on their production processes.
  • Drivers of change: The pressures on nature in different locations around the world will influence the level of risk exposure. For example, if climate change is driving shifts in water availability or changes in coral reef health, this can affect agricultural and tourism companies with supply chains reliant on coastal infrastructure in that specific location, which may become more exposed to extreme weather events formerly protected by coral reefs.
  • Timeframes and scenarios: It is also important to consider the timeframe, particularly when identifying nature-related risks and opportunities. As outlined earlier, the use of scenarios can be helpful to support longer-term thinking around key trends and critical uncertainties. This concept of scenarios has been included in the initial set of disclosure recommendations in this first beta version of the TNFD framework. Further consideration of scenarios will be included in future versions.

The LEAP approach for corporates

The LEAP approach for corporates involves four core phases of analytic activity:

  • Locate your interface with nature;
  • Evaluate your dependencies and impacts;
  • Assess your risks and opportunities; and
  • Prepare to respond to nature-related risks and opportunities and report.

These four core phases are broken down into 17 analytic components for corporates, each framed by a guiding question.

Additional Content

LEAP for financial institutions (LEAP-FI)

In addition to the 17 steps for corporates, the LEAP approach for financial institutions (LEAP-FI) includes a preceding set of four guiding questions that consider the type of financial institution, type of product/asset class, level of aggregation and sector in which the institution allocates capital.

This preceding phase is designed to enable financial institutions to progress to the ‘Locate’ or ‘Evaluate’ phase of the core LEAP approach, based on their specific business model as a financial institution, the nature of the capital being provided, and the appropriate level of aggregation in their portfolio. For example:

  • Financial institutions engaged in project finance, real estate, sovereign risk, some insurers (hazard assessment) and some private equity firms will make location-based capital allocations and therefore move to the ‘Locate’ phase of LEAP.
  • Listed and unlisted equity and debt are more likely to follow a sector or thematic-based capital allocation and would find it more appropriate to move to the ‘Evaluate’ phase of LEAP.
Additional Content

This early prototype of a LEAP-FI process is based on the following additional considerations:

  • Financial institutions operating as a corporate entity can apply LEAP approach for corporates as it pertains to their own operations and supply chain. However, these impacts will be limited compared to those of financed activities.
  • Financial institutions can encourage their clients (recipients of financial capital) to go through the LEAP approach for corporates and provide information in line with the TNFD disclosure recommendations.
  • For financed activities, nature-related risks will relate to the interface of those activities with nature. Financial institutions will therefore need information from the financed entities and/or projects to support their assessment.

Financial institutions need to apply the LEAP approach flexibly to accommodate variations in asset class, levels of influence and data.

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