A1: Risk Identification

Guiding Question: What are the corresponding risks for our organisation?

Assess the potential scale and probability of risks

As is standard in enterprise risk management frameworks, organisations need to assess the potential scale and likelihood of risks materialising over the short, medium and long-term.

The TNFD is aligned with the approach put forward by the TCFD:

  • Identify the most relevant drivers of physical and transition risks and opportunities;
  • Develop scenarios to understand how those drivers might change in the future;
  • Project impacts and dependencies; and
  • Map these projections to financial impact.
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Identification of risk drivers

First, organisations should identify the underlying drivers of nature-related risk in the ecosystem services, nature-related policies and demand drivers that are most relevant to their business or portfolio. Some of these drivers will be global in nature and broadly applicable across similar business operations and value chains. Others will be highly location-specific and require detailed consideration of drivers and local ecosystem conditions (as set out in the Locate and Evaluate phases of LEAP) as well as local political, policy and regulatory contexts.

As outlined in the TNFD Framework (Foundations for Understanding Nature), the physical state of nature is likely to evolve in the future and lead to changes in the provision of ecosystem services and potential physical risks to the organisation, its assets and business processes. For example, understanding an agricultural business’s dependence on soil quality for its core business processes and products and the risks associated with changes in soil quality can be assessed using detailed spatial data on soil quality locally. This then allows an organisation and its investors and creditors to consider the financial implications of identified risks based on an analysis of potential future soil health and agricultural productivity at that location.

In parallel, nature-relevant policy and regulation, technology and market sentiment might change, driving transition risks and/or creating new commercial opportunities for the organisation. Whilst many organisations have begun to define a transition risk pathway with respect to climate change, including a pathway to net zero emissions across scope 1, 2 and 3 emission categories, few have developed a comparable transition risk pathway for nature.

These tables present an illustrative list of nature-related risks and opportunities consistent with that provided for climate by the TCFD.

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Use of scenarios

Once key risk drivers and critical uncertainties have been identified, organisations should use scenarios to project how these drivers and uncertainties might plausibly change in the future. The key to the successful development and use of scenarios is the development of distinct but plausible, even if remote, future states of the world in which the organisation may have to operate.

The identification of risk drivers and critical uncertainties, when done well, is based on data about current and forward-looking trends and an integrative sense of how those trends might combine and recombine over various time horizons into the future. Organisations should look to leverage scientific evidence to help inform plausible forward estimates about the physical impacts of nature loss. The science on nature and nature-related impacts is increasingly clear that ecosystem functions are non-linear. Natural systems can be shaped by ‘tipping points’ which result in asymmetric shifts to new stable states. Hence, the limitation of forecasting and the value of scenario thinking to inform decision making on nature-related risks.

How dependencies and impacts link to risks and opportunities

In line with scenarios about how the external environment related to nature might change over time, organisations should consider how their business operations may evolve over time, and thereby shift the characteristics of their nature-related dependencies and nature impacts. As highlighted in the Figure below, this is a dynamic circular process of feedback loops between resource use, dependency and impact identification, material risk assessment, and strategy and risk management decision making. As well as identifying risks that need to be managed, this process may present commercial opportunities from adaptation and innovation around new business models.

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Due to these complex feedback loops over time, assessments of materiality are also dynamic as they must incorporate both dependency and impact analysis, and include forward-looking scenario analysis. They will also be constantly shifting as the ecosystem and business processes in priority locations both change over time.

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