The TNFD welcomes ongoing feedback from financial institutions on the modified LEAP-FI approach and will continue to evaluate and enhance its usability based on feedback from financial institutions.
Scoping the assessment - Corporates
The TNFD expects organisations to consider the following key scoping questions before embarking on the LEAP approach:
What business operations can reasonably be considered, based on available internal data and value chain data? Comprehensive assessment of nature-related risks and opportunities requires the assessment of direct operations as well as the full value chain (upstream and downstream). Nevertheless, the TNFD recognises that current data constraints may limit an initial assessment to direct organisational assets and operations only. Aligned with the TNFD’s view of the glidepath to full disclosure of nature-related risks, we recommend that organisations seek to have the data and capacity to assess direct, upstream and downstream risks and opportunities within a five-year time period.
What aspects of nature (realms, biomes, environmental assets and ecosystem services) can reasonably be considered, based on available internal, value chain and third-party data? It may, for example, be relatively easy to assess freshwater dependencies and impacts, but more difficult for other realms (e.g. dependencies and impacts on the ocean).
The TNFD recommends organisations that are testing the LEAP approach start with:
- A relatively narrow scope to ensure that the experience of testing the LEAP approach is practical and manageable. If capacity and relevant experience is limited, organisations may choose to start with an operating site, business unit, product line or input, instead of the whole business and relevant value chains. Once familiar with the approach, organisations can then extend the depth and breadth of their assessment.
- Available company data that is relatively easy to assemble and use. While the TNFD encourages organisations to include the full value chain for one or more business locations or operations, the TNFD recognises that data availability may make this practically difficult.
- Using existing frameworks and tools to support the assessment. A number of widely used and respected frameworks and tools are signposted throughout this beta version of the LEAP approach.
Additional guidance on evaluating exposure based on sectors where financial capital is allocated
The Natural Capital Protocol suggests that scoping of assessments be based on the organisational focus and value chain boundary, among other criteria that include value perspective, impacts and/or dependencies and type of value.
The Natural Capital Protocol – Determine the organisational focus
The Natural Capital Protocol considers three general levels of organisational focus, namely: corporate, project and product. There are important similarities and differences between these three levels in terms of how an assessment is undertaken.
Determining an appropriate organisational focus will likely depend on the business application you have chosen. This table provides some additional considerations for choosing an appropriate organisational focus.Additional Content
The Natural Capital Protocol – Determine the value chain boundary
This table suggests additional issues to consider when choosing the value-chain boundary. It is important to remember that the relative importance of each value-chain stage depends on the sector in which your business operates and therefore it is worth looking at sector guidance where this is available.Additional Content
The Science-Based Targets for Nature (SBTN) Initial Guidance for Business suggests in choosing the scope of their assessments that organisations consider different spheres of control and influence. At a minimum, the SBTN suggests organisations should cover their direct operations and choose how much to cover from the spheres of influence based on the characteristics of the issue and their company. The SBTN also recognises data availability and capacity constraints as a consideration.Additional Content
Scoping the assessment - Financial Institutions (LEAP-FI)
In addition to the four phases of the LEAP approach for corporates (Locate, Evaluate, Assess and Prepare) presented in beta v0.1, LEAP-FI v0.2 sets out a preceding set of scoping questions to help financial institutions prioritise and focus effort as they assess their financial portfolios.
The following scoping questions will help financial institutions to prioritise effort as they assess their financial portfolios using the LEAP approach:
Type of business (F1)
What is the nature of our business as a financial institution?
The nature of a financial institution’s business will shape its approach to using LEAP. Financial institutions can be highly diversified or more specialised. For example, a financial institution may have asset management, lending and/or insurance activities.
What are the main functional units within our business?
Consideration of different functional units within the business will also be important and may be a desired unit of analysis for assessment. For example, a financial institution may have retail, commercial and investment banking divisions. In practice, financial institutions may choose to start their assessment by focusing on one functional unit within their business. Over time, financial institutions should assess all areas of their business.
Entry points (F2)
The TNFD has identified three core entry points for financial institutions: 1) sector/geography, 2) type of product/asset class and 3) biome/ecosystem, outlined in further detail below. Financial institutions should use their best judgement to identify the most appropriate entry point(s) for their business.
In which sectors/geographies do we allocate capital?
Financial institutions may initially assess the exposure of their portfolios across sectors and geographies. For example, a financial institution may finance agriculture in the USA or fisheries in South East Asia. Following this initial prioritisation exercise, financial institutions could then undertake a deep dive into key sectors, biomes and/or companies.
What asset classes/financial products do we have and what are their potential interactions with nature?
Financial institutions may initially focus their assessment by product type/asset class. For example, a financial institution may have exposure via its commercial or retail lending portfolio, its insurance liabilities, its owned or managed assets and its capital markets or advisory activity.
This could then be followed by a deep dive into sectors, biomes and/or companies.
What biomes/ecosystems do our financial activities interact with and how?
Some financial institutions may initially focus their efforts on identifying the key biomes/ecosystems with which they interface. For example, a financial institution may interact with coastal biomes through the financing of tourism, impact tropical forests through agri-food lending or consider the dependence on freshwater ecosystems and related ecosystem services of its pharmaceutical and construction clients.
This analysis could then be supplemented with an assessment of the maturity of the regulatory environments in the jurisdictions for the relevant locations of specific ecosystems.
Type of analysis (F3)
What level of assessment is feasible/appropriate given the level of aggregation of financial products and services?
Financial institutions should take into account whether an assessment is appropriate at the project/site level, company level or portfolio level. The TNFD will continue to develop uses, learning from pilot testing, to help inform choices about the appropriateness of assessments at these different levels.
Additional guidance: case studies and tools
To support financial institutions to get started with the LEAP approach, TNFD has collated a reference list of case studies for assessing nature-related risks and opportunities, tools to support the assessment, guides which consider the various use cases and limitations of these tools and examples of how these tools have been applied in practice.
Tools to support use of LEAP-FI
Below is a non-exhaustive list of tools that can be used by financial institutions to support the LEAP approach. We distinguish between ‘tools’ and ’applications and analysis’, where the second have often been built from the first and may be more practically useful for financial institutions, while the first are the original source. For a more comprehensive catalogue of complementary tools and their use cases please refer to:
Outputs of LEAP-FI scoping questions
The output of the scoping questions could be, for example, an initial heat map of the priority nature-related exposures and opportunities within the portfolio. After the prioritisation is complete, further deep dives can be undertaken. Financial institutions may choose to assess initially only one area of their business. The TNFD believes that over time, they should assess all areas of their business.
LEAP-FI is designed to enable financial institutions to progress to the ‘Locate’ or ‘Evaluate’ phase of LEAP, as appropriate for their specific business activities, the type of asset classes/financial products and the appropriate level of aggregation in their portfolio. For example:
- Financial institutions engaged in place-based financing, such as project finance, real estate, some insurance (e.g. hazard assessment) and some private equity firms, may already have access to location-based data and therefore can start with the ‘Locate’ phase of LEAP.
- Listed and unlisted equity and debt, sovereign risk and commercial lending institutions are more likely to take a sector-focused approach and may therefore find it more appropriate to start their LEAP assessment with the ‘Evaluate’ phase, while recognising the importance of returning to a consideration of ‘Locate’ for evaluating the place-based dependencies and impacts on nature resulting from their investment and lending activities.
The TNFD recognises that the array of products and services offered by financial institutions is complex and diverse. These scoping questions are designed to enable financial institutions to better identify material nature-related exposures and opportunities across their portfolios. As, set out above, several entry points into the LEAP approach are possible for financial institutions, given their diverse needs and investing/lending objectives. Based on their individual business models, internal organisation and reporting systems, regulatory context and decision-making needs, each financial institution will need to use its best judgement to identify the most appropriate entry point(s) for their business.