New taskforce throws spotlight on nature-related risks for investors

The Taskforce on Nature-related Financial Disclosures (TNFD), a global initiative to quantify risks and opportunities presented by investments impacting on nature and biodiversity, was formally launched last week.

Dandenong ranges national park, Australia. Detailed analysis of the impact of investments on nature and biodiversity loss – and vice versa – is far from straightforward. Gagandeep Singh / Unsplash

The TNFD framework, scheduled for launch in 2023, is designed to complement the work of the existing Task Force on Climate-related Financial Disclosures (TCFD), which is already gaining traction as a means of stimulating more climate-friendly investment.

In a similar way to the Task Force on Climate-related Financial Disclosures, the TNFD will seek to provide information on how organisations operate, covering governance, strategy, risk management, metrics and targets.

Investors will then be able to use this data to assess how an organisation’s work affects nature and how nature-related risks are impacting the organisations themselves.

The TNFD is one of a number of major environmental initiatives to emerge in the run-up to the UN’s COP15 Biodiversity meeting to be held in Kunming, China, in October and the COP26 climate summit taking place in Glasgow, UK, in November.

Significant agreements on further action to tackle global environmental concerns at those meetings would boost the prospects for widespread adoption of the TNFD framework.

Bankrolling biodiversity loss?

It is easy to make the case for urgent change in investment strategies. Species numbers are falling fast, and established ecosystems are disappearing due to human impact on the environment, much of it bankrolled by large financial institutions.

In 2019 the world’s largest banks “invested more than $2.6 trillion in sectors which governments and scientists agree are the primary drivers of biodiversity destruction,” the Portfolio.earth Group of experts concluded in its Bankrolling Extinction report published in October 2020.

The World Economic Forum has estimated that more than half the world’s economic output is moderately or highly dependent on nature. However, while such figures catch the headlines, detailed analysis of the impact of investments on nature and biodiversity loss – and vice versa – is far from straightforward.

The TCFD’s climate framework can assess global warming impacts by comparing likely carbon emissions from an investment against what is needed to restrict global warming to less than 2°C.

But the TNFD faces a stiffer challenge in quantifying how a given investment will affect nature, given the absence of a similar overarching target and the complexity of quantifying impacts. Usable criteria will need to be established to measure the impact of livestock farming on deforestation, or agricultural chemicals on biodiversity around farmland, for example.

Institutional engagement needed

At the launch event, TNFD Co-chair Elizabeth Maruma Mrema, executive secretary of the United Nations Convention on Biological Diversity said that financial institutions had not been engaged with nature-related risks over the last decade, but that it was in their interest to do so given the impact of their investments on nature and biodiversity.

“Financial institutions will not want to find themselves unprepared, especially when 50% of their lending and insurance infrastructure is dependent on nature,” she said.

Collaboration with the TNFD to develop powerful analytical tools could turn nature-related risks into major opportunities, according to Mrema. David Craig, founder of financial-data company Refinitiv, which is now part of the London Stock Exchange Group, is her fellow TNFD Co-chair.

Useful investment tool

In a new report, Nature in Scope, TNFD says the initiative is “not a new standard but an aggregator of the best tools and materials to promote worldwide consistency for nature-related reporting.”

The TNFD says that, if it succeeds, financial institutions and corporate investors will be able to allocate capital on the basis of clear evidence of the environmental risks and opportunities. Their stakeholders will be able to better judge whether these organisations are meeting their environmental commitments.

Meanwhile, regulators will have a framework to assess whether investments meet sustainability requirements, and stock exchanges will be able to link listing requirements to environmental and natural capital-related risks and opportunities, as well as climate change.
Companies seeking to align themselves with TNFD reporting requirements will initially be asked to provide general information on their activities but will be asked to provide increasingly detailed information over time.

The TNFD regards itself as a coalition of the willing. Its structure is based on recommendations from an Informal Working Group of 74 Members from 24 countries, comprising financial institutions, corporates, governments, regulators, multilateral organisations, NGOs and others.