Below is a summary of the framework and the things that entities will need to consider.
What is the TNFD?
The TNFD was established in 2021, acknowledging the increasing need from stakeholders to factor nature into financial and business decisions. Its aim is to establish the importance of nature and its biodiversity within business and finance. The recommendations will help business and financial institutions integrate nature-related issues into decision-making, risk management and disclosures. As mentioned, it builds on the work on the TCFD, and doing this should encourage early adoption and promote alignment with existing risk management approaches.
General requirements of the TNFD
There are six general requirements that are applied across all four pillars of the TNFD:
- Approach to materiality – Entities should outline their approach to materiality, referencing any relevant regulations or standards. This will help readers understand the wider context of the disclosure and its significance.
- Scope of disclosures – Entities should include details of the scope of the disclosure, including areas of the business and wider value chain. This includes referencing the specific elements of the framework they are addressing with the disclosure.
- Consideration of nature-related issues – Entities should disclose any dependencies with, or impacts on, nature, including details of any risks or key opportunities.
- Locations – Entities should disclose where interactions with nature are taking place. The geography could heighten or increase the risk profile.
- Integration with other sustainability issues – Entities should state how they are integrating the TNFD framework with broader sustainability and climate-related disclosures. This includes any key alignments or trade-offs.
- Stakeholder agreement – Entities should think about how they are engaging with their stakeholders when putting together the report.
The four pillars and recommended disclosures
The TNFD sets out 14 recommended disclosures, made up of the eleven recommended disclosures set out by the TCFD, and three new disclosures. The TNFD recommended disclosures cover the four pillars first set out by the TCFD, which the International Sustainability Standards Board (ISSB) have subsequently incorporated into their first two Sustainability Disclosure Standards released in June 2023; IFRS S1 ‘General Requirements for Disclosure of Sustainability-related Financial Information’ and IFRS S2 ‘Climate-related Disclosures’. The four pillars are:
Entities should disclose their relevant governance arrangements. Recommended TNFD disclosures cover board oversight and management’s role in assessing and managing nature-related factors.
To achieve this, firms need to think about culture, tone from the top, roles and responsibilities and accountability processes. Entities are expected to get the right tools and metrics in place, and establish an effective reporting and management information (MI) framework to help senior management make informed decisions. Interdepartmental working groups, with effective training, can embed the right mindset, improve stakeholder engagement and promote oversight across the organisation. This includes upskilling boards to make sure nature-related issues are an integral part of decision-making processes.
Entities should disclose the practical impact of nature-related factors on their strategy, business and financial planning. Recommended TNFD disclosures cover nature-related factors in the short, medium and long-term. When considering the strategy, entities should consider the impact of physical, transition and legal aspects.
Risk and impact management
Entities should disclose how they are identifying, managing and assessing nature-related issues. Recommended TNFD disclosures cover processes for identifying nature-related factors in direct operations, across the value chain and in financed activities and assets; actions taken in response; integration across the firm’s wider risk management framework; and how the firm is engaging with relevant stakeholders.
Scenario analysis should be integral to help entities identify how nature loss can affect their business in the long term, informing risk management, strategy and resilience processes. Scenarios should consider science-based targets and build on any scenarios already available. They should also include metrics that relate to financial impacts and are comparable across a range of scenarios.
Metrics and targets
Entities should state the nature-related metrics and targets they are using in their disclosures and supporting processes. Recommended TNFD disclosures cover the metrics the firm uses: to assess and manage material risks and opportunities relating to nature; to manage dependencies and impacts; and all relevant targets and goals.
Metrics should be science based, but practical, and available to support annual reporting cycles. Incorporating financial activities and the full value chain, they should align to global policy goals, and reflect both positive and negative impacts. When putting together the relevant metrics, it is important to consider the specific biome, sector and location they apply to. All entities should have core metrics, assessing both dependencies/impacts and risks/opportunities, but they should also consider additional metrics, which are specific to their sector, location, and circumstances, and take wider objectives and impacts into account.
The LEAP approach
TNFD outlines the LEAP approach, which is designed as an internal process to help entities understand and manage their interactions with nature. This approach is not mandatory, but can be a useful tool to help entities get started. The four steps of the LEAP approach are:
- Locate their interface with nature. Entities need to think about their business footprint, the biomes and ecosystems they interact with, the locations they impact, and the sectors or business units affected.
- Evaluate dependencies and impacts. This includes identifying environmental assets and ecosystem services, finding any dependencies or impacts, and undertaking a dependency and impact analysis.
- Assess risks and opportunities for the business. Entities need to consider their existing mitigation controls and opportunity management processes, establish where they need to undertake further work, and consider material elements for inclusion in the TNFD disclosure.
- Prepare to respond to those risks and opportunities and report on them. This includes strategy and resource allocation, and disclosure actions, such as what to include in the disclosure and how and where to present those findings.
We support the release of the recommendations and framework by the TNFD and believe this will be next big thing in sustainability, after climate, for entities to focus on.
We agree that aligning the framework to that of the TCFD is a very sensible approach as entities will already be familiar with the TCFD framework and the four pillars of its framework. This will encourage implementation, despite the TNFD framework being voluntary for all entities. Many entities are already implementing it, and in some cases, applying it beyond the pilot stage.
In addition, as the TCFD framework is also the basis of IFRS S1 and IFRS S2, we believe the process of implementing these new recommendations should be closely aligned with existing processes that entities have been developing, leading to synergies when they start to consider their interactions with nature. In the absence of other existing processes, we think the LEAP approach provides a clear and accessible starting point for preparing disclosures.
The full TNFD recommendations can be downloaded from TNFD.global.