Striving to Lift Investors' Bids on Nature, A Task Force Follows a Carbon-Tested Path

We have updated this story from its May 25, 2021 version to reflect sources'  estimation of progress in the time since our initial reporting. 

February 2021 brought new terms to debates about valuing nature, when investors and policymakers sized up a report called The Economics of Biodiversity- The Dasgupta Review. Commissioned by the United Kingdom’s Treasury department and led by Sir Partha Dasgupta, University of Cambridge professor, the review argues for transforming the existing economic and financial ecosystem to account for nature. As capital moves more aggressively toward forests, oceans and soils, the report’s call for a reporting system on nature can help investors integrate nature-related considerations into their decisionmaking.  
The notion here holds that companies face risks and opportunities in nature, just as they do in competitive markets or under certain regulations. In that context, a new group called the Task Force on Nature-related Financial Disclosures (TNFD) aims to broaden and deepen investors' interest in details from companies about how they manage for biodiversity outcomes.
TNFD is a global market-led effort to develop recommendations for disclosures on material and systemic nature related impacts and dependencies by companies and Financial Institutions (FIs). 
Discussions around it first started at the 2019 Davos Summit of the World Economic Forum (WEF). The idea gained further currency with reports published by the Organization for Economic Co-operation and Development (OECD) and WWF on disclosures around nature related impact. The UK government, which at the time was developing its green finance strategy, took the lead by setting up a TNFD partners groups comprising United Nations Development Programme (UNDP) and United Nations Environment Programme-Finance Initiative (UNEP-FI) along with non-profit organizations, World Wide Fund for Nature (WWF) and Global Canopy.  
The partners group brings together expertise in advocacy, conservation and environmental data initiatives, partnerships with the financial sector and global leverage and reach. Still in its early stages, an informal working group of TNFD has expanded to 74 members. Members include 49 financial institutions, aiming to understand nature better and develop strategies for risk mitigation. The informal working group will finalize the governance and membership structure along with setting up of technical working groups. The next two years will see testing of draft framework designs, target setting and finalizing data collection and assessment protocols. The release of the Taskforce recommendations is expected in 2023. 
The case for TNFD
The World Economic Forum estimates that roughly half of the world’s GDP ~ $44 trillion is in some way dependent on nature and its services. In their 2020 Global Risk Report, biodiversity loss is the biggest risk that the world will encounter in the next decade in both likelihood and impact.  To reckon with this risk,  leaders have concluded, financial players need a common vocabulary. Yet global acceptance of valuation methods to quantify losses or complex and dynamic risks has not come together.
As with carbon-related risks, the report contemplates systemic, material and transition risks associated with nature. Systemic risks affect every company in a sector, such as the possibility that droughts will undermine food companies. Material risks affect a business model, and might come up when a travel company sees fewer attractive vacation destinations. Transition risk captures the danger that a company’s assets, such as buildings or refineries, will lose value in a carbon-constrained economy. Building the understanding of physical risks, transition risks and systemic risks arising from continual destruction of nature will be the first task for the Taskforce members – a significant task. 
Neha Dutt, the lead representative of the UK government on TNFD, observes “that the understanding of how nature risks could filter back and have feedback loops into financial institutions’  portfolio is largely missing. Also, the supportive market infrastructure that allows FIs and corporates to make that link, generate decision-grade data is in its infancy. Natural capital reporting is a very fragmented space." 
As a document from the United Kingdom Green Building Council puts it, he TNFD aims to help consolidate these thousand flowers blooming in the natural reporting landscape by building a framework for organizations to report and act on evolving nature-related risks, in order to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.
A sector-based prioritisation has been adopted, building on the Task Force for Carbon-Related Financial Disclosure (TCFD)’s four pillar approach, to focus on those sectors most reliant on or with the heaviest impact on the environment. The blueprint contains guiding principles to ensure the framework is built for market-use, crowding in the best-in-class work done by the SBTN, the Group of 4 standard setters etc on natural capital management and reporting.
The TNFD can help advance this ecosystem by incentivizing investments in nature by helping companies identify the impact of their operations on nature, their own dependencies on ecosystems and the quantification of financial impacts on corporate balance sheets. 

There is also a need to embrace the reality that nature is more complex than climate.

This increased understanding can potentially reduce the shortfall in financial flows into biodiversity resilience and conservation activities – the gap currently estimated at $824 billion in Global Canopy's Little Book of Investing in Nature. Societies are moving in the opposite direction. Andrew Mitchell, founder of Global Canopy, compares the dynamic with an impending car crash in nature, adding: “if we do not change the movement of money, the world will finance itself into extinction.”
Targets and data
A challenge for TNFD will be integrating overarching targets and themes –like the 1.50 C target to rally efforts and capture global attention. Andrew Mitchell says:  “in the climate debate we have a currency for climate – a ton of CO2e; with nature we don't have such a metric on how much nature is being destroyed and what targets to be set.”   
The TNFD is having conversations with the Convention on Biological Diversity (CBD), who themselves are mulling over the question of setting up apex targets for nature. Still a work in progress, it could possibly be in the shape of no net less by 2030 with the actual metrics and measurements developing around this goal. 
At the same time, Neha Dutt maintains, “there is also a need to embrace the reality that nature is more complex than climate and we may not see an apex target similar to the 1.5C equivalent for nature”. She also adds that “this complexity is well understood by the people working on TNFD. The goal is to cut through this complexity and provide a practical, decision-useful framework that is fit for purpose and has real world impact in getting market participants to make more informed and aligned capital allocation decisions that contribute to bending the curve on nature loss.” 
On the question of data availability, Mitchell remarks, “there exists large amounts of data on nature and the way it is changing but not in the form that can be utilized by the financial sector to make decisions”. Additionally, unlike emissions which can come from a range of models in labs, this data is in the hands of governments, academic institutions, and bodies like the United Nations. 
The Business Case for a TNFD report outlines these data challenges in detail and mentions “that the existing methods that calculate the quantitative impact on biodiversity are not able to account for the highly localized impacts on nature. At the same time, there is a lack of high-quality company level data as they are not collecting on what specific business activity occurs at what geographic location”. These two issues make it difficult to both quantify and allocate impacts to specific institutions. Later this year, TNFD will also start looking at best practices in data, and metrics to integrate in the framework.
Amid these challenges, the successful launch and progress of the Task Force on Climate Related Financial Disclosures (TCFD) provides many parallels and lessons for TNFD.
Lessons from TCFD and the challenges ahead
TCFD was created in 2015 to provide recommendations on climate related financial disclosures. The support and acceptance for TCFD has received momentum with countries like New Zealand and UK proposing making them mandatory. 
However, as the TCFD Status Report 2020 admits, disclosures on financial and strategic impact of climate change on companies remains low. Mardi McBrien, Managing Director of Climate Disclosure Standards Board (CDSB), an international consortium of business and environmental NGOs which offers a framework for reporting financial information, outlines that a major challenge lies in the “continued disconnect between sustainability issues and financial issues within the organization with data being collecting for different purposes, controls and reliability.” The pace of integration of sustainability issues within the broader risk management framework has been slow and increasing the interoperability of information between different reporting frameworks is key. 
Taking lessons from such operational issues will be key for TNFD. The overarching framework in TNFD is planned to be modelled along TCFD’s core approach of Governance, Strategy, Risk management and metrics & target setting. In addition to the similarity in approach, Mardi McBrien also suggests that “it is also important that TNFD builds up on the existing work that has been done by Global Reporting Initiative, Sustainability Accounting Standards Board and CDSB among others in terms of data platform, standard setting, stakeholder engagement along with a thorough gap analysis.” With a shorter time span for achieving its targets, this can be crucial for TNFD.
This is well understood at TNFD and Dutt mentions that they are working closely with the Impact Management Project and International Financial Reporting Standards (IFRS) with the aim of producing a collaborative effort.
TCFD adopted a pure risk approach and identified financially material risks for the company. The TNFD takes it further and as Dutt remarks, “aims to provide an internal risk management and reporting framework that will empower and enable real economy actors and financial sector players to include the appraisal of nature-related impacts and dependencies as part of their risk architecture and decision-making."
Another challenge involves positioning TNFD among many parallel works. CDSB is working with the European Union on disclosures around Natural Capital which includes water, land and biodiversity; the Science Based Targets Initiatives’ Forest, Land and Agriculture (SBTi FLAG) project aims to guide companies to reduce their impacts in these fields. Neha Dutt, however, sees this as a positive development and cites the case of TCFD which “generated catalytic additionality by weaving together the best of what was out there, in terms of climate disclosure, into a framework that could be better understood and more easily integrated into the risk frameworks of FIs.” 
To further achieve synergies in efforts, Dutt adds, “the TNFD also aims to work with the CBD on the Global Biodiversity Framework, especially through the FI engagement strand, to create the Paris-equivalent for nature, that will send a strong signal on the transition risk of nature-related financial materiality.” 
Finally, it is also important how companies act on disclosures they make – climate or nature related. While TCFD has increased the awareness about climate related risks, there has not been a lot of action on risk disclosures. Rebecca Self, Director of Sustainable Finance at South Pole, calls it the big “so what” question. She emphasizes on the need for companies for “following risk disclosures with questions around short-term decarbonization, value chain sustainability and long-term impacts.” She cites the challenges around scenario analysis coming from ambiguity in predicting future events and measuring the associated impacts, and sees this  as a critical challenge for TNFD. To initiate the transition, TNFD could develop a tier-based framework to cater to the different institutions at different levels of abilities on nature related scenario analysis and reporting. 
The success of TNFD will also hinge on support from regulatory institutions-  and developments over the last few years look promising.
Potential blueprints include  the Indebted to Nature report by the Dutch central bank, which tried to quantify the exposure of the Dutch financial sector to biodiversity loss; and the Network for Greening the Financial Systems’ (NGFS) attempt at understanding the feedback loops of biodiversity loss to systemic financial risk indicate growing interest in nature related risks. 
NGFS, a powerful global network of 83 central banks and financial supervisors including the Federal Reserve, Bank of England and the People’s Bank of China in its 2020 report - Overview of Environmental Risk Analysis by Financial Institutions highlights the need for regulators and FIs to adopt Environmental Risk Analysis and indicates that urgency of biodiversity loss and need for mitigation is being understood at apex financial decision-making bodies.
The French Government recently introduced changes in its Climate and Energy law and have introduced mandatory disclosure of biodiversity related risk and impacts by FIs. Political and regulatory push will increase and fasten efforts to understand such risk and the launch of TNFD will provide a platform for them to do this and inform changes in their economic and financial policies.