The final TNFD recommendations were published in September 2023. The framework provides long-awaited guidance on how organizations should report on nature-related risks. Financial institutions should wait no longer to start addressing the recommendations.
In September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published its long-awaited guidance and a set of recommended disclosures on nature-related risks, impacts and opportunities. The framework rolls forward the four pillars and eleven disclosures of the widely established Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, and introduces three additional, nature-specific disclosures.
On top of this, TNFD guides organizations in identifying and assessing nature-related issues through the so-called LEAP (Locate, Evaluate, Assess, Prepare) approach. The final TNFD disclosure additional guidance for financial institutions is expected to be released later in 2024. The second draft sector guidance is open for feedback by 27 February 2024.
The complexity of nature
While understanding and reporting on climate-related risks has not been an easy task for organizations, the management of nature-related risks brings additional layers of complexity for several reasons:
• Climate change is a one-dimensional issue (temperature rises driven by GHG emissions), while nature has several dimensions, such as water, forests and species;
• Climate change is a global matter, while biodiversity and ecosystems are local issues;
• Climate-related metrics are straightforward (e.g., GHG emissions), while relevant nature-related metrics depend on the dimension, location and local context;
• Climate-related data is widely available and of relatively high quality and comparability, while data on biodiversity and ecosystems are still in their infancy.
Relevance for Swiss financial institutions
Biodiversity and ecosystems are vital elements to achieve Switzerland’s climate and sustainable finance objectives. Since the private sector will have to make a significant contribution to the achievement of these objectives, it is critical that companies understand, manage and report on nature-related issues. For financial institutions, the greatest exposure to nature-related financial risks arises from their investment, financing and/or underwriting activities. Swiss Sustainable Finance (SSF) and the Global Compact Network for Switzerland and Liechtenstein set up a national consultation group on implementation of the TNFD recommendations.
Catching the wave as it’s building
Financial institutions should keep in mind that building capabilities and developing an effective approach takes time. How they act or fail to act today will likely impact their level of maturity in the medium term.
As the TNFD recommendations focus on processes rather than metrics, the current lack of data should not prevent financial institutions from integrating nature-related risks into their governance, strategy and risk management.
Planting the seeds
Financial institutions should take the following initial steps to begin implementing the TNFD:
1. Understand the fundamentals:
• Build internal knowledge and educate the management team on the biodiversity approach;
• Familiarize yourself with the TNFD recommendations and LEAP approach; and
• Assess where your organization stands today by reviewing work performed on TCFD and/or nature-related issues.
2. Determine the scope:
• Conduct a high-level, preliminary scan to define the parameters for a nature-related assessment, given the financial institution’s business model and value chain;
• Conduct a qualitative, high-level analysis on exposures to sectors, activities and locations with material nature-related dependencies, impacts and/or risks (using dedicated tools such as ENCORE, supported by, among others, the State Secretariat for Economic Affairs (SECO) and the Federal Office for the Environment (FOEN), or the WWF Biodiversity Risk Filter); and
• Apply the optional LEAP framework to determine the institution’s set of leading indicators.
3. Develop a strategy
• Leverage the knowledge and experience currently available (e.g., TCFD, biodiversity risk heat maps);
• Build processes for identification, assessment and management of nature-related risks;
• Consider integrating climate and nature-related risk disclosures, as both topics form a virtuous circle and should be managed jointly;
• Prepare a report based on TNFD recommendations; and
• Plan how the institution should improve over time by defining achievements and milestones.