The TCFD, a taskforce to develop risk disclosures on climate-related financial risk for companies, banks, and investors, has been gaining momentum, stimulating organizations across the world to report on their climate-related financial risks. In 2021, a very welcome successor has emerged: the new global initiative Taskforce for Nature-Related Financial Disclosures. In this article, we address nature-related risks and the challenges the TNFD faces in developing, measuring and reporting framework for nature-related risks which have severe business implications.
What are nature-related risks? What is the TNFD?
Despite rising public concern on consequences of biodiversity loss and nature-related risks, these risks are not yet integrated in business strategies. The TNFD, founded by UNEP FI, UNDP, WWF, and Global Canopy, aims to build upon the success of the TCFD and develop a risk management and disclosure framework to report and act on nature-related risks. While TCFD’s focus is on climate, the TNFD will focus on the impact of nature and biodiversity loss; together, these two working groups will build on the concept of double materiality: urging companies to measure their impact on the environment and the impact of environmental hazards on companies.
What are nature-related risks?
The TNFD will pave the way for reporting and action on nature-related risks, but what does this exactly entail?
“More than half of the world’s economic output – US$44tn of economic value generation – is moderately or highly dependent on nature.” – World Economic Forum1
Nature-related risks stem from issues such as climate change, land use change, pollution, invasive species, air quality & local climate, overexploiting natural resources, and habitat destruction2, all of which result in the decline of crucial ecosystem services on which our society depends (e.g. food, clean air, global temperature regulation)3. Nature-related risks are particularly concerning in sectors with high dependency on nature and tendency to overexploit ecosystems, such as agriculture, marine fishing, food & beverages, retail, and the pharmaceutical industry. The WEF highlights the three industries most dependent on nature: construction ($4 trillion), agriculture ($2.5 trillion), and food & beverages ($1.4 trillion)4.
These risks can have devastating impacts on business through disruption of the supply chain, raw material price volatility, pricing externalities, stranded assets, and capital destruction.
What are the challenges of measuring and reporting on nature-related risks?
The establishment of the TNFD is promising, but the task force faces serious challenges as it kicks off.
First, there are limited metrics for nature-related impacts. When the TCFD was founded, the task force had a leg-up: clear goals had been established in the Paris Agreement, and GHG data had been finetuned for decades. The impact of business on nature is far more complex, as it is difficult to pin down far-reaching impact in a wide range of complex ecosystems and habitats in oceans, freshwater, soil, and forests.
The research documentary Serengeti Rules, highlights how human disturbance can lead to trophic cascades, a phenomenon in which species impact other species even when there is no direct interaction between them. These widespread and almost invisible links are incredibly hard to measure, but absolutely crucial to understand the true impact and dependency of business on the environment.
Second, if the TNFD takes a ‘siloed’ approach to environmental risk, it will run the risk of missing key links between climate and nature-related risks. It is clear that climate change and nature loss are mutually reinforcing; climate change leads to the loss of nature, and the loss of nature jeopardizes the ability to tackle climate change.
“Biodiversity loss and climate change are both driven by human economic activities and mutually reinforce each other. Neither will be successfully resolved unless both are tackled together”
– United Nations, Sustainable Development5
However, it is also crucial to think about how solutions to manage climate-related risks may be at odds with biodiversity conservation (and vice versa).
For example:
- Solar farms, an instrumental tool of the clean energy transition in a 1.5°C world, are often placed in key biodiversity areas and contribute to deforestation, and thereby, biodiversity loss.6
- Also, the increase in demand for metals, as a result of renewable energy technologies, leads to mining in remote and biodiverse places, and in turn, habitat destruction.
How will the TCFD and TNFD address conflicting solutions?
What can we expect in the future?
The TNFD is an important new development that can lead to widespread and accurate measurement and reporting of nature-related risks. However, the TNFD faces a long journey ahead; nature-related risks are highly complex, difficult to measure, and closely intertwined with climate risks. Climate change and nature loss are intrinsically linked and impossible to manage as two distinct and isolated crises; it will be key to link the climate focus of TCFD and the nature focus of TNFD from the very start of TNFD’s journey.
In the future, we envision that additional task forces will be set up to address issues such as water, waste, and human rights and positioned to collaborate with one another. A likely successor may be a Task Force on Water-related Financial Disclosures, linking climate change and flood and drought management. Each of these forces, in collaboration, will pave the way to understand instrumental linkages between these issues from a risk perspective and navigate the multifaceted world of ESG.
Learn more about climate risk scenarios and Net-Zero decarbonization pathways
Download the paper and dive into the concepts of net zero and climate risks and identify the synergies between the two.
