- V0.2 of the Task Force for Nature-related Financial Disclosures (TNFD) beta framework was released on 28th June which includes an updated LEAP assessment process for financial institutions as well as further guidance on metrics.
- Some financial institutions have started taking steps to align to the draft framework (v0.1), with the greatest alignment around strategy. We expect more to make progress towards Nature Positive over the next 12-24 months.
- KPMG has developed a methodology that has been used in supporting clients to start assessing their nature-related risks, building on the TNFD publications.
TNFD published v0.2 of its beta framework on 28th June 2022. This builds on v0.1 which outlined the fundamental concepts and definitions for nature-related risk management. This will be further enhanced through future versions – October 2022 (v0.3) and February 2023 (v0.4) – before the release of the final version (v1.0) of the framework in September 2023.
Disclosure is expected against the final TNFD framework (v1.0) for firms that have signed up to TNFD. KPMG previously summarised the key elements of the framework v0.1 here and provided insight on our approach to managing the TNFD’s LEAP (Locate, Evaluate, Assess and Prepare) assessment process here.
V0.2 brings updates in several areas, but particularly noteworthy for financial institutions are the updated LEAP approach specifically for financial institutions (LEAP-FI) and more detailed guidance on metrics:
- TNFD acknowledges that financial institutions might be interacting with the framework differently depending on their business model and their investment and credit portfolios. The updated LEAP-FI assessment process introduces scoping questions that are intended to help prioritise and focus the assessment efforts. The addition of TNFD recommended tools as well as case studies showing their use cases and limitations will also be helpful as firms start to carry out their assessments.
- The release provides financial institutions further guidance on the types of metrics to disclose aligned to the LEAP process, with further considerations around how to select metrics and illustrative examples of metrics across realms. The TNFD are developing a set of “core” and “additional” disclosure metrics which will be finalised in September 2023. In the meantime, financial institutions should use the v0.2 guidance to inform the design of their own pilots to start developing an initial set of metrics. These can be enhanced as data and analytics improve and further TNFD guidance is released.
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What are some of the challenges for financial institutions?
- Location-specific impacts. Nature-related risks present additional complexities because impacts and materiality vary based on their geographic location and context. This contrasts with climate, where one tonne of carbon emissions has the same impact regardless of where it is released across the globe.
- Lack of universally accepted metrics, global targets, and gaps in data. The collection of nature-related risk data is less developed than for climate risk. For example, there is the measurement and reporting of GHG emissions and climate impacts for climate risk. When it comes to nature, data is currently fragmented and calculation methods are inconsistent. In the absence of a global target, the Taskforce is currently defining these important metrics, methodologies and materiality thresholds and overlaying these with the right location-specific data.
- Integrating climate and nature risk management frameworks. Climate change and nature are inextricably linked, impacting one another. Assessment and management of the risks relating to climate change and nature should be based on an integrated approach. Firms may want to start integrating nature into the existing climate risk management, with the same governance frameworks and processes, building these out to incorporate additional requirements for nature – for example different data sources and requirements.
- Practical application of the LEAP process: As we noted in our previous article, undertaking LEAP assessments can be challenging for financial institutions as it requires a detailed understanding of the complex interactions between business activities and the natural environment for many counterparties across multiple sectors, geographies, and often global supply chains.
TNFD v0.2 helps to address some of these challenges, and the Taskforce is planning to provide further guidance through future iterations and the final publication. Particularly useful will be the guidance on how the approach to indicators, metrics and targets can be adopted and used by financial institutions, which is currently targeted for v0.3.
However, financial institutions need to get started. So, to overcome some of these challenges we recommend financial institutions narrow their initial assessments to start with sectors and geographies where inherent risks are highest. An initial baselining and materiality screening should be performed to understand where these material exposures are. Pilot exercises can be used to develop the approach which can be later scaled up to cover other sectors and geographies.
How KPMG can help
KPMG is already supporting leading financial institutions on nature-related risks and has developed a methodology to help overcome some of the key challenges firms are facing, looking at the impacts of the firm on nature and the impacts of nature on the firm (or ‘dependencies’). The main components of this are:
- Baseline and define: KPMG is supporting financial institutions to understand their baseline position on nature-related risks, benchmarking against current and future market expectations. This includes work to achieve alignment on key terms and definitions, ensuring a common language is spoken across different functions and jurisdictions.
- Materiality screening: Leveraging both internal and external data sources, KPMG has developed a proprietary approach to identify and assess nature-related risks, supporting financial institutions to gain a greater understanding of their material exposures and identifying where these risks interact with existing risk types. This would be supported by the newly introduced scoping questions preceding the LEAP assessment.
- Pilot LEAP risk assessments: Following identification of priority sectors, KPMG has supported financial institutions in performing pilot assessments for nature-related risks, assessing the level of exposure across key risk types and geographies to enable prioritisation of actions to manage material risks.
- Implementation planning: KPMG has worked with financial institutions to develop implementation plans for nature-related risk frameworks, which include detailed objectives and actions for regulatory alignment in the short-term, as well as broader ambitions to fully embed nature-related risk considerations longer-term.
Get in touch with us for further insights on how we are helping our clients manage nature-related risks and opportunities.