With the continuous updates and buzz around sustainability reporting, it’s sometimes hard to keep up – but, for those hoping for increased alignment and interoperability, one recent announcement was particularly exciting.
In December, when the European Financial Reporting Advisory Group (EFRAG) and the Taskforce on Nature-related Financial Disclosures (TNFD) signed a cooperation agreement to advance nature-related reporting (see the full press release here), my colleague Louise Heffernan and I were so thrilled that we immediately got together to think through what this means for our clients applying the EU’s Corporate Sustainability Reporting Directive (CSRD).
Our first conclusion was that the agreement is an important and helpful step in giving organisations confidence in their assessments of how nature and biodiversity affect their business and vice versa. Because it builds on consistent collaboration between EFRAG and the TNFD, it brings alignment of the EFRAG-developed European Sustainability Reporting Standards (ESRS) – which underpin the CSRD – with the TNFD’s recommended disclosures.
EFRAG and the TNFD flagged five specific alignment points that organisations implementing either CSRD or TNFD should be aware of:
- Alignment with other frameworks – Both the TNFD and ESRS use the familiar TCFD reporting pillars: Governance, Strategy, Risk and Impact Management, and Metrics and Targets.
- Alignment of material risks – Both the TNFD and ESRS emphasise the importance of impacts and dependencies. When considering material risks and opportunities in relation to the environment, the ESRS encourage disclosure of impacts, risks, and opportunities (IROs) and TNFD encourages assessment and disclosure of both impacts and dependencies.
- Alignment on disclosures – All 14 TNFD recommended disclosures are covered in the ESRS.
- Alignment on the approach to materiality – The TNFD framework has been designed to accommodate an impact materiality perspective, facilitating alignment with the ESRS.
- Alignment of risk assessment approaches – The TNFD’s Locate, Evaluate, Assess and Prepare (LEAP) methodology, which can be used to systematically identify and assess nature related risks, can be used to conduct double materiality assessments (DMAs) on four out of five of the ESRS: pollution (E2), water and marine resources, (E3) biodiversity and ecosystems (E4) and resource use and circular economy (E5).
We also identified two areas in which we can see the agreement helping organisations improve their sustainability profile and performance:
1) An increased ability to manage nature-related risks and embed this into business strategy. It is clear from the breadth of the CSRD, and incorporation of all five drivers of nature and biodiversity loss in within the ‘Environment’ ESRS, that nature and biodiversity are seen as fundamental to understanding implications on and of the environment. With TNFD being the global poster child for identifying and addressing nature-related risks and opportunities, the agreement is real progress for supporting organisations to actively consider nature and biodiversity in their CSRD DMAs and understand how this affects their business strategy over time.
2) An efficient approach to providing information about nature in sustainability reporting. It is no secret that nature and biodiversity loss need to be addressed with the same velocity as climate change, and that both need to be considered in tandem from a business strategy perspective. And because the agreement gives a clear signal to organisations that they can use the TNFD framework in applying ESRS, it may be able to help organisations with securing resources and capacity when it comes to reporting - not just to meet the requirements but to inform strategy. For those working to increase their understanding of how their organisation interacts with nature, great efficiencies can be found in looking at both ESRS and TNFD and utilising the vast resources that are provided by the TNFD to inform materiality assessments and, ultimately, reporting.
We have anecdotally observed in our client conversations that organisations that have already piloted the LEAP assessment at any level may have a head start on their DMAs. The approaches developed for heatmapping, asset tagging and, increasingly, scenario analysis will only continue to drive efficiencies in assessing and managing nature-related risks and opportunities – in turn, drive efficiencies in reporting. We have also now seen 320 companies announce they will be ‘early adopters’ of the TNFD, we can expect those companies to start to benefit from engaging with the framework early within their reporting and sustainability strategies.
This is a complex area, and more guidance is set to come. Louise and I are now looking forward to EFRAG’s and TNFD’s detailed interoperability mapping table (expected in early 2024), which will illustrate the specific areas of alignment of the ESRS with the TNFD recommendations.
Please do reach out for a discussion on any of the above and to find out how KPMG can support you with CSRD and TNFD.
