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TNFD: The challenging and critical path ahead

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The publication of the final draft of the Task Force for Nature Related Disclosures (TNFD) brings us closer to the challenges of managing nature-related risks, but also presents multiple challenges for asset managers and owners, writes Scott Foster, head of digital & governance solutions, UK, CACEIS.

Managing biodiversity risk is going to be equally important to our clients as climate risk, so we really welcome the new Task Force for Nature Related Disclosures (TNFD) framework. While it has until now been in development, the essence of the TNFD framework aims to enable organisations to effectively consider, report, and act on evolving nature-related risks and opportunities using the LEAP approach (Locate, Evaluate, Assess, Prepare). This, as well as the identification of 10 core ‘Dependencies & Impacts’ metrics, as well as five core ‘Risk & Opportunity’ metrics, with sector specific metrics attached, is a great step forward, with final recommendations to be published in September this year.

Scott Foster - Group Product ManagerThe need for structured framework, and clear guidelines on metrics and targets is evident, with research from EcoVadis in 2021, highlighting that ‘less than 1% of companies had set policies on biodiversity. This figure increased to 5% for companies in high-risk sectors like agriculture and construction’. Misconceptions still remain across all areas, from companies through to the financial services sector, that measuring and tracking progress on biodiversity risk is still too complex. Furthermore, dependencies and impacts on nature are location and sector specific.

Unlike the standard reporting frameworks that exist for monitoring carbon emissions and pollution, there are no universal measurements for reporting on biodiversity. Collecting quantifiable metrics will be a challenge, despite having the TNFD framework in place. Furthermore, there’s education to consider in order fully activate initiatives like TNFD – the financial services industry is catching up on the subject of biodiversity risk, having recently focused resources on SFDR, EU Taxonomy, and TCFD implementation.

Everyone should view TNFD as a good starting point

Governments and regulators now have an eye towards biodiversity risk, with over 190 states committing to a set of ambitious goals and targets under the Global Biodiversity Framework (GBF) in December 2022. Biodiversity loss is also now recognised by the world’s central banks, via the

Network of Central Bank and Supervisors for Greening the Financial System (NGFS), as a source of systemic risk alongside climate change.

Certain industries are more prone to biodiversity risks across their supply chains. For example, food production, agriculture and forestry industries usually require intense harvesting of natural resources or rely on a single type of crop or livestock. In fashion, there is a reliance on raw materials and water. It’s important that companies focus on making their supply changes more resilient and adaptive not only protect nature, but to limit their exposure to biodiversity risks that could lead to rising business costs, litigation, and re-evaluation of debt servicing capacity.

And it’s key that asset managers and asset owners begin to look at biodiversity risks across the companies they invest in. This includes engagement on biodiversity issues and close scrutiny of supply chains and ground truthing – on-the-ground research and due diligence.

It’s against this context, that asset managers and pension schemes need to act and, once published, should view the TNFD framework as a good starting point. One of the key goals of [...]

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