A landmark report is expected to see stringent data disclosure rules placed on financial institutions to reduce their exposure to risks posed by biodiversity loss and help them direct capital to companies and projects that can restore waterways, forests and other natural features lost to human activity.
The Taskforce for Nature-related Financial Disclosures’ (TNFD) final draft of its proposed reporting framework calls on businesses of all types to provide better insights into their relationships with nature. That will include disclosure of data on the impacts that water stress and other nature-related phenomena are having on their assets. It will also require that companies assess how their operations and assets are affecting the natural world.
The recommendations have been written so that they can be integrated into reporting standards along with those of the Taskforce for Climate-related Financial Disclosure (TCFD) and the International Sustainability Standards Board (ISSB). Together they will provide a broad framework for institutions to gather and report their portfolio ESG performances. Their adoption by regulators will require financial institutions and corporates to deploy sophisticated data and analytical capabilities that match those for climate-linked disclosures.
“More investors, companies and other stakeholders are recognising that nature-related concepts, from biodiversity to natural capital to ecosystem dependencies, are inseparable from a robust climate strategy,” S&P Global Sustianable1 global head of sustainability market engagement Divya Mankikar wrote in an opinion piece that praised the TNFD’s recommendations. “Companies are increasingly looking for climate solutions that also reduce nature and biodiversity loss.”
The announcement comes as the importance of nature on global economies – and the impact that companies can have on it – are being realised by investors. An estimated 85 per cent of the world’s largest companies have a deep dependence on nature, including water and food availability, and face existential risks if those resources were lost. The COP15 gathering in Montreal last year struck an international agreement to protect 30 per cent of the land an oceans by 2030 under the Kunming-Montreal Global Biodiversity Framework.
In response, data and tech companies – NatureAlpha, ISS ESG, Clarity AI and RepRisk among them – have been creating biodiversity-linked products to help institutions and companies assess these risks and impacts. Adoption of the TNFD proposals will put greater emphasis on this fast-rising branch of ESG, meaning data providers will need to innovate. There will be particular need for better geospatial data services, argued Alexandra Mihailescu Cichon, Chief Commercial Officer at RepRisk.
“The challenge is that biodiversity is location specific, you need to know the location of the business operations to understand what the interface and the potential impact is with nature, and the data availability and the technology around that is still in progress,” Mihailescu Cichon told ESG Insight. “This type of data, that’s cutting edge and still in progress, will help us also move away from the reliance on company disclosures, which will then help us move to having more positive impact and fewer adverse impacts.”
RepRisk offers a geospatial data product focused on extractive industries to clients.
The unveiling of the TNFD’s methodology was the highlight of Climate Week, which runs alongside the United Nations General Assembly gathering. It recommends 14 disclosures covering: companies’ governance of nature-related dependencies, impacts, risks and opportunities; the effects of these on their business strategies; their processes for identifying risks and impacts; and, the metrics they use in their overall assessments.
The TNFD said that now was the time for financial capital to begin playing a central role in arresting the decline of biodiversity across the globe.
“There is growing evidence that this poses risks for businesses, capital providers, financial systems and economies, and that these risks are increasing in severity and frequency,” the organisation stated in a report that detailed its recommendations.
“To address the declining productivity and resilience of nature and, by extension, the declining prosperity and resilience of our societies, economies, financial systems and business models, nature-related issues must now be incorporated into enterprise and portfolio risk management processes,” it added. “Failure to do so leaves business, finance, financial systems and the whole of society with a major risk management blind spot in the face of accelerating nature loss.”
The recommendations have been widely welcomed across the sustainable finance and data industry.
“We anticipate that the TNFD will be transformational in enabling companies to identify, evaluate and assess their nature-related impacts, dependencies, risks and opportunities, and incorporate these into their strategic business planning and reporting,” said Sharon Smith, an expert in climate change and sustainable finance at purpose-focused international law firm Pinsent Masons.
“This is a significant milestone in providing clarity to business and investors that wish to assess and mitigate their exposure to nature-related risks,” offered S&P Global Sustainable1 vice chair Richard Mattison.
The importance that financial institutions place on assessing biodiversity loss risks and implementing mitigation capabilities was underlined days after the TNFD announcement. A communique from Nature Action 100, a grouping of investment firms with almost US$24 trillion under management, urged 100 of its members’ largest portfolio companies to reduce their exposure to nature-related risks.
The organisation, which comprises 190 asset and fund managers, said it had sent letters to the companies, in which its members have invested $9tn, “calling for urgent and necessary actions to protect and restore nature and ecosystems and thereby mitigate financial risk”.
It argued that companies and economies would collapse if biodiversity loss accelerated.
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