Navigating the Taskforce of Nature-related Financial Disclosures

Just as organisations across the globe have started to comprehend and implement the climate-related financial disclosure requirements, the Taskforce on Nature-Related Financial Disclosures (TNFD) finalised its disclosure recommendations and guidance for organisations to report and act on evolving nature-related dependencies, impacts, risks, and opportunities. Following suit, the International Sustainability Standards Board (ISSB) announced plans in April 2024 to research risks and opportunities tied to nature and human capital.

Preparers, auditors, and investors are currently struggling to accurately and realistically translate their impacts on nature into fiscal terms. 'Nature' encompasses biodiversity, ecosystem services, and impacts on natural resources, currently managed and disclosed by organisations. Emerging areas include assessing biodiversity dependencies and integrating natural capital into financial decision-making. Comparatively, recommendations from the Global Reporting Initiative (GRI), Environmental, Social, and Governance Reporting Standard (ESRS), and TNFD differ in their focus on sustainability impacts, comprehensive ESG reporting, and specific biodiversity and ecosystem risks.

Nature-related disclosures are valuable in understanding how businesses impact and depend on natural resources and are crucial for assessing long-term sustainability and resilience, including climate change risks.

At our recent Sustainability Networking Forum with CA ANZ, hosted by Kristy Porter (BDO Partner, Sustainability and Consulting) with Dr Lyndie Bayne (CA ANZ and Senior Lecturer, UWA Business School), we explored the definitions of 'nature' and new and practical tips for businesses. The forum’s expert panel included Daniel Smith (Executive Chair, Regen), Frances Carter (Sustainability Adviser, Thomas Foods Group), Sarah Day (Consultant, Edge Impact) and Md Moazzem Hossain (Senior Lecturer, Murdoch University).

A discussion: What is nature?

The discussion began with addressing the definition of nature according to the TNFD, which categorises nature into four realms: land, ocean, freshwater, and atmosphere. These realms serve as a framework for exploring how organisations and individuals rely on and influence natural capital. According to the TNFD, natural capital encompasses the resources from these realms that collectively generate benefits for people. Like financial assets generating revenue, nature comprises stocks of environmental assets that produce corresponding benefits for both people and the economy.

Organisations need to take a systems-based approach to assessing the impacts of business activities on nature, given the interdependencies associated with ecosystems. The TNFD defines this as an environmental asset that comprises naturally occurring elements like forests, wetlands, coral reefs, and agricultural areas. Ecosystems, comprising plants, animals, and microorganisms interacting with their environment, provide essential ecosystem services - benefits that are crucial to businesses and society. Biodiversity, integral to maintaining the quality, resilience, and quantity of ecosystem assets, ensures the ongoing provision of these services upon which businesses and society rely.

Assessing materiality within the TNFD framework

In response to widespread calls from market participants for consistent and integrated sustainability reporting, the TNFD’s draft disclosure recommendations explicitly build upon those of the Task Force on Climate-Related Financial Disclosures (TCFD). They align closely with the TCFD's framework, focusing on four key areas: governance, strategy, risk management, and metrics and targets. However, a notable distinction lies in their approach to materiality analysis. The TNFD introduces a concept of double materiality, which necessitates identifying risks and opportunities for mandatory and voluntary disclosures.

Double materiality requires organisations to disclose not only how nature may impact their immediate financial performance (‘outside-in’ perspective) but also how their operations impact nature (‘inside-out' perspective). This approach acknowledges that understanding nature-related dependencies and impacts is crucial for comprehensively assessing risks and opportunities. Moreover, the TNFD framework reflects a growing market consensus on materiality, recognising that the long-term impacts on nature are integral to assessing enterprise value, mainly through scenario analysis over future time horizons.

A case for nature

One of the most significant takeaways during the session was the case for nature. With the race to net zero, global sea level rise, and global warming, the majority of global efforts have focused on climate and how to respond to climate change. The panel noted that climate change is nature's response to all the man-made changes to the natural environment.

The impact of using natural resources was also discussed as the panel explored the trade-offs involved from an environmental, economic, and social impact. Decision-makers should understand the severity and extent of these impacts to choose projects that minimise negative effects and maximise benefits and plan and scope them carefully with ESG considerations in mind.

This discussion highlighted an important message: without nature and the ecosystem services it provides, our economies, business operations, manufactured products and services would all cease to exist. It urges preparers, auditors, and investors to assess the environment and climate as if they were not mutually exclusive but inextricably linked.

The complexity of reporting of nature versus climate

Unlike climate, the TNFD breaks down nature into various topics and subgroups from a macro-ecosystem to a micro-ecosystem scale, including realms (land, freshwater, ocean, atmosphere), biomes (tropical, sub-tropical, temperate), environmental assets (renewable energy resources, water resources) and ecosystem services (recreation, pollination, genetic materials) having individual topics for water, soil, biodiversity, and so on.

The panel discussed how to navigate the complexity of reporting best and whether to report under a macro-umbrella of ‘nature’ or against individual topics. Organisations need to understand their business model, operations and geographical presence, as depending on these will reveal the nature of their environmental impacts. This involves developing a clear understanding of the business’ material impacts, reliance on nature, and resilience to nature through a double materiality lens. In most cases, each topic is addressed separately, given the complexity of nature and the different standards for each sub-area.

In European legislation, nature has been identified as the ‘silent stakeholder’ and must be considered in specifically nature-sensitive industries. When it comes to intrinsic distinctions between the TNFD and TCFD, the diverse and wide landscape of the TNFD allows for more in-depth analysis and reporting of the subareas and differences that industries have by nature when interfacing with the surrounding natural capital.

A final word was given to the challenge of receiving accurate natural capital information from developing countries, given the lower levels of enforcement and legislation. Australian entities operating in developing countries will need to assess the risks and opportunities along their value chain and mitigation strategies to ensure coherent reporting across their geographical footprint.

Managing trade-offs in natural resource use

Whenever we utilise a natural resource, there are inevitably trade-offs involved. These trade-offs could include environmental impacts, economic costs, or social consequences. For example, extracting minerals might damage ecosystems, using land for agriculture might displace wildlife, or building infrastructure might affect local communities. A classic example is the transition as renewable energy projects are developed. It involves clearing large land areas, putting wind turbines in extremely sensitive areas, and then claiming the project is green. Hydropower, for instance, is no longer considered green in many investments because it hugely impacts nature, disrupts stream flow, causes damming of rivers, and causes increased flooding.

Understanding impact severity

It is crucial to understand the severity and extent of these trade-offs comprehensively. This involves conducting thorough environmental assessments, economic analyses, and social impact studies before embarking on projects. By understanding the potential consequences, decision-makers can make informed choices that balance the benefits of resource use against its costs.

Choosing wisely

Armed with knowledge of trade-offs and their impacts, decision-makers can make more sustainable and responsible choices. This involves choosing projects and infrastructure developments that minimise negative impacts while maximising benefits. It often requires considering alternative approaches or technologies less damaging to natural capital.

Planning and scoping

Effective planning and scoping are essential. This includes setting clear objectives, conducting feasibility studies, and engaging stakeholders early. By integrating environmental and social considerations into the planning phase, potential trade-offs are identified and mitigated before they become significant issues.

Starting your journey to measuring nature-based financial disclosures

In summary, managing natural capital and resources involves navigating complex trade-offs. A balanced approach requires understanding the severity of impacts, making informed choices, and integrating sustainability principles into project planning and implementation. Combining the reporting of climate and nature is important, as it can help businesses and stakeholders understand what trade-offs are considered less harmful.

Scope your assessment by:

• Locating your interface with nature
• Evaluating your dependencies and impacts on nature
• Assessing your nature-related risks and opportunities
• Preparing to respond to nature-related risks and opportunities to report on your material nature-related issues.

Here to help

Our national sustainability team has extensive experience in identifying, mapping and determining the materiality of nature-based impacts. Contact your local adviser today.