The Next Step in Non-Financial Reporting: The Task Force on Nature-Related Financial Disclosures (TNFD)
Day 5 of the Sustainable Finance Summit: Investing and Biodiversity
As the week wraps up, Finance Montreal successfully concluded its first-ever online Sustainable Finance Summit. Arguably the most challenging theme saved for last, Friday’s events focused on biodiversity and the investment community’s role in this burgeoning space.
The Task Force of Climate-Related Financial Disclosures (TCFD) was created in 2015 as a framework for companies to disclose climate-related risks and opportunities. Throughout the past six years, over 1,340 companies with a combined market capitalization of $12.6 trillion have become members. Despite the need for continued improvement, we can celebrate the widespread collaboration among investors, private enterprises, and governments in adopting a common reporting framework.
What is the TNFD? Modelled on its older sibling the TCFD, the Task Force on Nature-Related Financial Disclosures (TNFD) is a common framework for organizations to report their impact and dependencies on nature. Launched in September of 2020 from an informal working group of 74 members, it comprises of NGOs, financial institutions, regulators, and corporations. It will complement the TCFD in providing a more holistic picture of an organization’s impact.
Why does biodiversity matter? According to the World Economic Forum, half of the world’s GDP is moderately or highly dependent on nature. As Andrew Mitchell pointed out, nature is more than just bees and trees and COVID-19 is a glaring example of the impact nature can have on society.
“Science and economists are clear: nature is too big to fail”
Elizabeth Mrema, Co-Chair of the TNFD
Challenges: Unlike climate, whose impact can be measured using carbon emissions, nature does not have a single impact measure. A ton of carbon emitted into the atmosphere will have a similar impact regardless of the location on earth. For biodiversity, however, developing a plot of land might have a disproportionate impact depending on the region. The range of harmful activities is considerably wider; microplastics in the ocean, crop monocultures, and species overexploitation are all difficult to measure.
Whack-a-mole issues: Part of the difficulty in addressing biodiversity is the potential to conflict with climate solutions. For example, planting a forest to offset carbon emissions may seem like a noble endeavour. However, documented cases have shown that tree planting could have unintended and even negative environmental consequences. Andrew Mitchell, Founder of Equilibrium Futures, referred to this as whack-a-mole issues where trying to solve one problem leads to another one arising. Another example, we are seeing increased consumption of plant-based meats in part to reduce the emissions caused by raising livestock. Widespread adoption of plant-based meats however would lead to a significant increase in soy consumption, a known contributor to deforestation.
Actionable solutions. Florence Jeantet, Managing Director of OP2B, explained the first step is to understand and measure the impact the organization has on the environment. In terms of biodiversity, a lot of the impact is within their scope 3 activities. Agriculture is of particular concern; the WEF (World Economic Forum) estimates it is the single greatest source of ecosystem destruction. Working with BNP Paribas, the pair came up with three recommendations:
- Scale-up soil health: reduce dependence on pesticides and fertilizers.
- Biodiversity by itself: 60% of the calories we consume come from three crops, thus highlighting the need to diversify our food supply.
- Wild ecosystems: restoring lands around farms.
“There is no path to a net-zero world without being nature positive”
Brandon Lewis, Associate Director Sustainability, Hancock Natural Resource Group
Nature-related reporting poses unique challenges over climate reporting which had a five-year head start. Achieving a net-zero economy by 2050 is ambitious and becoming nature positive is equally if not more ambitious. There is little doubt however the two are inextricably linked. As the framework is tested in 2022 and launched in 2023, we will have reached a new milestone in achieving the Paris Climate goals.