The Taskforce on Nature-related Financial Disclosures (TNFD) unveiled its long-awaited final framework in September this year. This latest reporting guidance includes 14 recommended disclosures, offering yet another tool for businesses of all sizes to evaluate their environmental impact. Simply put, the TNFD framework underscores a crucial point: nature risk is fundamentally financial risk.
Since its launch, the framework has garnered a largely positive response. The final version of the framework is the result of two years spent collecting feedback from market participants and pilot testing beta releases with more than 240 institutions worldwide.
While the TNFD framework will sit in an already rich ESG lexicon, the good news is that alongside the final recommendations, the taskforce has provided a practical guide for companies to ease into implementing it. It offers insights into crucial aspects of the framework such as target setting and scenario analysis.
As businesses grapple with a growing list of ESG disclosure requirements, however, the introduction of new standards may spark confusion as they prompt various questions regarding compliance and data collection.
Practical approach
Whether for the TNFD’s predecessor – TCFD – or other reporting rules such as the GRI or the International Sustainability Standards Board’s standards, the workload implications for reporting entities in terms of compliance, time, effort, systems and co-ordination required internally across businesses are significant.
To make it slightly simpler, the TNFD has implemented a four-step approach known as Leap: locate, evaluate, assess and prepare. Meryl Richards, program director of food and forests at Ceres, the nonprofit organization that serves as the convener of the US Consultative Group for the TNFD, defines Leap as an ‘integrated process’.
‘The first step is [for your company] to locate [its] interface with nature, then evaluate [its] dependencies and impacts on nature,’ she explains. ‘[Then you can] assess those risks and opportunities and prepare to respond, which is the key part – the action part.’
This structured methodology enables businesses to align with a global standard for nature disclosure, similar to what the TCFD has done for climate-related risks and opportunities. Richards notes the TNFD framework is designed around the same structure as the TCFD’s and is the result of ‘really extensive market engagement’ and feedback from organizations that trialed earlier versions of the new guide.
Leslie Cordes, vice president of programs at Ceres, says the TNFD ‘has done a really good job of road testing the framework with a number of companies. [So] companies that are just starting their [TNFD] journey can identify companies that may be in their sector and look to them for some good examples, lessons learned for how to use the framework. And that’s one of the things Ceres has appreciated about the TNFD’s processes – it’s been so inclusive and so participatory in terms of road testing it with companies.’
Leading the way
Corporate giants GSK and Philip Morris International (PMI) were two of the frontrunners in embracing the TNFD framework. In both cases, the decision to endorse the framework underscores an increasingly recognized interdependence between the natural world and sustainable business practices.
For GSK, adopting the TNFD framework was in line with the climate nature objectives the company set in November 2020. Elaborating on the reasons that pushed the business to become an early adopter, Claire Lund, global vice president of sustainability at GSK, says ‘it was a simple decision’ for the British biotech firm.
‘The goals we have set for climate and nature support long-term business growth,’ she tells IR Magazine. ‘Protecting nature makes our business more resilient and helps us deliver for patients by ensuring the supply of raw materials needed to manufacture vital medicines and vaccines.’
PMI, conversely, gravitated toward the TNFD via its affiliation with the World Business Council for Sustainable Development (WBCSD). Through WBCSD, the firm was selected to participate in a pilot scheme that focused on testing one of the beta versions of the framework.
‘Recognizing that nature-related financial disclosures are growing in importance both within our company and externally, across stakeholders, we thought it would be strategic and important both because it makes business sense to have visibility and awareness of the material implications related to nature and the steps we are taking to address our impact, and because reporting on our approach to nature strengthens our strategy,’ says Jennifer Motles, chief sustainability officer at PMI.
The NYSE-listed tobacco company says it firmly believes the provision of high-quality data and transparent disclosures holds the potential to catalyze positive change.
‘We have built a system and a track record of non-financial performance and reporting that allows us to be in a place to support the TNFD in its important mission,’ says Motles. ‘Disclosure and good-quality data can promote fruitful engagement and drive positive change. We believe we can play our part and contribute to this trend by being an early adopter.’
Unlocking capital
Embracing the TNFD framework has yielded notable advantages for both GSK and PMI. Lund says it allowed GSK to understand the firm’s nature exposures, ‘which may prove to be just as significant as climate risks. For example, from our initial analysis we know many of our active pharmaceutical ingredient suppliers are in high water-stressed areas and that water is an important part of their manufacturing process.’
The adoption of the TNFD framework has also had an impact on the overall organization’s sustainability strategy and decision-making processes. ‘It allowed us to ground our overall nature targets in our business realities and build a portfolio of initiatives responding to each of those pressures,’ Lund explains. ‘This is helping to de-risk our business and ensure our actions are data-driven.’
At PMI, Motles says the company is working toward further aligning its existing biodiversity strategy with the TNFD’s requisites.
‘This has been an important validation for us,’ she says. ‘We have been focusing on this area quite extensively, especially in recent years, so we are pleased to be in a strong position to implement the framework quite early on. Now we can use it to continue driving the strategy forward in a way that is even more closely aligned.’
Jessica McDougall, chair of corporate governance and engagement practice at Longacre Square Partners, joined the TNFD taskforce during her previous tenure as director at BlackRock. She believes adoption of the framework could also help businesses attract new investors.
‘I think it’s an opportunity for companies to showcase how they’ve been thinking about their business models strategically across a global supply chain,’ she explains. ‘In some cases, these disclosures – where they’re identified as best practices – could help companies to attract new investors, particularly those that are increasingly aware of how companies need to be considering the risks of climate and nature as they pertain to that ongoing business model.’
Defining and navigating data challenges
Richards notes that for companies that have already embarked on the TNFD journey, one of the greatest challenges is traceability. ‘Nature impacts are local,’ she points out. ‘It’s not like the climate where, you know, a unit of CO2 is the same regardless of where it’s emitted. I think that’s one of the largest challenges for many companies.’
But she stresses that for many companies – particularly those that track deforestation or land use change – it should not be a new task. ‘Investors have been asking for traceability for years,’ she notes. ‘Requirements of understanding nature risk isn’t something that’s brand new for companies, particularly those with land use change.
‘And the TNFD is helping companies navigate this complexity by providing some detailed guidance on how to begin adopting the recommendations and what data companies are going to need.’
Lund echoes Richards’ thoughts and says traceability was one of the top three challenges GSK encountered when performing the scenario assessment. ‘Solutions demand traceability,’ she explains. ‘So partnering with suppliers is needed to increase levels of transparency on where and how materials are sourced – often well beyond those suppliers with which GSK has a direct procurement relationship.’
Lund also highlights complexity and localization of nature impacts as the framework’s biggest hurdles: ‘Nature has multiple different dimensions compared with climate. While carbon emissions are a global phenomenon, natural degradation is local and interacts with threats to health and resilience locally. This requires gathering data and implementing solutions in a more localized way.’
She further acknowledges that improving data will take time for GSK and explains that the firm has started building detailed business data into the very first step of each analysis.
PMI also faced two primary challenges in adopting the TNFD framework. The first was learning and understanding the framework and its various implementation mechanisms. The second was ensuring that PMI’s data was aligned with the requirements of the TNFD. The key to overcoming these hurdles was cross-functional teamwork, says Motles.
‘In the process, we have worked with numerous parts of our company and organization to ensure they understand how to align their approaches with the framework,’ she says. ‘Evidently, and just like the TCFD, working with this framework requires a proper embedding of sustainability within a company – as it is no longer just the sustainability team working on the topic, but all different parts of the organization.’
So how can organizations get started on their TNFD reporting journey and navigate data challenges? McDougall stresses that the TNFD framework is intended as an ‘iterative process and therefore there will be no company with a perfect TNFD report right out of the gate’.
‘I think the important part is that the first three pillars in particular for governance, strategy and risk management are core components of a company’s ability to operate over the long term and are perhaps entry points for those that might be thinking about how their reliance on water, land or basic inputs, such as timber or wheat, could be impacted,’ she adds.
‘This is an entry point for companies to start thinking about their business in a way that’s a little bit more fulsome as it pertains to nature-related risks and opportunities.’
Motles says it’s paramount for companies to start by studying the indicators. ‘Even before starting to collect the data, they should first understand what is required of them to report on. It will also be important to define priority areas,’ she notes. ‘This will allow any company to properly assess and understand how to work with different stakeholders within its organization.’
Lund says the best first step for companies is to get started. ‘Do not delay action while waiting for perfection,’ she recommends.
