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Taskforce on Nature-related Financial Disclosures: Time to get ahead of compliance before compliance is ahead of you

  • United Kingdom
  • ESG
  • Financial services and markets regulation
  • Financial services and markets regulation - ESG
  • Investment funds and asset management
  • ESG
  • Financial services

28-10-2021

What is TNFD?

The Taskforce on Nature-related Financial Disclosures (“TNFD”) was officially launched on 4  June 2021 by an Informal Working Group of 75 banks, investors, companies, governments and regulatory bodies convened by the UN Environment Programme.  The task force’s mission is to support organisations to report on nature related risks, with the aim of encouraging organisations to adopt nature-positive outcomes.  On the 7 June the G7 Finance ministers endorsed TNFD, and promised to deliver a framework by which organisations can report and act on nature-related risks by 2023.    

Why is TNFD important?

TNFD aims to do for nature what the Taskforce for Climate-Related Financial Disclosures (“TCFD”) is doing for climate.

TCFD is the leading climate reporting framework for many jurisdictions, with TCFD reporting mandatory for companies with a UK premium listing, as set out in the consultation papers published by the FCA, namely the “Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations” as well as on “Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital markets”.   

The TCFD works on a comply or explain basis.  TNFD is closely aligned with TCFD, and we expect that TNFD will adopt a comply or explain model too.  Currently there is a push to make environmental disclosures more wide-reaching and build on the progress made in the transition from voluntary to mandatory reporting in support of the Paris Climate Change Agreement goals.  

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The World Wildlife Fund (“WWF”) have stated that the government should do more to stop UK Banks and other financial institutions from funding deforestation across the world.  Voluntary schemes have led to no notable reduction in UK forest-risk commodities.  Moody’s Investors Service report titled Moody's - $2.1 trillion of rated debt highly exposed to natural capital impact or dependency, found that “12 sectors with $2.1 trillion in combined debt, including all extractive industries, face high or very high natural capital risk”.  In addition, a Moody’s study titled ESG Mood Solutions: Over One Third of Companies Are Associated With Habitat Loss found that of 5,300 large publicly traded companies 38% have at least one facility associated with habitat loss.

Whilst companies do not currently have the tools and experience to understand how certain nature-related risks may impact upon their financial performance, the TNFD will develop a framework and practical guidelines over the next few years to assist such reporting.

The timeline for TNFD is as follows:

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What is TNFD asking?

TNFD has published a proposed technical scope.  There are four key elements for companies to address. These are identical to those outlined within the TCFD and may include sector specific guidance:

  • Governance: What governance and processes are in place to manage nature related impacts and risks?
  • Metrics and targets: How are companies quantifiably measuring the impact of their business decisions?
  • Strategy: The actual and potential effect of the organisations impacts and dependencies on nature and consequential risks and opportunities on the business strategy and financial planning to accommodate such risks.
  • Risk Management: How are organisations identifying their nature dependent business decisions, and how are these risks best being managed?

Looking to the future

It was recently announced that senior executives from over 30 companies (including key players such as HSBC and BNP Paribas) are supporting the new framework and will sit on a working group focussing on five key areas: nature-related risks, standards and metrics, developing the framework, testing and integration.  More than 100 institutions have agreed to consult more broadly on the proposals.  Such engagement by the industry is hugely encouraging, in an area that has been somewhat overlooked in the rush to net-zero.

As investors become more and more clued up on sustainable investing, start to demand the data and the reporting to back up the choices fund managers are making, there will be much for asset managers to do.  They will no doubt be seeking to engage with the companies they already invest in as these companies prepare for TNFD reporting, so they are ready to explain and disclose to investors how their investment choices fit the requirements and how nature risks are being managed, as well as it being a key metric to measure and judge future investing.

How can Eversheds Sutherland help?  

Eversheds Sutherland has an excellent relationship with the FCA and a proven track record assisting Businesses with their regulatory and compliance requirements.  With our Konexo compliance team we have previously worked with managers on all aspects of the ESG compliance process and can consider any necessary adjustments to your compliance reporting with you.

We also work on these reports with Konexo, our provider of alternative legal and compliance services. For more information on how Konexo can support your business, please contact Simon Collins

For more information on the implications of this review and how this affects you, please get in touch.

Glossary

  • Natural Capital Risk - risk of reduction or interruption of the benefits that humans and the economy receive from nature, as a result of environmental change.
  • TCFD - Taskforce for Climate-Related Financial Disclosures.
  • TNFD - Taskforce on Nature-related Financial Disclosures.

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