TNFD releases framework for nature-related financial reporting

The Taskforce for Nature-related Financial Disclosures (TNFD) has released its final recommended risk management and disclosure framework for companies. We take a look at what directors need to know.

Released during New York Climate Week, the TNFD’s final recommended framework for nature-related risk management and disclosure comes in a move to address investor and regulator expectations for reporting on companies’ interface with nature.

The TNFD framework aligns with global commitments made by almost 200 governments, including Australia’s, in 2022 under the Kunming-Montreal Global Biodiversity Framework (GBF) to halt and reverse nature loss by 2030.

The final framework has been the subject of extensive design and development for over two years by the TNFD - a global, market-led initiative comprised of 40 senior executives from companies and financial institutions.

In brief, the TNFD framework sets out a recommended approach for companies to:

• identify and measure their dependencies and impacts on nature as well as their nature-related risks and opportunities (together, ‘nature-related issues’); and
• disclose actions being taken to address nature-related issues under the four pillars of governance, strategy, risk and impact management, and metrics and targets – subject to their own materiality, cost and capability considerations.

This update explores the TNFD’s recommendations, why they matter and next steps.

TNFD’s recommended disclosures

The TNFD recommends 14 disclosures for all sectors structured around four pillars: Governance, strategy, risk and impact management and metrics and targets.

1. Governance: The governance processes, controls and procedures the organisation uses to monitor and manage nature-related issues;
2. Strategy: The approach the organisation uses to manage nature-related issues;
3. Risk and impact management: The processes the organisation uses to identify, assess, prioritise and monitor nature-related issues; and
4. Metrics and targets: The organisation’s performance in relation to nature-related issues, including progress towards any targets the organisation has set or is required to meet by law or regulation.

For consistency, these disclosures align with those recommended by the Taskforce for Climate-related Financial Disclosures (TCFD) and the ISSB’s IFRS standards.[1]  The TNFD has, however, recommended three additional disclosure areas:

• Engagement with Indigenous Peoples: Disclosure of an organisation’s process for engaging Indigenous Peoples, local communities and affected stakeholders about their concerns and priorities with respect to nature-related dependencies, impacts, risks and opportunities in its direct operations and value chains. Indigenous Peoples are stewards of 80 per cent of the world’s remaining biodiversity and a source of traditional knowledge about the planet’s ecosystems, giving them a uniquely important role in halting and reversing nature loss.
• Priority locations: Disclosure of the location of assets and/or activities in organisations’ direct operations or, where possible, value chains that meet the criteria for ‘priority locations’ (e.g. areas of importance or rapid decline for biodiversity).
• Value chains: Disclosure of processes for identifying, assessing and prioritising nature-related dependencies, impacts, risks and opportunities in its upstream and downstream value chains. To make value chain disclosures, companies will need to rely on data from suppliers, while financial institutions will require data from their customers and investees. Many organisations that piloted the TNFD framework cited data constraints with nature-related reporting, similar to the experience with Scope 3 climate-related reporting, given the reliance on the provision of data across value chains.

For more on lessons learnt from the TNFD pilots in the Australian context, see the TNFD Pilots – Australian case study report.

The TNFD recommends that nature-related disclosures be integrated with other business and sustainability-related disclosures whenever possible. It also recommends that organisations apply ‘financial materiality’ - ie material information that could reasonably be expected to affect an entity’s prospects.

Why the TNFD matters for organisations

The TNFD's recommendations are not just about environmental responsibility; accounting for nature in corporate strategy and capital allocation decisions have significant implications for a company's financial performance and long-term sustainability. For example:

• Financial implications: Failing to address nature-related risks can result in financial losses, supply chain disruptions, regulatory fines, and reputational damage.
• Investor expectations: Institutional investors and asset managers are increasingly considering nature-related risks when making investment decisions.
• Regulatory landscape: globally, regulatory bodies are beginning to incorporate nature-related disclosures into their reporting requirements. The Australian government has been a major funder of the TNFD, but has not given a firm public commitment to mandating.
• Reputation: as with net zero commitments on the climate front, consumers are becoming more conscious of nature-related issues
• Alignment with climate commitments: changes to natural habitats and biodiversity loss are inextricably linked to both the drivers and impacts of climate change and should not be addressed in isolation. Directors should consider the role that addressing nature-related risks and opportunities can play in meeting climate-related targets.

Australia, with its rich and diverse natural environment, is particularly sensitive to biodiversity risks - magnifying the importance of these drivers.

Next steps

Australia is a signatory to the GBF commitment to halt and reverse nature loss by 2030. While Treasury and the Australian Accounting Standards Board (AASB) are currently focused on implementing the ISSB’s IFRS S2 Climate Change reporting standard, over time it is expected that government will consider policy settings regarding broader sustainability reporting.

As the focus now shifts to supporting capacity building efforts, the TNFD encourages organisations to take steps to get started with nature-related assessment and disclosure. To assist, the TNFD has published a suite of supporting additional guidance alongside the recommendations – including a ‘getting started’ guide.

To access free director-focused Climate Governance Initiative Australia webinars, videos, and resources, click here.