- David Craig is co-chair of the Taskforce for Nature-related Financial Disclosures, modeled after the Taskforce for Climate-related Financial Disclosures
- TNFD’s goal is to create a nature-related risk reporting framework and redirect capital flows towards more nature-friendly solutions
- $125 trillion in economic value is tied to “ecosystem services” every year, from rainfall for crops to carbon sequestration in soils and oceans
June 6 – As the planet’s climate changes, so does corporate reporting. This exercise sees the largest registered companies in the UK prepare mandatory climate-related financial disclosures for the first time. All UK businesses will have to follow by 2025.
But what about nature-related risks? Research suggests that up to $125 trillion in economic value annually is tied to so-called “ecosystem services,” from rainfall for crops to recreational spaces for recreation.
Like the regulations on climate reporting, the pressure is now increasing for listed companies to disclose their exposure to the risks linked to the depletion of the planet’s biodiversity.
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One of the main proponents of such a move is David Craig, former chief executive of financial markets data provider Refinitiv, and now co-chair of the Task Force on Nature-Related Financial Disclosures (TNFD).
The case for corporate action on nature conservation is clear, he says. And not just business either. “We can’t just continue to degrade the natural system at the rate we are at and survive,” he says.
Nor does he insist that there is no time to waste in protecting corporate assets against natural hazards or in shifting capital flows to “nature-positive” solutions – by which he means innovations that actively enhance natural ecosystems (think living walls on buildings or sustainable agroforestry). ).
Nature-based disclosure will not rebalance the fragile ecological health of the planet, admits Craig. But it can help in what he sees as the vital task of changing mindsets in financial markets about the materiality of nature’s risks.
He gives the example of the Taiwan Semiconductor Manufacturing Company (TSMC). Last year, the world’s largest third-party semiconductor maker had to truck water across Taiwan to prevent its factories from drying out after a bad monsoon saw reservoir levels rise. collapse.
“We (TNFD) are saying, ‘look, if you’re operating in this part of the world and you’re taking 156,000 tonnes of water a day from the natural groundwater, that could be a real problem,’ he says. .
“Soon you won’t be able to do any business, either because the local government’s environmental agency is stopping you or because you’re running out of water.”
Disclosure also has a stimulating effect on management, he adds. By placing an audited data point in the public domain, a company explicitly acknowledges the materiality of the problem as well as its intention to address it.
Yet the preeminent rationale for greater transparency – and the primary rationale for TNFD – is to help financial markets understand the “interface” between the nature and performance of the business.
Based on the model of the Taskforce for Climate-related Financial Disclosures (TCFD), the intersectoral body includes a hard core of 34 representatives of large companies, financial institutions and market service providers. This group, which collectively controls $18.3 trillion in assets under management, is supported by an advisory group of more than 400 institutional supporters.
The TNFD was created in June 2021 with the stated objective of creating a voluntary “management and disclosure framework” to help companies report their evolving nature-related risks.
A first iteration of this framework was released for consultation in March 2022, with modified updates scheduled for late June and October this year, and February 2023. Final recommendations are scheduled for September 2023.
To catalyze debate around the adoption of its proposed framework, TNFD recently announced a series of national and regional dialogues. The first discussions will begin in Australia and New Zealand, India, Japan, the Netherlands, Switzerland and the United Kingdom.
Efforts are also underway to run a portfolio of pilot tests of the “beta” version of the TNFD framework over the next 12 months. Spearheading this test phase are the African Natural Capital Alliance, Global Canopy, the United Nations Environment Program Finance Initiative (UNEP FI) and the World Business Council for Sustainable Development.
The challenge, Craig concedes, is to establish a disclosure system that provides the consistency and comparability that investors need, while reflecting the highly contextual nature of nature’s risks.
“You can’t aggregate your way through nature…So you can’t destroy an ecosystem in one part of the world and replant a forest in another part…and then say you’re net zero.”
The difference here with climate disclosure is stark. There is no “magic number of 1.5 degrees,” says Craig, referring to the Paris Agreement’s goal of a maximum temperature increase of 1.5 degrees Celsius.
Instead, context is everything. High water consumption is acceptable (within reason) in a tropical environment with a lot of rainfall, for example; less good in an arid region prone to water shortages.
Any disclosure framework must therefore be nuanced. TNFD’s proposal is to develop a four-part “taxonomy” covering land, freshwater, oceans and atmosphere. These broad categories are further subdivided into different “biomes”, such as coastal areas, lake systems, subterranean environments, etc.
“The design is meant to help companies really look at a specific area and capture all of the ecosystem services that are important to that area,” he says.
While the logic is “not rocket science,” to use Craig’s phrase, the act of data collection, corroboration, and reporting is far from a metaphorical walk in the park.
That said, developments in spatial mapping, geolocation data, artificial intelligence and other digital technologies are mitigating what was a diabolical challenge until very recently.
As welcome as the increase in the quantity and quality of nature-related data is, few financial institutions currently have the in-house expertise to know how to interpret this information, according to Craig.
“There are a lot of people now talking passionately about nature-based accounting (but) it’s bringing all that data together and making it a proof of investment that’s important,” he says.
Important, but also urgent. Over 10 million hectares of forest are felled each year. Our oceans are getting progressively warmer and, therefore, more acidic. The number of species threatened with extinction has now reached 40,000 species.
If Craig has learned any lessons from the parallel TCFD process, it’s imperative to move on. Six years into the TCFD process and “only 40%” of public companies are reporting their emissions, he notes, “We need to have a much, much faster adoption curve for nature.”
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