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INSIGHT

TNFD Recommendations to prompt a step change in nature risk management and disclosure

By Jillian Button, Emily Turnbull, Victoria Costa, Tiana Macleod, Heidi Ruckert 10 October 2023
Boards & NEDS Climate Change & Sustainability Corporate Governance Environmental, Social & Governance General Counsel Risk & Compliance

Nature on the rise 20 min read

The Taskforce on Nature-related Financial Disclosures recommendations (the TNFD Recommendations) provide a means to standardise nature-related risk management and reporting, and to capitalise on nature-related opportunities. Resembling both in form and purpose the disclosure framework developed by the Task Force on Climate-Related Financial Disclosures (the TCFD Recommendations), it is expected that TNFD-aligned disclosures will become market standard far more quickly than their climate counterpart. The shift towards transparency will trigger broader questions about whether and how organisations and directors are fulfilling their duties in relation to nature risks and opportunities.

In this Insight, we provide an overview of the TNFD Recommendations, and highlight some key considerations for Australian businesses in identifying, assessing, managing and disclosing their nature-related risks and opportunities.

Jump to

  1. Key takeaways
  2. The TNFD Recommendations at a glance
  3. Key considerations for Australian businesses
  4. What's next?

Key takeaways

  • Nature waits for no one: The Taskforce has made clear that companies no longer have the luxury of time in responding to their nature-related risks and opportunities, and existing data constraints are no excuse for delayed action. The TNFD Recommendations are intended to provide a practical basis for organisations to get started on nature-related assessment and reporting, notwithstanding capacity and data limitations – similar to the TCFD, the majority of the TNFD's recommended disclosures are process descriptions that do not require quantitative metrics in order to begin reporting. The TNFD envisages that as organisations 'start their TNFD adoption pathway and nature-related issues move into mainstream reporting, practices and techniques will evolve rapidly, as they have for climate'.1 In turn, these improvements, including in data and analytics, are expected to facilitate the increased quality, scope and ambition of disclosures over time.
  • Potential move to mandatory: In the longer term, climate, nature and other ESG-related reporting, such as human capital matters, may be integrated into mandatory holistic sustainability reporting. The architecture of the Federal Government's proposed mandatory climate-related disclosure regime (discussed in our recent Insight) is being designed so as to make it possible for ESG disclosures on nature and other matters to be mandated without further changes of law. Similarly, the International Sustainability Standards Board (the ISSB) has flagged nature-related disclosures as a potential future priority area.
  • Mitigating potential greenwashing risks: There has been significant regulatory activity in Australia in relation to greenwashing (see our previous Insight setting out recommendations to mitigate greenwashing risks), and ASIC has indicated that 'trust and transparency are paramount' as companies move to address their nature-related risks and opportunities.2 As nature-related disclosures increase around the world, we expect there will be a subsequent uptick in stakeholder engagement and, potentially, enforcement activity in relation to greenwashing, including in respect of nature-related targets and commitments made by businesses.
  • TNFD to influence investor engagement: The advent of the TNFD Recommendations will increase the flow of decision-useful information to investors and other stakeholders, which we expect will lead to nature risks and opportunities featuring more prominently in investor engagements, such as AGM questions, shareholder-led resolutions, shareholder engagement and, possibly, strategic litigation. Just as such engagements often are based on alignment with the Paris Agreement and TCFD, we expect alignment with the goals of the Global Biodiversity Framework and TNFD to become central to such engagements in the near future.
  • Shining a light on the opportunities: The TNFD is not just about identifying risks. It facilitates the disclosure of nature-related opportunities, which include opportunities regarding biodiversity markets (see our previous Insight on the Nature Repair Market Bill 2023), the provision of goods, services and technologies for nature repair, and potential competitive advantages associated with pursuing deforestation-free supply chains.

The TNFD Recommendations at a glance

The TNFD Recommendations provide organisations with a framework to identify, assess, manage and disclose their nature-related risks and opportunities consistently with the global sustainability reporting baseline set by the ISSB.

The TNFD Recommendations mirror the four disclosure pillars of the TCFD Recommendations (which themselves are incorporated into the ISSB sustainability- and climate-related standards), and transpose all 11 of the recommended disclosures of the TCFD Recommendations into a nature context. This mirroring is intended to provide a means for integrated climate- and nature-related reporting, which we expect will facilitate expedited uptake of voluntary adoption of the TNFD Recommendations across the market, and future integration of other sustainability matters such as those being addressed by the Task Force on Inequality-related Financial Disclosures.

Four disclosure pillars

In summary, the TNFD Recommendations provide for disclosures across the four pillars of Governance, Strategy, Risk and impact management, and Metrics and targets.

Governance

The organisation’s governance of nature-related dependencies, impacts, risks and opportunities, including a description of:

  • the board's oversight of, and management's role in assessing and managing, nature-related dependencies, impacts, risks and opportunities; and
  • the organisation's human rights policies and engagement activities, and board and management oversight, regarding Indigenous Peoples, local communities, affected and other stakeholders in the organisation’s assessment of and response to nature-related issues.
Strategy

The effects of nature-related dependencies, impacts, risks and opportunities on the organisation's business model, strategy and financial planning (where material), including a description of:

  • the short-, medium- and long-term nature-related dependencies, impacts, risks and opportunities identified by the organisation;
  • the effect of nature-related issues on the organisation's business model, value chain, strategy and financial planning, as well as any transition plans or analysis in place;
  • the resilience of the organisation's strategy, having regard to different nature-related scenarios; and
  • locations of assets and/or activities in the organisation's direct operations and, where possible, upstream and downstream value chain(s) that satisfy the criteria for priority locations ie:
    • material locations: where an organisation has identified material nature-related dependencies, impacts, risks and opportunities; and/or
    • sensitive locations: where assets and/or activities interface with nature in areas important for biodiversity; areas of high or rapidly declining ecosystem integrity; areas of high physical water risks; and/or areas of importance for ecosystem service provision, including benefits to Indigenous Peoples, local communities and stakeholders.
Risk and impact management

The organisation's process for identifying, assessing, prioritising and monitoring nature-related dependencies, impacts, risks and opportunities, including a description of:

  • the organisation's processes for identifying, assessing and prioritising nature-related dependencies, impacts, risks and opportunities in its direct operations and upstream and downstream value chain(s), and for monitoring these issues; and
  • how such processes are integrated into and inform the organisation's overall risk management processes.
Metrics and targets

The metrics and targets used by the organisation to assess and manage material nature-related dependencies, impacts, risk and opportunities, including a description of:

  • the metrics used to assess and manage material nature-related risks and opportunities in line with the organisation's strategy and risk management process, and to assess and manage dependencies and impacts on nature; and
  • the goals and targets used to manage nature-related issues, and how the organisation is performing against these targets and goals.

Complexity of nature warrants three new disclosure recommendations

The TNFD Recommendations contain three new disclosure recommendations (in addition to the 11 recommended disclosures transposed from the TCFD Recommendations) that respond to the 'clear rationale' for providing further information in the nature context across stakeholder engagement, sensitive locations and value chains.3

1. Human rights policies and engagement activities, and board and management oversight, regarding Indigenous Peoples, local communities, affected and other stakeholders

The TNFD recognises that effective and meaningful engagement with Indigenous Peoples, local communities, affected and other stakeholders is critically important to the robust identification, assessment and management of nature-related issues. With this in mind, Recommendation C within the Governance pillar is intended to facilitate assessment by the market of whether an organisation's human rights policies and engagement activities are appropriate for managing its nature-related issues. The Taskforce has released specific guidance to assist businesses with meaningful engagement processes and related disclosures.4

2. Locations of assets and/or activities in priority locations

In recognition of the fact that nature-related dependencies, impacts, risks and opportunities are location specific, the TNFD Recommendations provide that consideration of the geographic location of an organisation's interface with nature should be central to the assessment of its nature-related issues and, where material, to its disclosures. Accordingly, Recommendation D within the Strategy pillar is directed at providing information on assets and/or activities that are located in 'priority locations', which include material locations and/or sensitive locations (detailed in the Strategy pillar above).

3. Processes for identifying, assessing and prioritising nature-related issues in upstream and downstream value chain(s)

Acknowledging that many important nature-related issues will occur upstream and downstream from an organisation's direct operations, the TNFD Recommendations make clear that organisations should identify, assess and disclose material nature-related issues in their upstream and downstream value chain(s), as and where possible (noting this may take time, due to data and capacity constraints). Recommendation A(ii) within the Risk & impact management pillar provides that organisations should describe how they have identified, assessed and prioritised nature-related issues in their value chain(s).

To assist organisations, the Taskforce has released a draft discussion paper on its proposed approach to value chains, including where seeking full traceability is appropriate, and where using secondary data may be an acceptable alternative to directly measuring nature-related dependencies and impacts.5

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Key considerations for Australian businesses

1. To report or not to report?

Presently, adoption of the TNFD Recommendations is voluntary – which begs the question: to report or not to report? As the voluntary and regulatory reporting landscape continues to evolve at pace, companies and financial institutions are already signalling their intention to commence TNFD-aligned reporting, in preparation for anticipated changes in regulatory requirements and in response to increasing stakeholder demands for businesses to report on nature-related issues. Indeed, the TNFD reports that of 239 organisations surveyed earlier this year, 70% stated that they plan to begin reporting in alignment with the TNFD Recommendations by their financial year 2025 or earlier.6

Early adoption of the TNFD Recommendations will bring strategic benefits to first movers, who are expected to benefit from timely identification of nature-related risks and opportunities, and internal capacity building in terms of nature-related governance, risk management and reporting processes. In turn, early adopters will be well placed to adapt to the changing regulatory landscape (with the potential for mandatory nature-related reporting on the horizon), and respond to growing stakeholder expectations, and rapidly accelerating market practice, in relation to nature.   

2. Interaction between nature-related disclosures and mandatory disclosure requirements

The voluntary disclosures that entities make under the TNFD Recommendations should complement and be consistent with those made under existing statutory reporting requirements. For example:

  • financially material nature-related risks identified by applying the TNFD Recommendations may be material to business operations or prospects such that they warrant disclosure to the market in accordance with existing reporting requirements under the Corporations Act 2001 (Cth);
  • nature-related disclosures should be aligned with, and not contradict or cast doubt on the accuracy of, other financial-related disclosures including financial statements prepared in accordance with the Corporations Act; and
  • as organisations and investors developer a deeper appreciation for the financial materiality of nature-related risks and opportunities, listed entities should be alert to the possibility of nature-related issues triggering continuous disclosure under the ASX Listing Rules.

To ensure alignment across voluntary and mandatory reporting, organisations will need to build (or continue to build) cross-functional engagement between teams including finance, legal, governance and ESG, which may include nature and community engagement experts.

Although Australian regulators are still yet to comment at length on their expectations for nature-related disclosures, we consider much of the discourse from ASIC, the ASX Corporate Governance Council and APRA on climate change can be readily transposed and applied to nature-related risks and opportunities. This approach is also consistent with emerging international nature-related guidance, which leverages and integrates previous work undertaken in relation to climate-related risks.

Organisations should consider:

  • What disclosures ought to be made under the Corporations Act, ASX Listing Rules and other applicable laws as to nature-related risks?
  • What transparency requirements might apply in relation to nature-related risks eg under the Superannuation Industry (Supervision) Act 1993 (Cth)?
  • How can internal team capabilities, including across natural sciences (such as ecology or environmental science), data collection, finance, governance and community engagement, collaborate to meet, and integrate, the reporting requirements of the TNFD Recommendations with existing reporting processes?

3. Embedding nature into risk management and governance frameworks

Nature-related disclosures have the capacity to increase, or decrease, investor confidence in an investee company's underlying approach to strategy, governance and risk management. In that sense, while nature disclosure goes through the process of mainstreaming across the market, some organisations may find the 'disclosure tail' wagging the 'strategy dog'. To mitigate the risk of this, and to prepare for a more orderly transition towards nature-related transparency, organisations should proactively embed nature, as appropriate (having regard to materiality), into risk management, strategy and governance frameworks.

The TNFD Recommendations make clear that:

'Nature is no longer a corporate social responsibility issue, but a core and strategic risk management issue alongside climate change. It needs to be brought into the strategy, risk management and capital allocation decisions of business and finance, with fully integrated climate and nature considerations.'7

Although the TNFD recognises that this shift will be resource intensive, businesses should remind themselves they have the capacity for significant systemic change as has been seen for regulatory reforms regarding climate and modern slavery.8 In recognition of the task at hand, the TNFD has provided a suite of additional guidance to support businesses in their nature-related transition, and no doubt this guidance will continue to evolve as industry road-tests the new framework.

As businesses develop nature-related capacities, consideration should also be given to the practical learnings of the Australian TNFD Pilot. This includes key challenges faced by pilot participants:9 eg the need for specialised expertise to undertake nature-related assessments, particularly in relation to natural science and geo-spatial data, and the related need to invest in reliable data collection across direct operations and value chains, which will likely require significant allocation of time and resources.

As in the context of climate governance, boards and senior executives should also expect near-term scrutiny of how they are discharging their statutory duties regarding material nature-related risks and opportunities.10 Eg, aided by disclosures under the Governance pillar of the TNFD Recommendations, stakeholders are likely to increasingly interrogate the nature accountability and competency of boards and senior management. In anticipation of this, businesses should consider what processes are in place for directors and senior executives to actively improve their expertise and skills as to nature.

Organisations should consider:

  • What measures are currently taken to manage nature-related risks in accordance with existing legal obligations, including prudential standards and directors' duties?
  • How do existing risk management and governance frameworks, and, ultimately, the business's overall strategy, account for nature-related matters?

4. Mitigating potential greenwashing risks

In light of continued and significant investor activism and regulatory activity in relation to greenwashing, businesses should remain mindful of existing regulatory guidance when making nature-related claims, including in the context of nature-related disclosures.

The potential greenwashing risks that may arise in relation to nature-related claims and disclosures are not new concepts for businesses, and the same rules that are being enforced in relation to other sustainability-related claims, such as net-zero representations, are equally appliable. Eg, in preparing disclosures under the TNFD Recommendations, businesses should consider ACCC and ASIC guidance on avoiding greenwashing.

We expect that nature-related targets and commitments, much like their climate counterparts, are likely to receive particular scrutiny. Claims about a business's future environmental targets and commitments (eg 'to have a deforestation-free supply chain by 2030', or 'we will protect 50% of our landholding by 2030') should be supported by reasonable grounds at the time the claims are made. Businesses should ensure that such targets and commitments are consistent with and complementary to disclosures made under the 'Metrics and targets' pillar of the TNFD Recommendations, which includes disclosure of targets and goals used to manage nature-related dependencies, impacts, risk and opportunities, and performance against these.

Similarly, when disclosing nature-related impacts, businesses should ensure that both positive and negative impacts on nature are disclosed accurately and transparently, so that stakeholders receive a complete and holistic picture of the organisation's impacts. The TNFD Recommendations also set out that the 'metrics' (ie the system or standard of measurement used under the framework) used for negative and positive impacts are reported separately, and not on a net basis. The need to provide a fulsome picture of both positive and negative impacts, rather than cherry-picking disclosures, is consistent with existing regulatory guidance, such as the ACCC's recent draft guidance for business on environmental and sustainability claims, which cautions against making claims that exaggerate an environmental benefit or understate an environmental harm, as such claims risk misleading consumers.11

Organisations should consider:

  • What representations are being made in relation to nature? If the representation being made is about a future matter, are there reasonable grounds for making that representation?
  • When reporting on nature-related impacts, are both positive and negative impacts disclosed accurately and transparently?
  • How will progress against nature-related targets and commitments be measured (including against what baselines) and reported? Have key assumptions about and qualifications to targets and commitments been accurately disclosed?

5. Capitalising on existing and emerging nature-related opportunities

Nature-related opportunities are a key element of the TNFD Recommendations, and a growing focus globally for institutional investors, shareholders and other stakeholders. The Taskforce defines such opportunities as 'activities that create positive outcomes for organisations and nature by creating positive impacts on nature or mitigating negative impacts on nature'.12 The existing and emerging opportunities available to a particular business will depend on its particular circumstances, including the region, market and industry in which it operates.

The TNFD Recommendations categorise nature-related opportunities into two non-mutually exclusive categories: those related to 'business performance' and those related to 'sustainability performance'.

Business performance13
Markets

Changing dynamics in overall markets, such as access to new markets or locations, that arise from other opportunity categories as a result of changing conditions, including consumer demands, consumer and investor sentiment, and stakeholder dynamics

Capital flow and financing

Access to capital markets, improved financing terms or financial products connected to positive nature impacts or the mitigation of negative impacts

Resource efficiency

Actions an organisation can take within its own operations or value chain in order to avoid or reduce impacts and dependencies on nature (eg by using less natural resources), while achieving co-benefits such as improved operational efficiency or reduced costs (eg micro-irrigation, which maximises plant health, reduces water use and reduces costs) 

Products and services

Value proposition related to the creation or delivery of products and services that protect, manage or restore nature, including technological innovations

Reputational capital

Changes in perception concerning a company’s actual or perceived nature impacts, including the consequent impacts on society and engagement of stakeholders

Sustainability performance14
Sustainable use of natural resources

Substitution of natural resources with recycled, regenerative, renewable and/or ethically responsibly sourced organic inputs

Ecosystem protection, restoration and regeneration

Activities that support the protection, regeneration or restoration of habitats and ecosystems, including areas both within and outside the organisation’s direct control

The release and uptake of the TNFD Recommendations, in combination with other global trends, including domestic regulatory reforms, are likely to direct capital flows towards nature-based solutions and nature markets. This will provide an additional suite of opportunities for businesses to leverage in making positive contributions to the environment. Eg the Federal Government's Nature Repair Market Bill 2023 will, if passed, establish a new means for businesses to invest in registered nature restoration projects that generate tradeable biodiversity certificates. The Nature Repair Market aims to provide businesses with access to new markets while investing in Australia's biodiversity.  

The Australian TNFD Pilot highlighted that participants faced particular challenges in identifying and understanding their nature-related opportunities. It recommends that businesses have regard to the TNFD's Nature-related Risk and Opportunity Registers, which provides a template that can be applied by businesses in assessing risks and opportunities relevant to their direct operations and upstream and downstream value chains.15

Organisations should consider:

  • What 'business' or 'sustainability' performance opportunities are relevant to our operations and unique circumstances, including the region, market and industry in which we operate?
  • What actions do our key stakeholders expect us to take to contribute to global nature-related goals, including efforts to halt and reverse biodiversity loss?

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What's next?

The release of the TNFD Recommendations starts the clock on early adoption. The TNFD is already accepting registrations from organisations prepared to start adopting the TNFD Recommendations, with the inaugural cohort of TNFD Adopters to be publicly announced at the World Economic Forum Annual Meeting at Davos in January 2024. We expect early adopters will position themselves as market leaders, and slow movers may face potential scrutiny from an active stakeholder audience.  

One of the key goals of the TNFD Recommendations is to enable integrated consideration of climate and nature by businesses, including in relation to governance, risk management and reporting. To achieve effective integration, business will need to:

  • embed climate- and nature-related considerations in organisational structures and processes; and
  • build (or continue to build) cross-functional stakeholder engagement, including between finance, legal, governance and ESG teams.

It's important to consider what the TNFD Recommendations mean for your business, and you may wish to seek independent advice regarding the interactions of nature-related disclosures with existing disclosures, governance and risk management processes, and how to embed and enhance nature-related considerations within your wider business strategy.

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Footnotes

  1. Getting started with adoption of the TNFD recommendations (September 2023) p. 6 (here).

  2. See speech by ASIC Deputy Chair Karen Chester at RI Australia 2023 annual conference, 10 May 2023 (here).

  3. Recommendations of the Taskforce on Nature-related Financial Disclosures, p. 18 (here).

  4. See the TNFD Guidance on engagement with Indigenous Peoples, Local Communities and affected stakeholders (August 2023).

  5. See the TNFD Discussion paper on proposed approach to value chains (August 2023).

  6. See TNFD Adopters (September 2023).

  7. See Recommendations of the Taskforce on Nature-related Financial Disclosures (September 2023), p. 8 (here).

  8. See Getting started with adoption of the TNFD Recommendations (September 2023), p. 7 (here).

  9. See Australian case study report on piloting the Taskforce on Nature-related Financial Disclosures framework.

  10. See eg the World Economic Forum, How to Set Up Effective Climate Governance on Corporate Boards: Guiding principles and questions (January 2019) (here).

  11. See the ACCC's recent Environmental and sustainability claims – Draft guidance for business (July 2023).

  12. See Recommendations of the Taskforce on Nature-related Financial Disclosures (September 2023), p. 131.

  13. Recreated from Figure 16 of the Recommendations of the Taskforce on Nature-related Financial Disclosures (September 2023), p. 37.

  14. Recreated from Figure 16 of the Recommendations of the Taskforce on Nature-related Financial Disclosures (September 2023), p. 37.

  15. See TNFD Nature-related Risk and Opportunity Registers (November 2022), which was prepared as part of the beta TNFD Recommendations but remains a relevant tool to help organisations with their nature-related assessments.

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