The Taskforce on Nature-related Financial Disclosures (TNFD) framework: The Third Beta Version

• United Kingdom

• ESG
• Investment funds and asset management
• Financial services

17-03-2023

The Taskforce on Nature-related Financial Disclosures (the “TNFD” or “Taskforce”) released the third version of its beta framework on 4 November 2022. 

What is TNFD and the TNFD Framework?

The TNFD was launched by an informal working group of 75 banks, investors, companies, governments and regulatory bodies in June 2021.  With the assistance of industry bodies and science expert groups, the Taskforce is developing a risk management and disclosures framework for businesses to report and act on their nature-related risks and opportunities.

The Beta Framework

The development of the framework occurred sequentially through the release of various beta versions. This innovative approach allows market participants to test and feedback on the framework prior to its final release.  The first version of the framework was released on 1 March 2022, followed by a second version in June 2022.

Defining Nature and Nature-related Risks and Opportunities

The Framework defines nature as ‘the natural world, with an emphasis on the diversity of living organisms (including people) and their interactions among themselves and with their environment’. This working definition divides nature into four realms:

• Atmosphere

• Freshwater

• Land

• Ocean

In each of the four realms, aspects of nature are categorised as an asset or a service under two umbrella classifications, “ecosystem services” and “environmental assets”.  

Ecosystem services

The contributions of ecosystems to the benefits that are used in economic and other human activity.

Environmental assets

The naturally occurring living and non-living components of the Earth, together constituting the biophysical environment, which may provide benefits to humanity.

The TNFD works on the basis that the relationship of a business with nature is ‘bi-relational’, as businesses both depend on and impact upon nature.  A business’ impacts and dependencies on nature are said to generate nature-related risks and opportunities. The framework adopts the following definitions of risks and opportunities:

Nature-related risks

Potential threats posed to an organisation linked to their and wider society’s dependencies on nature and nature impacts, which can derive from physical, transition and systemic risks.

Dependencies are the aspects of ecosystem services on which organisations rely. Examples include the ability to regulate water flow, water quality, and to prevent or create resilience against hazards like fires and floods; provide a suitable habitat for pollinators, and sequester carbon (in terrestrial, freshwater and marine realms).

Impacts are defined as changes in the state of nature, which can be positive or negative, and direct, indirect or cumulative. Impacts may result in changes to the capacity of nature to provide social and economic functions.

Nature-related opportunities occur:

• When organisations avoid, reduce, mitigate or manage nature-related risks, for example, connected to the loss of nature and ecosystem services on which the organisation and society depend

• Through the strategic transformation of business models, products, services, markets and investments that actively work to reverse the loss of nature, including by restoration, regeneration of nature and implementation of nature-based solutions

The LEAP Approach

The TNFD has a four-step process for assessing nature-related risk and opportunity management called LEAP:

• Locate your interface with nature

• Assess your nature-related dependencies and nature impacts

• Evaluate your nature-related risks and opportunities

• Prepare to respond and report on nature-related risks and opportunities

The approach is voluntary and not everything identified using it must be disclosed.  There is accompanying guidance for each step.

For financial institutions there is a specific variant known as LEAP-FI (financial institutions).

The LEAP-FI model involves three additional steps.  The specifics of the LEAP approach and the LEAP-FI elements are set out in the below table. 

LEAP-FI
F1	F2	F3
Type of business	Entry points	Type of analysis
"What is the nature of our business as a financial institution?"	"What asset classes/financial products do we have and what are their potential interactions with nature?"	"What level of assessment is feasible/appropriate for our business, given the level of aggregation of financial products and services?"

LEAP
L  Locate	Interface with Nature		L1	L2		L3		L4
			Business footprint	Nature interface		Priority location identification		Sector identification
E  Evaluate	Dependencies & Impacts		E1	E2		E3		E4
			ID of relevant environmental assets and ecosystem services	ID of dependencies and impacts		Dependency analysis		Impact analysis
A  Assess	Material Risks & Opportunities		A1	A2		A3	A4	A5
			Risk ID & assessment	Existing risks mitigation & management		Additional risks mitigation & management	Materiality Assessment	Opportunity identification & assessment
P  Prepare	To Respond & Report	Strategy & resource allocation	P1	P2	Disclosure actions	P3		P4
			Strategy and resource allocation	Performance measurement		Reporting		Presentation

The TNFD Disclosure Recommendations

The identification of nature-related risks and opportunities feeds directly into  the TNFD Disclosure Recommendations.  The TNFD disclosure framework is modelled on the Taskforce on Climate-related Financial Disclosures (“TCFD”) disclosure framework.  This is most clearly seen in the structure and language of the TNFD model, which mirrors the TCFD four core pillars of disclosure.  The TNFD disclosures adopt some of the TCFD recommendations with minimal modifications, if any, to make reference to nature.  Other TCFD model elements were adapted before incorporation, and the third beta version introduced three nature-related disclosures for impacts, dependencies, and risks and opportunities.

The below table depicts the similarities and differences between TNFD and the TCFD disclosure recommendations. The red text signifies the revisions made to the TCFD to create the TNFD recommendations.

TCFD Climate-related Disclosure Recommendations against TNFD Nature-related Disclosure Recommendations (v0.3)
Governance		Strategy		Risk & Impact Management		Metrics & Targets
Disclosure the organisation's governance around climate-related risks & opportunities		Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation's businesses, strategy and financial planning where such information is material		Disclose how the organisation identifies, assesses and manages nature-related dependencies, impacts, risks and opportunities		Disclose the metrics and targets used to assess and manage relevant nature-related dependencies, impacts, risks and opportunities where such information is material.
TCFD Recommended Disclosures	TNFD Recommended Disclosures	TCFD Recommended Disclosures	TNFD Recommended Disclosures	TCFD Recommended Disclosures	TNFD Recommended Disclosures	TCFD Recommended Disclosures	TNFD Recommended Disclosures
A. Describe the board's oversight of climate-related risks and opportunities.	A. Describe the board's oversight of nature-related dependencies, impacts, risks and opportunities.	A. Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term.	A. Describe the nature-related dependencies, impacts, risks, and opportunities the  organisation has identified over the short, medium and long term.	A. Describe the organisation’s processes for identifying and assessing climate-related risks.	A. Describe the organisation’s processes for identifying and assessing nature-related dependencies, impacts, risks and opportunities.	A. Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.	A. Disclose the metrics used by the organisation to assess and manage nature-related risks and opportunities in line with its strategy and risk management process.
B. Describe management's role in assessing and managing climate-related risks and opportunities.	B. Describe management's role in assessing and managing nature-related dependencies, impacts, risks and opportunities.	B. Describe the impact of climate-related risks and opportunities on the organisation's businesses, strategy and financial planning.	B. Describe the impact of nature-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.	B. Describe the organisation’s processes for managing climate-related risks.	B. Describe the organisation’s processes for managing nature-related dependencies, impacts, risks and opportunities.	B. Disclose Scope 1, Scope 2 and if appropriate Scope 3, greenhouse gas (GHG) emissions, and the related risks.	B. Disclose the metrics used by the organisation to assess and manage direct, upstream and, if appropriate, downstream dependencies and impacts on nature.
		C. Describe the resilience of the organisation's strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.	C. Describe the resilience of the organisation’s strategy.	C. Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management.	C. Describe how processes for identifying, assessing and managing nature-related risks are integrated into the organisation’s overall risk management.	C. Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.	C. Describe the targets used by the organisation to manage nature-related dependencies, impacts, risks and opportunities and performance against targets.
			D. Describe the organisation’s interactions with low integrity ecosystems or areas of water stress.		D. Describe the organisation’s approach to locate the sources of inputs used to create value that may generate nature related dependencies, impacts, risks and opportunities.		D. Describe how targets on nature and climate are aligned and contribute to each other, and any trade-offs.
					E. Describe how stakeholders, including rights-holders, are engaged by the organisation in its assessment and response to nature related dependencies, impacts, risks and opportunities.

The explanatory materials accompanying the third beta version envisage the eventual amalgamation of the TCFD and the TNFD frameworks.  

Timeline to Implementation

The final beta version is due for release in March 2023.  TNFD seeks feedback from market participants before the conclusion of pilot testing on 1 June 2023.  TNFD’s final recommendations will be published in September 2023.

Some amendments expected in the next beta version include: 

• Finalised disclosure metrics
• Revisions to incorporate elements of the global biodiversity framework agreed at the convention on biological diversity (“CBD”) COP-15 meeting held in December 2022
• Greater detail on the adaptable approach to implementation and additional disclosure recommendations  

How can Eversheds Sutherland help? 

Our team have been advising on regulatory interpretation and product development for the fund management industry since the 1980s and we have been at the forefront of new products under European and UK regulation in the period since then. Our in depth understanding of the sector and experience with the practical implementation of new product categories mean that we are very well placed to guide you in complying with the changing product and regulatory environment.