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TNFD nature-related risk management framework

  • United Kingdom
  • Pensions

07-04-2022

The Taskforce on Nature-related Financial Disclosures (“TNFD”) has published an initial version of the nature-related risk management framework for consultation and feedback from businesses and market participants. Please see our news alert for further detail on the TNFD.

The draft framework is designed to support organisations in assessing evolving nature-related risks and opportunities (“NRRO”) and support more informed and robust capital allocation based on clarity and trust in data relating to NRRO. The TNFD framework is intended for use globally by corporates, financial institutions, investors and asset owners (including pension schemes) of all sizes.

This is the first stage of a detailed consultation process - the TNFD proposes to publish a further three iterations of the draft framework in June 2022, October 2022, and February 2023, with the final release of its recommendations proposed for September 2023.

What are nature-related risks and opportunities?

Natural capital is the stock of renewable and non-renewable natural resources (e.g. plants, animals, air, water, soils and minerals) and environmental assets (e.g. forests, wetlands, coral reefs, agricultural areas) that combine to yield benefits to people, the economy and upon which corporates and financial institutions depend for their business operations.

Nature-related risks are the potential threats posed to an organisation through its and other organisations’ dependencies on nature and nature impacts (i.e. business activities that lead to changes in natural capital). Potential changes in natural capital may affect the costs and benefits of doing business and present risks to short-, medium- and long-term earnings and cashflow. 

Nature-related opportunities are activities that create positive outcomes for organisations and nature by avoiding or reducing the impact of business activity on nature or contributing to its restoration. By transitioning to nature-positive activities and outputs, businesses can mitigate the long-term risks of nature loss and financially benefit.   

Does the TNFD’s risk management framework apply to pension schemes?

Companies and pension schemes are not yet required to make nature-related disclosures in line with the TNFD, but we expect that the Government may seek to put the TNFD’s recommendations on a legal footing in the same way as those of the TCFD.

It is noteworthy that the pensions minister, Guy Opperman, stated publicly last month that any action on climate change “will need to take deforestation into account” and “ending deforestation would make the single largest contribution to greenhouse gases reduction targets for 2030” shortly after the TNFD published its initial framework.

What does the initial framework look like?

The TNFD’s draft disclosure framework is based on the same four pillars used by the TCFD: governance, strategy, risk management, and metrics & targets.  These have already been embedded into law for occupational pension schemes through the Climate Change Governance and Reporting Regulations 2021.

Disclosure pillars
Governance Strategy Risk Management Metrics & Targets
Disclose the organisation’s governance around NRRO Disclose the actual and potential impacts of NRRO on the organisation’s businesses, strategy and financial planning where such information is material Disclose how the organisation identifies, assesses and manages nature-related risks Disclose the metrics & targets used to assess and manage relevant NRRO where such information is material
Recommended disclosures
A. Describe the board’s oversight of NRRO A. Describe the organisation’s identified NRRO over the short, medium and long term A. Describe the organisation’s processes for identifying and assessing nature-related risks A. Disclose the metrics used by the organisation to assess and manage NRRO in line with its strategy and risk management processes
B. Describe management’s role in assessing and managing NRRO B. Describe the impact of NRRO on the organisation’s businesses, strategy and financial planning B. Describe the organisation’s processes for managing nature-related risks B. Describe the targets used by the organisation to manage NRRO and performance against targets
C. Describe the resilience of the organisation’s strategy, taking into consideration different scenarios C. Describe how processes for identifying, assessing and managing nature-related risks are integrated into the organisation’s overall risk management [TFND is currently considering whether to adapt the TCFD’s requirement to disclose Scope 1, 2 and, if appropriate, Scope 3 greenhouse emissions and related risks]
D. Describe the organisation’s interactions with low integrity ecosystems, high importance ecosystems or areas of water stress

 

 

 

 

 

 

 

The draft recommendations also include four general requirements that disclosures should be based on:

(i)  an assessment of nature-related dependencies and nature impacts: organisations should consider their processes for assessing the potential size and scope of nature-related risks; how they make decisions to minimise, control or avoid these risks; and the resilience of their strategies to nature-related risks.

(ii)  consideration of location: an organisation’s dependencies on nature and nature impacts are location-specific and organisations need to consider location as an integral part of their assessment of nature-related risks and implications for cash flows, revenues and enterprise value.

(iii)  consideration of capabilities for NRRO  assessment and management: organisations should consider whether (and how) they integrate NRRO into their performance objectives, capital expenditure, plans of action and risk management processes.

(iv)  statement of the scope of disclosures and what will be covered in future disclosures; organisations should provide the key metrics used to measure and manage NRRO and how they seek to align with a nature-positive economy.

Guidance to assess NRRO – Locate, Evaluate, Assess, Prepare

To accompany the draft framework, the TNFD has published voluntary guidance called LEAP (Locate, Evaluate, Assess, Prepare), which sets out a structured and science-based process for assessing, evaluating and disclosing NRRO.

The LEAP approach involves four core phases:

  • Locate your interface with nature – for example, where are the organisation’s direct assets and operations and which locations have ecosystems of high biodiversity importance?

  • Evaluate your dependencies and impacts – for example, is the organisation dependent on  environmental assets or services at priority locations and what is the size/scale of dependencies?

  • Assess your risks and opportunities – for example, which risks are material and should be disclosed in line with the TNFD disclosure recommendations?

  • Prepare to respond to NRRO  and report to investors – for example, what are the organisation’s strategy decisions based on this analysis and what will the organisation disclose in line with the TNFD recommendations?

What should you do now?

NRRO is still very much a developing field and, pending the publication of the TNFD’s final framework, it is still too early for corporates, pension schemes and other asset owners to develop a detailed approach to identifying, managing and disclosing their NRRO. But the UK Government’s approach to TCFD, the DWP’s consultation on stewardship last year, and the Pensions Minister’s publicly stated views all indicate a clear direction of travel on NRRO. We expect TNFD will be put on the same statutory footing as TCFD in due course.

As a starting point, trustees of pension schemes may wish to engage with their investment advisers and managers to understand: (i) how NRRO are being taken into account in their decision-making and whether they may be financially material given specific asset classes, investee companies and locations; (ii) what information is available now and in the next few years; and (iii) how trustees could start to build up a more complete picture of NRRO and their materiality to the portfolio. It would be consistent with trustees’ fiduciary obligations to understand how NRRO are being factored into the advice they receive.

We recommend trustees take a proportionate approach in relation to NRRO, particularly while it is unclear if and when the TNFD’s recommendations will become a legal requirement. Ultimately, trustees’ approach at this stage will depend on their scheme-specific circumstances, the type of scheme and attitude of the sponsor/provider, available resources and the type and location of asset classes. For example, the close connection between climate-related risks and nature-related risks would indicate that if trustees have material exposure to climate risks in certain aspects of their portfolio, they may also wish to consider their exposure to nature-related risks and how to mitigate these.

There are potentially good reasons for large schemes at the leading edge of this evolving area to get ahead of the game. Other occupational schemes may well wish to consider what sort of timeframe works best for them.

Disclosure pillars

Governance

Strategy

Risk Management

Metrics & Targets

Disclose the organisation’s governance around NRRO

Disclose the actual and potential impacts of NRRO on the organisation’s businesses, strategy and financial planning where such information is material

Disclose how the organisation identifies, assesses and manages nature-related risks

Disclose the metrics & targets used to assess and manage relevant NRRO where such information is material

Recommended disclosures

A.    Describe the board’s oversight of NRRO

A.    Describe the organisation’s identified NRRO over the short, medium and long term

A.    Describe the organisation’s processes for identifying and assessing nature-related risks

A.    Disclose the metrics used by the organisation to assess and manage NRRO in line with its strategy and risk management processes

B.    Describe management’s role in assessing and managing NRRO

B.    Describe the impact of NRRO on the organisation’s businesses, strategy and financial planning

B.    Describe the organisation’s processes for managing nature-related risks

B.    Describe the targets used by the organisation to manage NRRO and performance against targets

 

C.    Describe the resilience of the organisation’s strategy, taking into consideration different scenarios

C.    Describe how processes for identifying, assessing and manging nature-related risks are integrated into the organisation’s overall risk management

[TCND is currently considering whether to adapt the TCFD’s requirement to disclose Scope 1, 2 and, if appropriate, Scope 3 greenhouse emissions and related risks]

D.    Describe the organisation’s interactions with low integrity ecosystems, high importance ecosystems or areas of water stress