From Compliance to Competition: How Your Relationship with Nature Will Change
Many companies are not ready for the mindset shift that TNFD-aligned nature risk reporting will bring. The paradigm in which corporations have been operating enables them to hide their environmental impacts from the public, and even from themselves. The aim of the TNFD (Task Force for Nature-related Financial Disclosures) is to provide an ESG reporting framework for transparency around a company's relationship with nature.
For example, companies don’t typically report their soil, water, and air pollution to investors, even in ESG reports, though GHG emissions are a recent exception thanks to the TCFD and regulation around climate risk disclosures. In many jurisdictions, however, pollution emissions must be reported to local environmental regulators, and companies focus more on whether they are compliant with local regulations and emissions limits than on the ecosystem impacts of that pollution. It is thus up to the regulator to understand environmental impacts, set limits, and enforce regulations.
A recent study of EPA enforcement of the Clean Air Act found that 36% of violations were profitable after fines, and the largest violations were almost always profitable.
With a narrow focus on compliance, companies are sometimes surprised when a journalist or environmental protection watchdog exposes the damage they have done to the environment, and they will point to compliance as though it should be a sufficient excuse or as a way to deflect responsibility for damages done to the environment.
Even with a focus on compliance, many companies will choose not to comply with local environmental regulations where non-compliance is more profitable even after penalties are imposed. A recent study of EPA enforcement of the Clean Air Act found that 36% of violations were profitable after fines, and the largest violations were almost always profitable.
This paradigm is about to change. What the TNFD recommends, and what investors want in ESG reporting, is transparency into how much of which kinds of pollution a company is emitting and assessments of the environmental damage done by that pollution, in addition to fines and penalties from environmental non-compliance violations. Companies will no longer be able to ignore the impacts of their actions on the environment and hide behind clean compliance records as an indicator of environmental responsibility.
Companies will no longer be able to ignore the impacts of their actions on the environment and hide behind clean compliance records as an indicator of environmental responsibility.
Investors will use nature disclosures to determine financial risks, to compare companies’ environmental impacts to those of their peers, and to influence valuation assessments and investments. Investors will reward companies that are more ‘pollution efficient’ than others making similar products, and that more quickly adopt sustainable business practices like circularity, regenerative, zero waste, etc.
Ultimately what this means is that pollution, and environmental impacts in general, will become a point of competition instead of a matter of compliance, for companies looking to access green finance or be favorably valued by the markets. This is a major mindset shift, one that will take some time to be adopted across large organizations. Industry leaders are starting to become aware of this, and are quickly adopting TNFD to first give themselves transparency into their relationship with nature, in order to start preparing for strong first public disclosures, which are coming soon.
