TNFD: Guiding Finance to a Sustainable Economy
We are so deeply committed to and entrenched in a market-based global economy that the most powerful tool we have to enable systemic change is through finance. This is why investors are critically important to addressing climate change and biodiversity loss, and driving our transition to a sustainable economy.
The Dasgupta Review eloquently described how our entire economic system made a critically false assumption that nature is free and limitless, when in fact it is subject to the same limitations as the corporate bank account. If not managed properly, it can disappear, and the business can fail. Accounts cannot be managed properly if they are not being measured and reported accurately. No one questions why we need financial reporting. Climate and nature reporting thus need to become as common and standardised as financial reporting if we are to manage our nature accounts sustainably and ensure long-term business and economic success.
However we are at the beginning of this journey, trying to figure out how to measure and report on our complicated economic relationship with nature, which itself is complicated and vast. And it all needs to roll up into a standardised financial report that an investor can read and decide where and how to deploy finance, balancing risk and reward. This is what the Taskforce for Nature-Related Financial Disclosures (TNFD) aims to achieve. Following in the footsteps of the Taskforce for Climate-Related Financial Disclosures (TCFD), which has seen widespread acceptance by investors and financial regulators globally as a governance and reporting framework for climate reporting, the TNFD offers a governance, measurement, and reporting framework for companies to disclose their nature-related financial risks in a way that is intuitive to and actionable by investors…eventually.
The TNFD recommendations, like those of the TCFD, are necessarily loose to allow for experimentation and limitations in available tools and resources. Before we can converge on global, regional, or industry-specific standards, we need a better understanding of the accounting itself and how it should be structured to drive sustainable outcomes. Through its LEAP approach (Locate interfaces with nature, Evaluate impacts, Assess risks and opportunities, Prepare to disclose), the TNFD illustrates the complexity of understanding nature risk. For example, it is not easy for a company that uses plastic packaging to understand how that plastic usage impacts biodiversity. There are numerous links in the chain that connects them, several data sources of varying measures, quality, and completeness that need to be consulted, and expertise on both plastics and biodiversity and maybe other areas is required.
Once risks are identified, companies will be compelled to take action. Fortunately the TNFD, the Science Based Targets Network (SBTN), and the Sustainability Accounting Standards Board (SASB) appear to be collaborating and will hopefully align toward a clear recommendation over time. The SBTN somewhat overlaps with the TNFD but extends to target setting and tracking, while SASB is likely to bring the TNFD into its suite of sustainability reporting standards, as it has done with TCFD.
The TNFD offers a governance, measurement, and reporting framework for companies to disclose their nature-related financial risks in a way that is intuitive to and actionable by investors…eventually.
While these efforts are underway, many companies are trying to fill the data gap for investors, taking a top-down approach to understanding nature risk. Hopefully this stop-gap will enable finance to drive sustainable outcomes in the near term. But only the companies themselves have the most complete picture of their operations and supply chains to accurately report on nature risk. Would investors base financing decisions only on third party estimates of financial reports? Maybe, but they would account for the risk of unknowns in the financing terms. To get the same level of transparency and sophistication in driving economic outcomes around nature, companies must report on nature risk holistically in a standardised way, and the TNFD is the first step to getting there.
To get the same level of transparency and sophistication in driving economic outcomes around nature, companies must report on nature risk holistically in a standardised way, and the TNFD is the first step to getting there.
The size of this challenge is enormous, even bigger than for climate change. The number of innovations and solutions needed to enable nature risk reporting to become as easy, affordable, and common as financial reporting will become an industry in its own right, especially if you include risk mitigation and adaptation. Dunya Analytics is an emerging innovator in this space, building models and tools that connect the chain links between a company’s plastic use and the impact on biodiversity, to make it easier for companies to report on nature-related risks at scale.
Finance must demand transparent and standardised reporting from companies to make informed investment decisions. Companies must pursue solutions and prepare to report on climate and nature risk as they do with financials. Scientists and technologists must collaborate to build the tools and frameworks to ensure all this can be done at scale. We all have a role to play in the transformation to a sustainable economy.
