TNFD: Expectations and developments in the financial sector
TNFD: Expectations and developments in the financial sector
Authors: Gloria Perez Torres and Esther Batt
Our experts in Financial Services Advisory (FS) specialise in helping a range of banks and financial institutions comply with regulatory requirements, covering ESG, climate change and wider sustainability risks with their work. Gloria Perez Torres, Associate Director in Financial Services, provides insight into how the Taskforce for Nature-related Financial Disclosure (TNFD) may affect the Financial Services industry.
The financial industry is exposed to nature-related risks through the investment, insurance and banking services provided to companies that depend on and impact nature. The European Central Bank found that around 75% of bank loans to companies operating in the Euro space were made to companies that had at least one major nature-related dependency. Therefore, highlighting how vulnerable portfolios are to the degradation of nature, increasing nature risk for financial institutions.
Financial institutions should position themselves in a pivotal role to help protect nature, critical resources and restore biodiversity. By leading on nature, financial institutions can facilitate a just transition that addresses environmental challenges.
The ECI study concludes that the erosion of natural capital linked with biodiversity loss and environmental degradation generates significant and long-term risks to society, the economy and finance, from increased physical risks, such as from pandemics, floods and droughts. As other ESG factors continue to evolve, nature risk is emerging as a critical aspect of strategic risk management. In this scenario, regulatory scrutiny, business risks and demands from stakeholders continue to increase and financial institutions are under pressure to evaluate, disclose, monitor, and actively address nature-related risks.
In response to the increasing demand for nature-related risks to be factor into financial and business decisions, the TNFD introduced a set of disclosure recommendations and guidance to encourage and enable firms to assess, report and act on nature-related dependencies, impacts, risks and opportunities.
To support TNFD implementation in the financial sector, the Taskforce published Sector Guidance for financial institutions on how banks, assets managers and owners, insurers and other financial services providers should report on TNFD recommendations. The Taskforce sought feedback on the guidance until 29 March 2024; while they do not intend to change its recommended disclosures, periodic updates will be published over the next two years, incorporating feedback from market participants and other stakeholders.
The format of the TNFD recommendations is designed to be consistent with the language, structure, recommendations, and approach of the Task Force on Climate related Financial Disclosures (TCFD) around four disclosure pillars: Governance, Strategy, Risk Management and Metrics and Targets. This structure will be useful as firms may wish to consolidate both the TNFD and the TCFD within one comprehensive report.
The guidance is intended to be applied on reporting at entity-level and not at financial product level. Firms that wish to report at product level (e.g. funds, derivatives, equities) on their sustainability characteristics must follow the Sustainability Disclosure Requirements (SDR) and investment labels Regime. The TNFD guidance instead is designed to report on the relationship between nature, business and financial capital, positioning nature risk alongside financial, operational and climate risk, at the firm level, and aiming to shift capital flows to nature-positive outcomes. It provides a comprehensive overview of how to report on the 14 recommendations, on a comply or explain basis, providing detail by sub-sector.
The guidance also includes a recommended set of TNFD disclosure metrics that banks, insurers, asset managers and other financial institutions can implement themselves. The recent TNFD consultation requested feedback from financial institutions on these proposed disclosure metrics, and the extent to which the metrics are relevant, useful, and ample enough. Where possible, firms should consider the proposed metrics and comment on whether these seem appropriate and useful for financial institutions.
Other critical activities to consider include developing a strategy, governance, risk management and metrics and targets in relation to nature-related risks and opportunities.
Furthermore, firms should consider introducing or updating internal human rights policies and engagement activities, with respect to Indigenous Peoples, Local Communities and other stakeholders who can be affected by the firm’s financial activities.
More broadly, ESG expectations keep continuing to evolve. Whether firms decide to engage with TNFD now or later, will be a business decision. However, early consideration may give firms a competitive advantage against peers.
We offer support to evaluate your readiness, pilot the TNFD framework in your firm, and implement strategies to mitigate risks and capitalise on opportunities. We have extensive experience in materiality assessments, scenario analysis, and providing assurance on metrics and targets. Together with expertise in both TCFD and TNFD, and a history of guiding diverse organisations, we are well-equipped to support your journey.
If you have any questions, please contact a member of BDO’s Sustainability and ESG or Financial Services teams, we will be happy to talk to you and discuss our and your views on what to watch out for in 2024.
If you have any questions or concerns around TNFD, please contact Tauni Lainer, who will be happy to talk you through the landscape of what to look out for in 2024.
Our experts in Financial Services Advisory (FS) specialise in helping a range of banks and financial institutions comply with regulatory requirements, covering ESG, climate change and wider sustainability risks with their work. Gloria Perez Torres, Associate Director in Financial Services, provides insight into how the Taskforce for Nature-related Financial Disclosure (TNFD) may affect the Financial Services industry.
The financial industry is exposed to nature-related risks through the investment, insurance and banking services provided to companies that depend on and impact nature. The European Central Bank found that around 75% of bank loans to companies operating in the Euro space were made to companies that had at least one major nature-related dependency. Therefore, highlighting how vulnerable portfolios are to the degradation of nature, increasing nature risk for financial institutions.
Financial institutions should position themselves in a pivotal role to help protect nature, critical resources and restore biodiversity. By leading on nature, financial institutions can facilitate a just transition that addresses environmental challenges.
Introduction
Oxford’s Environmental Change Institute (“ECI”) studied the development of scenarios for climate-nature shocks and gathered the evidence on the macro-criticality of nature for the global financial system, focusing on three main risks: water, pollution and pollination.The ECI study concludes that the erosion of natural capital linked with biodiversity loss and environmental degradation generates significant and long-term risks to society, the economy and finance, from increased physical risks, such as from pandemics, floods and droughts. As other ESG factors continue to evolve, nature risk is emerging as a critical aspect of strategic risk management. In this scenario, regulatory scrutiny, business risks and demands from stakeholders continue to increase and financial institutions are under pressure to evaluate, disclose, monitor, and actively address nature-related risks.
In response to the increasing demand for nature-related risks to be factor into financial and business decisions, the TNFD introduced a set of disclosure recommendations and guidance to encourage and enable firms to assess, report and act on nature-related dependencies, impacts, risks and opportunities.
To support TNFD implementation in the financial sector, the Taskforce published Sector Guidance for financial institutions on how banks, assets managers and owners, insurers and other financial services providers should report on TNFD recommendations. The Taskforce sought feedback on the guidance until 29 March 2024; while they do not intend to change its recommended disclosures, periodic updates will be published over the next two years, incorporating feedback from market participants and other stakeholders.
What is the TNFD Framework?
The TNFD is a framework of 14 recommendations on how to report on nature-related risks and opportunities. The objective behind TNFD reporting is to build data and information that can be used for decision making and supporting financial flows towards biodiversity friendly projects.The format of the TNFD recommendations is designed to be consistent with the language, structure, recommendations, and approach of the Task Force on Climate related Financial Disclosures (TCFD) around four disclosure pillars: Governance, Strategy, Risk Management and Metrics and Targets. This structure will be useful as firms may wish to consolidate both the TNFD and the TCFD within one comprehensive report.
What is the guidance for financial institutions?
The guidance is intended to be applied on reporting at entity-level and not at financial product level. Firms that wish to report at product level (e.g. funds, derivatives, equities) on their sustainability characteristics must follow the Sustainability Disclosure Requirements (SDR) and investment labels Regime. The TNFD guidance instead is designed to report on the relationship between nature, business and financial capital, positioning nature risk alongside financial, operational and climate risk, at the firm level, and aiming to shift capital flows to nature-positive outcomes. It provides a comprehensive overview of how to report on the 14 recommendations, on a comply or explain basis, providing detail by sub-sector.
The guidance also includes a recommended set of TNFD disclosure metrics that banks, insurers, asset managers and other financial institutions can implement themselves. The recent TNFD consultation requested feedback from financial institutions on these proposed disclosure metrics, and the extent to which the metrics are relevant, useful, and ample enough. Where possible, firms should consider the proposed metrics and comment on whether these seem appropriate and useful for financial institutions.
What are the implications for the financial sector?
Firms engaging early will need to review and update their ESG strategies and plans to be TNFD aligned. This includes incorporating nature-related considerations into business strategies and it is recommended that these considerations are aligned with decarbonisation and/or transition plans to become Net Zero by 2050 in line with the 2015 Paris Agreement.Other critical activities to consider include developing a strategy, governance, risk management and metrics and targets in relation to nature-related risks and opportunities.
Furthermore, firms should consider introducing or updating internal human rights policies and engagement activities, with respect to Indigenous Peoples, Local Communities and other stakeholders who can be affected by the firm’s financial activities.
What is next for financial institutions?
At the moment, TNFD is a voluntary framework. However, on 23 February 2024, the Government’s responded to the Environmental Audit Committee report on the financial sector and the UK’s net zero transition, recommending that Ministers set out an overarching implementation timetable for mandatory TNFD reporting.More broadly, ESG expectations keep continuing to evolve. Whether firms decide to engage with TNFD now or later, will be a business decision. However, early consideration may give firms a competitive advantage against peers.
How can we help?
The ESG landscape is evolving at a rapid pace, and this sometimes requires additional resources or guidance to keep up with the pace.We offer support to evaluate your readiness, pilot the TNFD framework in your firm, and implement strategies to mitigate risks and capitalise on opportunities. We have extensive experience in materiality assessments, scenario analysis, and providing assurance on metrics and targets. Together with expertise in both TCFD and TNFD, and a history of guiding diverse organisations, we are well-equipped to support your journey.
If you have any questions, please contact a member of BDO’s Sustainability and ESG or Financial Services teams, we will be happy to talk to you and discuss our and your views on what to watch out for in 2024.
If you have any questions or concerns around TNFD, please contact Tauni Lainer, who will be happy to talk you through the landscape of what to look out for in 2024.