The launched on September 20 of disclosure guidelines by the Taskforce on Nature-related Financial Disclosures (TNFD) seems to have added to the already confusing myriad of disclosure requirements that corporates, financial institutions, investors, shareholders and the public have to pay attention to.
In simple terms, there are currently three sets of disclosure standards or frameworks that corporates and the other entities have to pay attention to:
- TNFD, which sets standards for nature-related disclosures by the same entities
- Task Force on Climate-related Financial Disclosures (TCFD), which sets standards for climate-related disclosures for companies and financial institutions
- International Sustainability Standards Board (ISSB), which aims to harmonize sustainability reporting by the reducing burdens, complexity and confusion for the reporting entities.
The main obvious difference between the TCFD and the TNFD, as referenced in their names, is that the TCFD focuses on disclosure with regards to climate change, while the TNFD focuses on disclosure with regards to nature-related activities.
However, there is often a thin line separating climate-change activities and nature-related ones, and this is what these two sets of guidelines attempt to sort out.
In any case, both the TCFD and TNFD guidelines are expected to be incorporated, within the next couple of years, into the ISSB to form one set of standards or framework for disclosure.
The TCFD is at a more advance stage since it was established much earlier at the Group of 20 (G20) finance ministers and central bank governors meeting in 2015.
As well, it can be said that the TCFD is much simpler than the TNFD because it, the TCFD, focuses on one metric, the greenhouse gas emissions. This metric is used to help keep global warming to no more than 1.5 degrees Celsius – meaning global emissions need to be reduced by 45% by 2030 and net zero reached by 2050 – under the Paris Club agreement.
At present, many corporate and financial institutions are already complying, or working on complying, with the TCFD disclosure guidelines. However, there is still a lot of work to be done, especially in Asia.
Compared with the TCFD, the TNFD framework is much more recent. Also, its more complex since it involves more than one metric, and most of these metrics are still being defined. The term biodiversity – which represents a critical, science-based, market-led framework that is designed to facilitate holistic decision-making – is now being used in connection with TNFD.
To be fair to the TNFD initiative, they were able to put together the TNFD framework within a period of two years, which is relatively short when compared with the time taken by the TCFD, which started its work back in 2015. However, the TNFD had the advantage of being able to leverage the work done by, and the experiences of, the TCFD framework.
For a corporate, the TNFD framework or biodiversity involves thinking about how its business operations are impacting the environment or community where it is located.
For example, the management of a factory that dyes clothing material and uses a lot of water to process its products must now think about how and where it discharges the used water that may contain chemicals pollutive or harmful to the environment. In this case, the factory must be able to measure the amount of used water it discharges, what chemicals and how much of them are in the water, and which specific location or community the polluted water goes to, etc.
This is a basic example. There are other much more sophisticated and complex examples across various industries, particularly in agriculture, manufacturing, forestry and consumer products. Where it gets more difficult is when the companies involved have operations that impact different parts of a value chain or across different sectors.
For individual companies, it should be feasible to at least identify the key impact and implications on biodiversity of their respective operations and to be able to measure them. Measuring the impact is important because it would not be possible to effectively address an impact unless it is measured.
For investors, they also have to identify the activities of their investee companies that may impact biodiversity and set their investment strategies according to the TNFD framework.
For example, an investor who must manage and design his portfolio to be compliant with TNFD and TCFD standards, now has to determine how the TNFD and TCFD standards will fit into their investment strategy, portfolio allocation and risk management.
Complying with the TNFD standards will require a lot of work, particularly in generating data on biodiversity.
Like the TCFD, there will be a lot of challenges when it comes to complying with the TNFD disclosure requirements. On the bright side, the world is one-step closure to saving the planet from extinction.