Nature Related Risk and Opportunity Management
The Challenge
How do we meet the challenges of mitigating and adapting to climate change, protecting biodiversity and improving the management of natural capital?
One doesn’t need to search too hard to locate an abundance of articles, scientific reports or peer-reviewed research relating to biodiversity loss, the causes, effects and the consequences, many from well credentialed science based groups. The scientific community have now coined a new term for humanity’s impact on the Earth. The ‘Anthropocene Epoch’; now a widely used unofficial unit of geologic time, used to describe the most recent period in Earth’s history when human activity started to have a significant impact on the planet’s climate and ecosystems.
If you are familiar with the Triple Bottom Line (3 P’s, Profit, People, Planet), you will likely know there is no specific guidelines to accurately measure TBL. A consistent and globally adopted framework for organisations to report and act on evolving nature-related risks is required.
One response to effect positive change can be that businesses integrate, with equal ranking, financial profit with social and environmental impact as key pillars of strategy and governance.
This will require, in addition to the business norm of financial capital management and climate related reporting, the recognition of the value that lies in natural capital.
Lawrence Smith, Niche’s Commercial Director, walks through the established and emerging frameworks defining nature-related risks and opportunities for organisations.
Let’s get some basics covered first:
The OECD (Organisation for Economic Co-operation and Development) definition of biodiversity, an ecosystem and natural capital. [my additional comments].
What is ‘Biodiversity’? “Biodiversity refers to the range of genetic differences, species differences and ecosystem differences in a given area”. [The variety of life, including animals, plants and other living organisms and ecosystems in which they live, underpinning and supporting everything in the natural world needed to survive and maintain life.]
What is ‘an Ecosystem’? “An ecosystem is a system in which the interaction between different organisms and their environment generates a cyclic interchange of materials and energy. Groups of organisms and the physical environment they inhabit. Three main types of ecosystem assets are recognised; terrestrial ecosystems, aquatic ecosystems and atmospheric systems. [Ecosystems can be of any size but are usually places. An ecosystem may be of very different size, for example a whole forest or a small pond.]
What is ‘Natural Capital’? “Natural assets in their role of providing natural resource inputs and environmental services for economic production. Natural capital is generally considered to comprise three principal categories: natural resource stocks, land and ecosystems. All are considered essential to the long-term sustainability of development for their provision of functions to the economy, as well as to mankind outside the economy and other living beings.” [Healthy forests and oceans, fertile soils, and clean air and water are some of the examples of the world’s natural capital.]
Defining nature based solutions:
An enormous body of work is well underway to assess and identify the negative impact of human activity upon biodiversity and ecosystem functions, defining Nature Based Solutions that involve working with and enhancing nature.
Tangible progress commenced at the United Nations Convention on Biological Diversity; one of three international environment agreements that emerged from the Rio Earth Summit held in 1992.
The other two international environment agreements are:
- the United Nations Framework Convention on Climate Change, and
- the United Nations Convention to Combat Desertification.
The Convention on Biological Diversity (CBD) is an international legally binding treaty with three objectives:
- The conservation of biodiversity
- The sustainable use of its components
- The fair and equitable sharing of the benefits arising from the use of genetic resources.
Australia has been a Party to the CBD since 1993 and is committed to implementing its obligations in accordance with its national priorities.
The UN Biodiversity Conference of the Parties (CoP15 Part One) was held in October 2021. The next meeting (CoP15 Part Two) is scheduled for December 2022 in Montreal, Canada, where governments from around the world will convene to agree on a post-2020 global biodiversity framework.
A key objective of CoP15 is to set new global targets for biodiversity over the next ten years, as a stepping stone towards the CBD 2050 Vision of “Living in Harmony with Nature“.
A LEAP to nature positive impact
In September 2020, an international financial sector led Informal Working Group (IWG) was established to plan a Taskforce on Nature-related Financial Disclosures (TNFD).
The Working Group comprises representatives from non-financial companies, financial institutions, regulators, NGOs and governments. The Taskforce members can be viewed here https://tnfd.global/about/taskforce-members/.
The TNFD is developing a framework for organisations (non-financial companies and financial institutions) to report and act on evolving nature-related risks.
The TNFD framework is being designed to address both how nature may impact the organisation, and how the organisation impacts nature, serving as a mechanism to assist organisations to understand, disclose and manage financial risks and opportunities associated with the deteriorating state of nature and a transition to an economy consistent with meeting future nature-related international agreements such as the UN CBD and the ambitions being set out in the Post-2020 Framework.
The Taskforce released the first version, beta v0.1, in March 2022 and v0.2 in June 2022. The release of v0.3 is scheduled for November 2022 and v0.4 for February 2023, before the launch of the Taskforce’s final recommendations in September 2023.
Supporting the taskforce on nature-related financial disclosures:
The Australian Government, through the Department of Climate Change, Energy, the Environment and Water are providing support for the Taskforce on Nature-related Financial Disclosures (TNFD) as a strategic funding partner and member of the TNFD Stewardship Council, and as a participant of the TNFD Forum.
TNFD objectives:
To provide a framework for organisations to report and act on evolving nature related risks, in order to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.
TNFD four-pillar approach:
The TNFD framework adopted a four-pillar approach, structured around how organisations operate: governance, strategy, risk management, metrics and targets (see Figure 1). This is the same structure used by the Task Force on Climate related Financial Disclosures’ (TCFD) framework. However, in recognition of the particular challenges of measuring nature, broader policy and market developments, and the systemic nature of the risk, the TNFD will incorporate a broader definition of the term “risks and opportunities” into each pillar.
Nature related risks and opportunities:
Nature related risks and opportunities refer collectively to positive or negative impacts on nature, dependencies on nature, and financial risks and opportunities resulting from these impacts and dependencies.
Impacts can be categorised as follows:
- Direct impacts: The direct impacts on nature of the organisation’s own operations and not including the impact of its wider value chain.
- Upstream impacts: The impacts on nature of the operations of the organisation’s upstream value chain.
- Downstream impacts: The impact on nature of the operations of the organisation’s downstream value chain plus use and end of life treatment of sold products.
TNFD’s proposed priority sectors and guidance:
The TNFD will organise guidance into the four major financial services industries identified and defined by the TCFD (banks, insurance companies, asset managers, asset owners), with the addition of Development Finance Institutions. These five financial industry sectors are considered priorities for the development of additional guidance.
For non-financial sectors specifically the TNFD will prioritise eight thematic sectors for the development of TNFD sector-specific guidance and recommendations.
The eight thematic sectors are:
- Food and beverage
- Renewable resources and alternative energy
- Extractives and mineral processing
- Consumer goods
- Transportation
- Health care
- Infrastructure
- Resource transformation.
Each sector’s potential opportunities – activities that create positive outcomes for organisations and nature by avoiding or reducing impact on nature or contributing to its restoration – were considered.
TNFD’s approach to specific guidance:
Many market participants have provided feedback that nature related risk and opportunity assessment is new and unfamiliar. Additional guidance, including sector-specific guidance, but also by realm, biome and nature related issue will be required.
The TNFD will therefore approach the development of specific recommendations and guidance using the following structure:
- Sector specific: Guidance tailored to the economic sector in which organisations conduct business.
- Nature-related issue specific: Guidance tailored to specific nature related issues, dependencies, impacts, risks and opportunities – that are relevant for a particular organisation and across sectors.
- Realm specific: Guidance linked to the nature realms defined by the TNFD (ocean, freshwater, land and atmosphere), and possibly also by biome.
LEAP: an assessment and disclosure method:
The TNFD proposed an internal risk and opportunity assessment approach, called LEAP (Locate, Evaluate, Assess, Prepare, reference figure 2) for use by both corporate and financial institutions.
This ‘how to’ guidance was developed and proposed based on extensive feedback during the preparatory phase for establishing the TNFD.
Assessment and disclosure metrics:
The TNFD’s approach to measurement includes two types of metrics:
Assessment Metrics – metrics used within an integrated internal assessment process for nature-related risk and opportunity management.
These Assessment Metrics help to inform internal decision making and would not be required to be disclosed unless specified in the Disclosure Metrics.
Assessment Metrics are relevant to the Locate, Evaluate and Assess phases of LEAP as well as the ‘Strategy and resource allocation’ components of the P phase (P1 and P2).
Disclosure Metrics – metrics required to be disclosed to market participants in line with the TNFD’s disclosure recommendations (i.e., Metrics & Targets disclosure recommendation A2).
Some, but not all, Assessment Metrics may also be Disclosure Metrics.
The phased approach of LEAP makes clear the different types of assessment metrics required as report preparers assess nature-related risks and opportunities.
Note: The Task force will not make final decisions on ‘core’ and ‘additional’ Disclosure Metrics until the final release v1.0 in September 2023.
Global metrics and targets architecture for action – climate vs. nature
The ‘architecture for action’ on global action on climate change is fully developed and enabling action by governments, business, finance and civil society.
However, for coordinated global action to tackle nature loss and achieve global targets that address nature loss, the ‘architecture for action’ is largely incomplete (reference figure 3). No comparable global architecture for measurement and target setting for nature – covering land, freshwater, oceans and atmosphere – yet exists.
At the global level, the TNFD seeks to align with the environment-related Sustainable Development Goals and the post-2020 the Global Biodiversity Framework (GBF) currently being negotiated through the UN CBD COP15 process.
At the organisational level, the TNFD also seeks to align with the corporate target-setting approach being developed by the Science Based Targets Network (SBTN).
What comes next?
The Taskforce’s final recommendations are scheduled for September 2023, after which time the final version of the framework will be released.
Three interim actions to consider:
Governance responsibility: Is the responsibility for nature related risks and opportunities clearly defined within your organisation?
‘LEAP’ to identification: Nature related risks and opportunities are highly specific to location. Now is the time to commence collating geospatial data as a key early step in the LEAP process.
Proactively engage: Provide feedback on the TNFD framework. https://framework.tnfd.global/
Find out more
Reach out to discuss how Niche’s discrete advisory services could support your project or Company.
- The TNFD framework
- Biodiversity and Carbon offset strategy
- Net-Zero, ESG and natural capital management
- Environmental planning, approvals and management
- Heritage planning and advice
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References and further reading:
- United Nations Convention on Biological Diversity https://www.cbd.int/
- Post-2020 global biodiversity framework https://www.cbd.int/article/draft-1-global-biodiversity-framework
- Biodiversity Conference of the Parties CoP15 Part 2 https://www.unep.org/events/conference/un-biodiversity-conference-cop-15
- Taskforce on Nature-related Financial Disclosures https://tnfd.global/
- Explore the TNFD https://framework.tnfd.global/
- TNFD framework feedback https://framework.tnfd.global/
