Environmental risks are top of mind for international business leaders, according to the World Economic Forum’s Global Risks Report 2022, with climate change failure the perceived topmost risk. The recent UN Climate Change Conference, or COP26, galvanised commitments on reaching global net zero by 2050 and keeping 1.5 degrees Celsius within reach. And financial institutions responded to the call for action: during the event, the Glasgow Financial Alliance for Net Zero committed more than $130tn of private capital to transforming the economy for net zero.
Another – and deeply intertwined – risk that was one of COP26’s four goals and highlighted in the WEF report is nature and biodiversity risk. Nature-related risks can manifest in many ways, such as pollution, water scarcity, soil degradation, deforestation and biodiversity loss.
Financial institutions will also need to rise to this challenge, as managing nature-related risks will play a critical role in solving the climate crisis. It is not possible to look at climate without looking at nature, says David Craig, former CEO of Refinitiv and current co-chair of the Taskforce on Nature-related Financial Disclosures (TNFD), which is defining a risk management framework for nature.
“The most effective and efficient ways of absorbing carbon are natural, such as forests, seagrasses and savannas. The mechanical ways of absorbing carbon aren’t yet cost effective, operate at scale or efficient enough to hit net-zero targets by 2030 or even 2050,” he explains. “But at the very time we need to rely on these natural sinks for absorbing carbon, the adverse weather that climate change creates is destroying them through forest fires, droughts and floods. This is a vicious feedback loop: climate change is degrading the natural systems and the degradation of nature is fuelling climate change.”
Launched in June 2021, TNFD consists of 34 senior executives from financial institutions, corporates and market service providers, including Norges Bank Investment Management, BlackRock, Olam International, Rabobank and BNP Paribas. Members are selected for their individual subject-matter expertise across nature and finance, as well as their sector and geographical coverage. In addition to the 34-strong design group, the taskforce has more than 250 other members that are involved in the testing of the framework.
The larger group also involves the nature lobby and nature groups, which are very active. “We’re trying to do something that’s never been done before, which is to create a comprehensive framework that intersects the views of the nature and science community around biodiversity and nature with something practical that the financial community can use,” says Mr Craig.
TNFD has aligned its framework with that of the Task Force on Climate-related Financial Disclosures (TCFD). “The four pillars in TCFD’s framework – governance, strategy, risk management, and metrics and targets – are agnostic to climate or nature,” says Mr Craig. “The difference is that the definition of nature-related risk is more specific and detailed. We’re looking at across all areas of nature (biomes and not just ecosystems), which are specific habitats, so we need to incorporate location of the activity as well as the activity.” He uses the example of companies reporting on water usage: the sensitivity to groundwater shortage is different when running a bottling plant in north-west Scotland versus South Africa.
The taskforce is releasing a beta version of the framework for open consultation next month. “Our goal is to deliver a risk management and disclosure framework that people can start using in 2023. The industry is crying out for something that is standardised and is global,” he says. TNFD is also determined to include training and capability building as part of the framework, to bridge the gap between environmental and investment knowledge.
Mr Craig voices concerns around the current state of the carbon offset market and returns to his original point: climate and nature must be looked at holistically. “Carbon offsets need to be nature positive; they can’t be encouraging activities that are harmful for nature and biodiversity. For example, people in some countries are currently incentivised to cut down the forests and replant them. Instead, we need to align financial incentives and net-zero offsets with the preservation of nature,” he says.
“Everyone uses the word transition to describe moving from high carbon to low carbon activities. What they should also be thinking about is the transition from nature negative to nature positive,” he adds, where activities that are positive for nature and biodiversity also create new opportunities for business – higher efficiency, productivity or new revenue streams.
Mr Craig believes that TNFD – like TCFD – will likely cease to exist in three or four years. “Our work should be done once we’ve developed the framework. We expect that aligning with the recommendations of the TNFD will initially be market-led,” he explains. “Over time, it’s possible that regulators want to make it mandatory for organisations to comply with the TNFD framework, as we are now seeing regulators like the G7 doing with the recommendations from the TCFD.”
Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight
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