Investing in Value through Nature Protection

Elizabeth Mrema and David Craig, Co-Chairs of the Task Force for Nature-related Financial Disclosures (TNFD) talk to us about how to improve the understanding of Nature-related risk.

More than half of the world’s economic output – $44tn USD of economic value generation – is moderately or highly dependent on Nature. But, already, humanity has wiped out 83% of wild mammals and half of all plants. Degradation and loss of our natural environment represents a clear, urgent and long-term risk to corporate and financial stability.

To make a difference we must look more deeply into the structure of our economy and recognise that shifting the engine of our economy towards Nature-positive brings risks for businesses as they reset their trajectories to deal with changing regulations, consumer expectations and a renewed sense of corporate purpose.

Despite the widely accepted knowledge of these risks, detailed information on the impact of business and investments on biodiversity is highly inconsistent. Financial institutions and companies need better information to incorporate Nature-related risks and opportunities into their strategic planning, risk management and asset allocation decisions.

Elizabeth Mrema, a Co-Chair of the TNFD and Executive Secretary of United Nations Convention on Biological Disclosures, shares the importance of working together to create change, “Nature cannot be dealt by one body on its own. This is where we hope the work of the Terra Carta , and particularly the support of His Royal Highness, will really help in terms of urging governments to create that level field.”

Shifting to Nature-Positive

The TNFD aims to shift global investment towards Nature-positive outcomes and away from nature-negative outcomes. TNFD is set up by the market, for the market, and the Task Force aims to provide a framework for businesses and organisations to report and act on Nature-related risks.

By encouraging better information flows TNFD will help the private sector turbo-charge Nature-positive outcomes through stronger long-term decision making.

Where the Terra Carta puts sustainability at the heart of the private sector, the TNFD will provide the platform and framework to catalyse Nature-positive outcomes. 250 companies are already part of the TNFD forum, sharing best practice, experience and contributing to the development of the framework.

The Terra Carta is urging governments to create a level playing field for the private sector to be able to operate and contribute to our common objective and the private sector is making clear commitments to action.

Creating a Framework by 2023

Since formal launch in June 2021 the TNFD has gathered widespread support from financial institutions, corporates, governments and civil society, including endorsement from the G7 Finance Ministers, and the G20 Sustainable Finance Roadmap. Other individual leaders endorsing TNFD include:

• Mark Carney, UN Special Envoy on Climate Action and Finance

• António Guterres, UN Secretary General

• Emmanuel Macron, President of France

• Boris Johnson, Prime Minister of the UK

The TNFD is working through five phases in the period to 2023: Build, Test, Consult, Disseminate and Uptake. The aim by the end of this period to have established and promoted an integrated risk management and disclosure framework that aggregates the best tools and materials.

The Task Force is made up of up to 35 senior executives from financial institutions, corporates and market service providers. The Task Force aims to launch a beta version of the framework in Q1 2022, and the final framework by 2023.

The Forum represents a broad range of institutional types; businesses, financial institutions, public sector institutions, regulators, NGOs and many more. Organisations that share the vision and mission of the TNFD and want to contribute to the work and mission of the Task Force can apply to join the TNFD Forum.

For more information on TNFD or to get involved visit:

https://tnfd.global/

NATURE-RELATED FINANCIAL RISKS

PHYSICAL RISKS

Physical risks arise when the natural systems our global economy depends upon are compromised, due to the impact of climatic or geologic events, or widespread changes in ecosystems such as soil quality or marine ecology. Physical risks can be event-driven or longer-term in nature. For example, deforestation could reduce local rainfall and consequently increase operating costs.

TRANSITION RISKS

Transition risks relate to the process of adjustment towards a Nature-positive economy. Regulatory or market efforts to address environmental harm can negatively impact companies. These can include abrupt or disorderly introduction of public policies, technological changes, shifts in consumer or investor sentiment and disruptive business model innovation. For example, anti-deforestation legislation increases due diligence costs for businesses in related sectors.

LIABILITY RISKS

These are risks associated with emerging legal cases related to Nature loss, which could arise if parties that suffer loss or damage from the effects of environmental change seek compensation from companies they hold responsible. These losses or damages can include “potential pay-outs, fines, legal and administrative costs, insurance costs, financing costs, and reputational costs.” Fines for oil spills are a prominent example.

Edited from Handbook for Nature-related Financial Risks, University of Cambridge