Natural capital reporting advances

The fragility of our ecosystems is growing more apparent by the year. Biodiversity is declining apace, and issues such as water scarcity and deforestation are discussed no longer just by environmental pressure groups but across governments and within businesses.

In September last year, the Taskforce on Nature-related Financial Disclosures (TNFD) published its recommendations for a framework intended to guide businesses towards meaningful reporting of natural capital.

‘Our society, economies and financial systems are embedded in nature,’ it declares, ‘not external to it.’

The taskforce’s approach overlaps existing frameworks: those of the Taskforce on Climate-Related Financial Disclosures (TCFD) and the International Sustainability Standards Board’s Sustainability Disclosure Standards, IFRS S1 and IFRS S2. However, TNFD moves the conversation on significantly, with its focus on the dependencies organisations have, and the impact of human activity on nature, as well as opportunities to report on the sustainable use of natural resources, and to encourage activities that support the protection, regeneration or restoration of habitats and ecosystems.

Overall, it sets out 14 recommended disclosures under four pillars: governance, strategy, risk and impact management, and metrics and targets. For organisations that have already engaged with the climate-related disclosure framework, there will be more than a degree of familiarity, as 11 of the recommendations already appear under TCFD.

Skin in the game

Joanna Bonnett, an independent corporate sustainability officer and formerly group treasurer and sustainability officer at Page Group in the UK, says the recommendations have had significant airplay.

‘For anyone operating as a head of sustainability, or head of regulatory reporting, this has absolutely been across their desk,’ she says.

More than 300 early adopters have committed to begin making disclosures in line with TNFD recommendations for their 2024 or 2025 corporate reporting. Companies from across the globe are represented within that group, and Bonnett is encouraged by both the number and range of UK-based early adopters listed.

The BBC is among those committing to 2024 adoption, along with a number of financial services and asset management companies, such as Fidelity. These organisations that may act as standard bearers by adopting good practices and, in the case of asset managers, positively influence others through their investment practices.

Among those adopting TNFD for 2025 reporting are organisations with greater complexity and risk around natural resource use and impact, Bonnett notes, such as Heathrow Airport and UK water company Severn Trent, as well as multinational mining company Anglo American. ‘They will need to think about this in a very different light compared to others, and will have very different risks and opportunities to articulate,’ she says.

Strategic aims

Environmental lawyer Joanne Holbrook, counsel at Herbert Smith Freehills ESG practice, says that the overlap between TNFD and the earlier TCFD means that many companies will have looked across their operations and identified relevant issues and datasets already. TNFD is a good evolution, she says, adding that its most critical elements are strategy recommendations A and C.

Strategy recommendation A requires the identification within a business of nature-related dependencies. ‘It’s about that initial risk assessment and understanding what’s crucial to the business. It’s absolutely at the core of what this is intended to do,’ she says.

Strategy recommendation C is crucial because it homes in on business resilience. ‘If you’re sitting at board level and you want to get to grips with what this is, these are the things that you really need to be paying attention to the most: What is the impact we’re having? What is the risk? What’s our resilience to these things changing? Those are the critical questions TNFD is trying to address.’

The centrality of business risk and resilience is a win when it comes to focusing attention in the boardroom, she says. In the past, an organisation’s impact on nature may have been responded to with a corporate social responsibility initiative or an offset arrangement. The idea of business interruption is far more compelling, says Holbrook.

Water scarcity is a really good example, she says, pointing to recent drought  across Europe. ‘This is suddenly becoming thought of as a business risk that might affect the ability to continue, to grow and adapt, and might genuinely be a business-critical issue,’ she says.

UK-based Aldersgate Group, a non-profit alliance supporting the sustainable economy, notes in a recently-issued report that while TNFD-aligned disclosures are not mandatory, there is a strong case for putting nature firmly within companies reporting requirements.

Adoption

In the meantime, the TNFD recommendations move us closer to broader natural capital reporting adoption.

‘I think what it encourages is adopting a natural capital accounting approach. It does very much mean thinking about this in a different way to make informed decisions,’ says Holbrook.

Another valuable aspect of TNFD, Bonnett says, lies in the foundation it supplies for the financial community.

‘It will provide asset managers, shareholders and financial entities more broadly with a way of comparing entities in a consistent manner and will form an important part of the toolkit around reviewing responsible business practices,’ she says.

Bonnett doesn’t believe that the framework on its own will move the needle, however: ‘I don’t think TNFD will be the single answer for natural capital. I think traction around the circular economy and change in consumer behaviour will arguably have a larger impact on the natural world.’

Holbrook is optimistic about TNFD’s impact. ‘I think what’s encouraging is there is a considerable amount of information that exists already,’ she says. ‘Those companies that have already structured themselves to respond in a TCFD perspective have found this much easier.’