In this article, we demystify the TNFD Framework, set out the key takeaways for Australian business and provide actionable insights to respond proactively to this critical development.

Five key takeaways for business:

1. The Taskforce on Nature-related Financial Disclosure (TNFD) Framework is a risk management and disclosure framework designed to guide organisational reporting and action on rapidly evolving nature-related risks.
2. The TNFD Framework provides a framework for a business to consider its interface with nature, the financial materiality of relevant impacts, dependencies, risks and opportunities, and to transparently disclose how it is governing, strategising, measuring, managing and targeting improvement.
3. The publication of the TNFD Framework is not merely an additional disclosure consideration for corporates. It reflects an emerging expectation that businesses govern, strategise and manage natural capital through a financial risk, rather than a purely 'environmental', lens. In addition to improving internal reporting processes, implementing the TNFD recommendations will likely drive organisations towards greater ambition in response to market demands.
4. Like the Task Force on Climate-Related Financial Disclosures (TCFD), the TNFD is likely to drive a significant uplift in market practice on reporting – and, as a result of this increased transparency, also in underlying corporate governance, strategy and risk management. However, with the 'climate playbook' as a guide, the shift in recognition (and reporting) on nature-related financial issues will likely be far more rapid.
5. While capacity and data constraints prevail in many areas, businesses should not let perfect be the enemy of good. Investors understand that the issues for business are complex, and will require a strategic journey rather than a one-shot tactical decision. However, with the TNFD as an influential guiding framework, companies would be well-advised to begin their nature-related assessment and reporting journey, and in doing so, ensure any uncertainties, caveats, assumptions and dependencies are clearly disclosed and identified.

The science is clear – nature is deteriorating at an alarming and unprecedented rate. The Taskforce on Nature-related Financial Disclosure (TNFD) Framework marks a significant milestone in the global effort to integrate nature-related risks and opportunities into financial decision-making.

In this article we demystify the TNFD Framework, set out the key takeaways for Australian business and provide actionable insights to respond proactively to this critical development.

More than half of the world’s GDP is moderately or highly dependent on nature and as a result, exposed to risks from nature loss. There is a rapid recognition of the urgent need for economic transformation to a nature positive future.

To quote the TNFD Version v0.4 Beta Release,

'Our economies are embedded within nature, not external to it. Yet most corporates, investors and lenders today are inadequately accounting for nature-related risks and opportunities. Corporates are failing to consider how their supply chains, operations and enterprise values depend on, and impact, nature. In turn, lenders and investors are not assessing nature-related risks and opportunities across their loan books and investment portfolios.'

Released on 18 September 2023, the TNFD Framework paves the way for entities to incorporate nature-related risks and opportunities into their strategic planning, risk management and financial disclosures. Albeit voluntary at this stage, it is predicted that the TNFD (like its climate predecessor, the Task Force on Climate-Related Financial Disclosures (TCFD)) will ultimately be adopted into regulatory requirements around the world. The TNFD Framework incorporates all 11 of the TCFD recommendations to encourage integrated climate and nature reporting. For businesses already disclosing against TCFD, the application of the TNFD Framework may in fact be less daunting than first anticipated.

What is the TNFD Framework and why should business take note?

The TNFD is a risk management and disclosure framework designed to guide organisational reporting and action on evolving nature-related risks. It guides businesses to consider their interface with nature, to consider the financial materiality of relevant impacts, dependencies, risks and opportunities, and to transparently disclose how they are governing, strategising, measuring, managing and targeting improvement these complex and dynamic matters.

The TNFD Framework contains the following components: conceptual foundations for nature-related disclosures, a set of general requirements and 14 recommended disclosures structured around the four pillars of governance, strategy, risk and impact management and metrics and targets. This aligns with the approach adopted by the TCFD and the International Sustainability Standards Board's (ISSB) IFRS Sustainability Disclosure Standards in addition to consistency with the Global Reporting Initiative (GRI) and Global Biodiversity Framework (GBF). The Framework also includes a suite of implementation guidance to assist entities to get started and a set of recommended metrics for assessment and discussion papers on the TNFD website to assist businesses. These key components are outlined in further detail in the graphic below.

The LEAP approach is the 'hero' of the TNFD's implementation guidance. The LEAP approach is an optional integrated approach for assessing and managing nature-related issues and involves four phases of assessment:

• Locate your interface with nature;
• Evaluate your dependencies and impacts on nature;
• Assess your nature-related risks and opportunities; and
• Prepare to respond to nature-related risks and opportunities, including reporting on your material nature-related issues to the primary users of financial reports, including investors and other stakeholders, in a way that is aligned with the TNFD’s recommended disclosures.

The LEAP approach has been pilot-tested by over 200 organisations across the world; however, it is not compulsory. As a result, not everything identified, assessed and evaluated using the LEAP approach must be disclosed to comply with the TNFD Framework. Where an entity already has its own equivalent assessment process in place, the LEAP approach can be used as a checklist to ensure that process adequately addresses nature-related risks and opportunities in a way that is aligned with the reporting and disclosure requirements recommended by the TNFD.

How has the TNFD been developed?

The TNFD is a market-led, science-based initiative comprising 40 members from companies and financial institutions representing over $20 trillion in assets under management, with operations and value chains in over 180 countries. The TNFD was established to promote the integration of nature-related risks and opportunities into mainstream financial disclosures and decision-making processes and ultimately elicit the disclosure of decision-useful information to users of sustainability reporting.

Over the last two years, the TNFD has undertaken an 'open innovation' approach to design and develop the TNFD Framework, incorporating feedback from stakeholders in over 60 countries around the world:

• 200 pilot tests were undertaken by companies, financial institutions and community enterprises
• The online 'beta' framework accumulated over 750,000 page views
• Over 3,400 pieces of substantive feedback was provided

TNFD's 'open innovation' approach has resulted in a final Framework that has agilely responded to market feedback, including a new website and updated metrics based on market demand and reflects the market useful decision-making focus of the TNFD Framework.

What are the relevant nature-related risks? And what sectors is the TNFD Framework relevant for?

The TNFD Framework both recognises and is symptomatic of the fact that managing nature-related risk is not just an ethical imperative but also essential for ensuring long-term economic stability, resilience, and sustainable growth for businesses and society as a whole. Moreover, it is designed to allow for integrated reporting by considering both climate- and nature-related risks and opportunities through the application of the Framework. For example, nature, ecosystems and biodiversity provide critical services such as water purification, the provision of crops, pollination, and natural disaster mitigation.

Disruption of these natural resources and ecosystem services expose entities that rely on them to significant risks.

The TNFD calls upon entities to identify and measure their dependencies and impacts on nature as well as their nature-related risks and opportunities.

Unsurprisingly, industries such as food and beverages, agriculture, fisheries and construction are highly exposed to nature-related risks as a result of their direct dependencies on nature. However, nature is relevant to every sector, across every industry. By applying the Framework and being aware of these risks businesses will be better equipped and as David Craig, TNFD Co-Chair, describes as 'helping to drive more resilient outcomes'.

Let's take Aussie Outback Adventures (AOA), a hypothetical Australian tourism business operating in the Northern Territory, as an example:

• Dependencies of the entity on nature – AOA relies on Australia's unique natural landscapes and rich biodiversity to attract domestic and international tourists to its tours.
• Impacts on nature caused, or contributed to, by the entity – The construction of tourism infrastructure such as accommodation and visitor centres may contribute to habitat loss and fragmentation, impacting native flora and fauna.
• Risks to the entity stemming from their dependencies and impacts – Stricter environmental regulations and policies may increase AOA's compliance costs, impacting its profitability and competitiveness.
• Opportunities for the entity that benefit nature through positive impacts or mitigation of negative impacts on nature – AOA could adopt sustainable practices such as waste reduction and water and energy conservation, which can lead to cost savings and appeal to tourists who prioritise sustainability and environmentally responsible practices.

Where to from here? Further insights, and next steps for business

In light of the growing market recognition of nature as a financial risk, the TNFD will likely follow a similar, albeit accelerated trajectory to the TCFD. In other words, the TNFD may currently represent the best practice 'gold standard', however, as market expectations continue to elevate, TNFD-aligned disclosures are poised to become the baseline 'ticket to play'. Entities may currently face practical capacity and data gaps to assemble, assess and report nature-related financial risks. However, that is no reason for entities to delay commencing their nature reporting journey. Now is the time to start upskilling.

Indeed, as part of the Framework's launch, the TNFD noted that 70% of the 1,200 forum members surveyed intend to start reporting on FY24 using the TNFD Framework while 80% will report on FY25. This is despite the Framework being voluntary at this stage.

The TNFD recommendations are intended to provide a practical basis for entities to get started and to increase the scope and ambition of their disclosures in the coming years as market understanding of nature-related issues and capacity increases. In light of this, the TNFD has launched a campaign for 'TNFD Adopters' – that is organisations who register as inaugural TNFD Adopters prior to January 2024 – to be included in a public announcement in January 2024 at the World Economic Forum in Davos. 

Practical steps for preparing to implement the TNFD in your organisation

As discussed above, the TNFD is more than a reporting checklist. It should be seen as a governance guide – one to which business can refer in evolving their strategic and risk management approach to nature-related issues. With that in mind, it is important to 'walk before you can run'. We have set out below a 'top 5' initial questions that all entities should ask themselves to help build a strong foundation for their natural capital governance, target-setting and TNFD reporting journey:

1. Understand the TNFD Recommendations: (Without wanting to state the obvious… have a read!) Start by thoroughly understanding the TNFD Framework and its recommended disclosures. Does your organisation already possess some of the answers/data required to comply with the recommendations? Where are the major gaps
2. Governance foundations – capacity and capability: Assess organisational capacity to consider nature through the financial, strategic lens contemplated by the TNFD. Does the board, as well as executive, finance, risk and legal teams, have the appropriate skills and information? What training or information may be required to build capacity? Do we have the appropriate internal expertise to interrogate relevant issues and progress our reporting journey, or do we need to engage external experts?
3. Analysis of dependencies, impacts, risks and opportunities – within business fencelines and broader value chain (using the TNFD LEAP approach). Consider what analysis has been done of the primary activities and assets in our value chain and their interaction with nature. What are the most material points of interaction, and why? What further evaluation should be undertaken of impacts and dependencies, risks and opportunities? How should this be focused and staged based on our own, and stakeholder, priorities?
4. Governance foundations – structures: Does the board and its committees have appropriate oversight of our approach, and receive regular reports on point from management? Who is responsible and accountable for biodiversity and nature-related issues at executive level? Who is responsible and accountable for our progress towards TNFD reporting?
5. Consider implications for strategy, risk management and disclosure: How should our understanding of material nature-related issues be integrated into strategy, capex, business planning and budgeting? Into our risk management framework? Beyond the TNFD, are there material impacts on financial assumptions and variables that should be considered in our 'standard' reporting on financial performance, position and prospects?

MinterEllison's combined subject-matter expertise in biodiversity and nature risk governance, sustainability and audit provides not only robust legal risk management for our clients, but underwrites our ability to offer the highest quality, practical and commercially-relevant advice. For more information and tailored advice on how to proactively respond to this critical transformation, please contact us.