Measuring More Than Hot Air
A year since its final recommendations, the TNFD faces tough choices and evolving challenges in building out a comprehensive framework for nature-focused reporting.
It’s been 12 months since the Taskforce on Nature-related Financial Disclosures (TNFD) published its finalised guidance for reporting on risks, impacts and dependencies on the natural world by businesses and financial institutions.
As of the end of June, 416 major companies – including 114 financial institutions – have committed to disclosing in line with the framework.
“TNFD has introduced a conceptual framework with a common language and clear definitions on nature for investors and companies to utilise,” says Lucian Peppelenbos, Climate and Biodiversity Strategist at Dutch asset manager Robeco.
It also serves as a key tool for meeting Target 15 of the Global Biodiversity Framework (GBF), which specifically calls for corporate disclosures on nature-related issues.
One of the main drivers of the TNFD’s early success boils down to its adoption of the same baseline structure, language and approach as the Task Force on Climate-related Financial Disclosures (TCFD), introducing 14 recommended disclosures housed within four familiar pillars: governance, strategy, risk management, and metrics and targets.
However, while the TCFD focused its disclosure recommendations and guidance on greenhouse gas (GHG) emissions specifically, the TNFD needed to adopt a broader scope across the five main drivers of nature change, including climate.
“With six of the nine planetary boundaries already breached, it is increasingly clear that nature risk, beyond climate change, is a financial risk,” says Emily McKenzie, Technical Director of the TNFD. Alongside climate change, other drivers of nature degradation include land, freshwater and ocean use change, resource use, pollution, and invasive alien species.
“The risk of irreversible tipping points is increasing; whereby entire ecosystems may permanently change state and cease to provide the flow of benefits upon which businesses depend,” McKenzie says.
Many see a unified framework for environmental reporting in future, but for now the TNFD faces two linked challenges in further developing a holistic and systemic approach to understanding nature-related risks, impacts and opportunities.
It must help organisations navigate the risks along the climate-nature nexus including, for example, managing all the impacts on nature from changes in the atmosphere, accounting for its many pollutants. At the same time, it needs to continue to identify and develop metrics that provide a comprehensive oversight of the interconnections between climate- and nature-related risks, dependencies and impacts.
Climate as a part of nature
The TNFD’s founding documents placed the climate-nature nexus at the heart of its framework.
“It recognised that climate is a part of nature – not the other way around – and it exists as part of our natural ecosystem,” says Simon Zadek, Chair of think tank NatureFinance.
One way in which the TNFD aimed to account for both climate- and nature-related risks was through a metric focused on non-greenhouse gas (GHG) emission air pollutants.
While the TCFD framework and the GHG Protocol focused on GHGs, primarily as carbon dioxide (CO2) and methane, non-GHG emissions can have a damaging impact both on climate and nature.
Since 1990, the Intergovernmental Panel on Climate Change (IPCC) has calculated the global warming potential (GWP) of all gases – this measures the expected amount of warming caused by one tonne of a gas compared to one tonne of CO2. Non-GHG air pollutants like chlorofluorocarbons, hydrofluorocarbons and sulphur hexafluoride are all considered high-GWP gases, as they can trap substantially more heat than CO2.
As such, the TNFD framework calls for disclosures on non-GHG pollutants by type, these include particulate matter and a number of volatile organic compounds, as well as nitrogen oxides, sulphur oxides and ammonia. Entities are asked to disclose the volume of pollutants removed from land, atmosphere, ocean and freshwater, in line with targets seven and 11 of the GBF.
“Non-GHG air pollution is a big driver of nature and biodiversity loss and harm to human health; GHGs [like methane and CO2] do not have a direct, local impact on nature,” says TNFD’s McKenzie. “It was therefore important to include metrics and guidance related to air pollution in the framework.”
Norwegian sovereign wealth fund Norges Bank Investment Management’s (NBIM) TNFD-aligned reporting has revealed notable portfolio exposures to non-GHG emissions and environmental pollution. By sector, portfolio companies in the energy sector generated the highest level of non-GHG pollutants as a share of its overall emissions (56%), followed by basic materials (50%) and utilities (19%).
Due to advancements in emissions-focused metrics and data developed for climate-related reporting, it is “very achievable” for companies and investors to measure non-CO2 emissions via existing instrumentation, estimates, modelling, and remote sensing techniques, says James Phare, CEO of sustainable fintech software and data consultancy Neural Alpha.
“For sectors like energy and power generation, this is a regulatory requirement in many places – like the US,” he adds.
But reporting is not widespread across sectors. According to Neural Alpha’s Responsible Capital AI tool less than 100 S&P500 companies are disclosing specific annual values for non-GHG emissions. In addition, just a handful have specific non-GHG policies in place.
Much has been made of ongoing challenges for firms in certain sectors to disclose their Scope 3 GHG emissions, yet non-GHG emissions are even harder to track along complex supply chains, according to Sajeev Mohankumar, Senior Technical Specialist on Climate and Biodiversity at the FAIRR Initiative, an investor network focused on animal agriculture.
In the agriculture sector, for example, non-GHG emissions are often estimated using broad, secondary data – like regional livestock census data – rather than farm-specific data, Mohankumar says. “This misses critical on-farm practices that could significantly reduce emissions, such as feed choices or effective manure management.”
In addition, there are a huge variety of air pollutants beyond the TNFD’s current scope to measure, each with different sources and impacts for investors and companies to consider. The US Environmental Protection Agency’s list of hazardous air pollutants alone names over 180.
Something in the air
For investors seeking to understand their nature risks and impacts, getting to grips with non-GHG pollutants is an important present challenge.
Take nitrogen – it accounts for around 80% of the Earth’s atmosphere and is relatively harmless on its own. The problem is when it reacts with other elements and forms more unstable compounds, like nitrous oxide (N2O).
The climate-related impacts of N2O – which is considered a greenhouse gas – are well documented. However, the TNFD asks for disclosures on non-GHG nitrogen compounds, such as nitrogen dioxide (NO2) and nitrate (NO3), which have negative nature-related impacts.
“Beyond their effects on the Earth’s atmosphere, non-GHG air pollutants [like nitrates] can cause rain acidification, algal blooms in bodies of water, heavy metal pollution and skewed calcium levels in soil,” says Steven Bullock, Global Head of Research and Methodology at S&P Global Sustainable1. “There are also negative impacts for human health – especially for those with respiratory issues.”
The agriculture sector has a big nitrogen problem.
On the GHG side, farmers’ use of nitrogen fertilisers and animal waste on farmland and pastures generates N2O, which contributes to global warming. However, as highlighted by NGO Planet Tracker, the inefficient use of these fertilisers – and the consumption of nitrates by livestock – is also causing a stream of non-GHG pollutants like NO3 to flow into water sources, poisoning marine life and causing significant economic consequences due to issues like algal blooms.
More broadly, there is also the just transition lens to consider. Efforts to divorce the farming industry from its dependency on nitrogen have backfired in the Netherlands – one of the most intensive agricultural systems in the world – as Dutch famers revolted.
“For decades, the country has emitted above European norms via these pollutants – this eventually prompted a nitrogen lockdown which changed the entire political landscape of our country,” says Netherlands-based Peppelenbos.
But action on nitrogen pollution has so far been hampered by problems with attribution. “Traceability and primary data at the farm-level [on these nature impacts] are scarce, making it difficult to implement recommendations like farm-gate nutrient balances, pollution mapping, and sourcing data from individual farms,” says FAIRR’s Mohankumar.
TNFD’s McKenzie argues there are tools available which can support entities’ efforts to measure non-GHG air pollutants, including GIST Impact’s Impact Valuation Engine.
“But there is still a lack of systematic, comparable data reporting across all industries, which the TNFD hopes to address,” she acknowledges.
The pollutants currently listed by the TNFD are also only the tip of the iceberg.
“Heavy metals such as arsenic, cadmium, lead and mercury – which have serious negative effects on human health – are not included in the TNFD framework, despite being required under reporting for the EU’s Sustainable Finance Disclosure Regulation (SFDR),” notes Patricia Pina, Head of Product Research at data provider Clarity AI.
“Convergence of frameworks and metrics to ensure interoperability and to push for equivalency across regimes should be a key goal for all of us.”
Riding the technology wave
Experts are hopeful that the TNFD will continue to widen and deepen the scope of the framework’s coverage, ironing out wrinkles both as metrics and methodologies evolve and more data becomes available.
When making its final recommendations, the TNFD risked erring on the side of caution, not specifying a metric relating to ‘state of change’, asserting that “no single metric that will capture all relevant dimensions of changes to the state of nature and a consensus is still developing”. This meant choosing to omit a frequently-used metric – mean species abundance (MSA) – arguing that it’s “not readily available to non-technical users”.
Shahbano Soomro, Deputy Head of Policy and Public Advocacy at Impax Asset Management, counters that the TNFD needs to take a “more decisive stance” by endorsing MSA or explicitly one such metric to ensure greater comparability and alignment across sectors – “even if these metrics remain today far from perfect and detached from verifiable on-the-ground impacts”.
“The absence of a standardised framework for nature-related Scope 3 impacts also creates gaps in comprehensive reporting,” adds Soomro.
For Robeco’s Peppelenbos, metrics and reporting on land-use impacts remains a concern.
“There is still very low disclosure in this area, even though it is a major driver of nature loss,” he says. “The ability to measure invasive species also needs to be charted and would benefit from more data.”
Meanwhile, Bullock from Sustainable1 emphasises the importance of TNFD-aligned disclosures moving beyond mapping dependencies to evaluating impacts and future risks.
“Impact can have a very different meaning according to the type of portfolio and locations in which you operate – whereas it’s easier for investors to get their heads around the dependency side,” he says.
“[On the forward-looking dimension,] we currently only consider transition risk from a climate perspective, but more scientific innovation is needed to understand the path for nature,” Bullock says. “How do investors set appropriate targets? There is still debate around impact metrics and a resolution on this will take time.”
Thankfully, the nature technology and data market has been responding to growing demand for nature-focused information over the past 12 months.
A recent report has predicted that the nature technology market will grow from US$2 billion to US$6 billion by 2030.
“We’re beginning to ride on a technology wave,” says NatureFinance’s Zadek. “This is making it more possible to provide location-specific, high integrity biodata, but it’s not yet at a level where we are seeing large scale asset reallocation.”
Fusing the landscape
To drive the development of all nature-focused data, the TNFD is building an equivalent of the Net Zero Data Public Utility project for nature. The NZDPU aims to provide an open, free and centralised data repository allowing stakeholders access to climate transition-related data. The nature-focused version would ensure that the nature information landscape is similarly well-connected and accessible.
In addition to the focus on data availability and quality, the TNFD’s efforts going forward are focused on driving market engagement and building capacity, according to McKenzie.
“To do this, we’re continuing to raise awareness about the importance of corporate and financial institution action on nature loss and the recommendations of the TNFD, and enabling and encouraging organisations to get started with assessing and disclosing their nature-related issues,” she says. “We’re also supporting adoption by addressing any remaining barriers and enhancing access to relevant data, tools and further guidance.”
Experts agree that success depends on the TNFD’s continued ability to place the climate-nature nexus at the heart of its framework.
“Without [an intergrated] approach, one could be transferring risks from one area to another – restoring climate does not always necessarily translate into restoring nature,” says Pina. “As we evolve our thinking in this area, I think we are going to see more integrated reports. One day, I hope to see TNFD and TCFD merge.”
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