A recent report by Sustainable Fitch on biodiversity in ESG reveals an increased prevalence of nature-related disclosures, especially with the recent creation of the Taskforce for Nature-related Financial Disclosures (TNFD) framework. However, difficulties remain in measuring biodiversity and nature-related impacts, and creating mandatory reporting rules appears unlikely.
Many investors appear to be looking to transition to “nature-positive” investing, but the comparatively new concept lacks a standardized definition -- according to a Cambridge study, 11 different definitions were identified from entities working on biodiversity, ranging from reversing ecosystem loss to social equity considerations. This wide variety of issues and the range of accompanying tracking metrics make biodiversity a challenging impact theme for investors, according to the report.
A new TNFD framework, launched in September, reportedly represents a breakthrough for nature-related disclosures and may even expand the practice into mainstream reporting expectations. Through its guidance on performance indicators, a move towards a core set of nature-related metrics may be established. The TNFD's core global indicators for nature-related dependencies and impacts include land, freshwater and ocean-use change, pollution and pollution removal, resource use and replenishment, invasive alien species, and state of nature that are defined as ecosystem conditions or species extinction risk.
The categories intend to provide investors with line items that link directly to specific nature themes, allowing for better measurability. The TNFD has also released guidance on risk and opportunities, complementing the ICMA’s guidance on reporting impacts of projects financed through green bonds.
Sustainable Fitch said a rising number of entities setting nature-related targets due to concern over the effect of business activity on the environment and the financial risks associated with biodiversity loss.
The report identifies water consumption as the largest category for companies setting nature-based targets, followed by land use, water pollution, and biodiversity. Similar to the metrics used to measure nature-related impacts, nature targets also maintain a wide range, so the Science Based Targets Network has launched a five-step methodology to help with validation.
Nature-based targets also remain considerably less common than climate targets, namely because emissions reductions and carbon credits are easier to measure and track.
Though a voluntary reporting standard, the TNFD’s 14 recommended disclosures are expected to assist with regulatory compliance, such as the EU’s Corporate Sustainability Reporting Directive. It is also projected to influence existing standards, such as the Global Reporting Initiative, as they are updated in the years to come.
The report does not expect a large-scale expansion of mandatory nature reporting rules at present, due to practical challenges associated with the practice.
