Taskforce for Nature-Related Financial Disclosures: What Actuaries Need to Know

The global economy is fundamentally reliant on a healthy and functioning natural world.

From the raw materials that fuel industries to the ecological processes that regulate climate and water resources, nature provides a vast array of services, often termed ecosystem services. These services underpin trillions of dollars in economic activity yet are frequently overlooked in traditional financial analysis.

This lack of quantification can lead to business decisions that degrade ecosystems, ultimately posing a risk to long-term economic stability and growth. The Taskforce for Nature-Related Financial Disclosures (TNFD) seeks to address this critical gap by establishing a framework for organisations to assess and report on their dependence and impact on nature. By incorporating the value of ecosystem services into financial analysis and planning, businesses can make more informed decisions that promote a sustainable future.

In September 2023, the TNFD released its set of disclosure recommendations and guidance for organisations to report and act on evolving nature-related dependencies, impacts, risks and opportunities.

The recommendations and guidance have been developed to enable business and finance to integrate nature into decision making, and ultimately support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.

How were the recommendations developed?

Sometimes referred to as the 'TCFD for Nature', the TNFD is a global, market-led, science-based and government-supported initiative that was launched in 2021, consisting of 40 senior executives from companies and financial institutions globally representing over $20 trillion in assets. The TNFD used a broad consultation process and an "open innovation" approach which saw the TNFD release four 'beta' releases of a prototype framework for feedback and pilot testing.

While the groundwork for TNFD had been laid for several years, the impetus for the release of disclosure standards comes from the agreement to the Global Biodiversity Framework (GBF) of the Kunming-Montreal convention , a historic agreement signed by 188 governments to "arrest the ongoing loss of terrestrial and marine biodiversity and set humanity in the direction of a sustainable relationship with nature, with clear indicators to measure progress". Target 15 of the GBF specifically calls for regular monitoring, assessment and disclosure of the risks, dependencies and impacts of large companies and financial institutions on biodiversity.  

What will companies be required to disclose?

At the highest level, the TNFD is asking organisations to make disclosures across:

• Governance: Disclose the organisation's governance of nature-related dependencies, impacts, risks and opportunities.
• Strategy: Disclose the effects of nature-related dependencies, impacts, risks and opportunities on the organisation's business model, strategy and financial planning where such information is material.
• Risk and impact management: Describe the processes used by the organisation to identify, assess, prioritise and monitor nature-related dependencies, impacts, risks and opportunities.
• Metrics and targets: Disclose the metrics and targets used to assess and manage nature-related dependencies, impacts, risks and opportunities.

If these conceptual pillars sound familiar, that's because they are based on those developed by the Taskforce on Climate-Related Financial Disclosures (TCFD), which have been embedded into the International Sustainability Standards Board's (ISSB's) IFRS S1 and IFRS S2. Legislation to make an Australian Sustainability Reporting Standard for climate-related disclosures mandatory for large Australian businesses is currently passing through Parliament and is expected to come into force on 1 January 2025.

A topic that will be of interest to actuaries is the data which will be available under the nature-related disclosures. Unlike climate change, where there is a comprehensive global reporting measurement architecture in place for greenhouse gas accounting, the global and corporate measurement and reporting architecture is still in development for other drivers of nature loss.

This presented the TNFD Taskforce with significant challenges in making recommendations on metrics and targets comparable with the TCFD recommendations.

In response to this challenge, the Taskforce adopted a "leading indicators" approach, similar to the approach taken in mainstream financial reporting, comprising:

• a small set of core metrics - "core global metrics" that apply to all sectors and "core sector metrics" for each sector - to be disclosed on a comply or explain basis; and
• a larger set of additional metrics, which are recommended for disclosure, where relevant, to represent an organisation's material nature-related issues, based on their specific circumstances.

The core global metrics cover the main drivers of nature change as identified by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES): climate change, land/freshwater/ocean-use change, pollution/pollution removal, resource use/replenishment, invasive alien species and other, and state of nature.

Currently, TNFD is in the process of providing additional guidance and frameworks to assist with preparation of the disclosures. Over 400 companies and government entities have signed up as pilot entities to start making TNFD-aligned disclosures as part of their annual reporting, commencing in 2023 through 2025. Only a handful of these pilot disclosure reports have so far been published.

Will nature disclosures be mandatory?

At the moment, nature-related discloses are voluntary. However, the market anticipates that, like climate-related disclosures, they will eventually become mandatory. The time taken from recommendations release to mandatory reporting will likely be much shorter than the six years taken by the TCFD framework.

Indeed, in April 2024, the ISSB announced it would commence a research project on disclosures around risks and opportunities associated with "biodiversity, ecosystems and ecosystems services", citing "feedback indicated a significant and growing need among investors for improved disclosures".

What role might actuaries have in the implementation of TNFD reporting and disclosure?

Actuaries should take a keen interest in nature-related risks and dependencies since our economy is highly dependent on nature and ecosystem services. 

The World Economic Forum estimated that $44 trillion of economic value generation - over half the world's total GDP - is moderately or highly dependent on nature. As the TNFD becomes more mainstream, areas where the profession will likely become involved include:    

• Assisting companies with risk nature identification and estimation: TNFD requires the reporting company to identify and quantify their nature-related dependencies. This will require companies to understand the impact of company activities on nature, as well as the impact of nature's decline on the company. Actuaries will need to estimate these impacts, adapt actuarial models and report accordingly. For example, under TNFD, a life insurance actuary may need to consider the frequency of pandemics arising from zoological pathogens which is likely correlated to deforestation activities (which bring population centres closer to forest areas, increasing linkages between wild animals and human food production).
• Incorporating nature risks into valuations of assets, liabilities, revenues and expenses: Transition risks arising from shifting an organisation to a nature-positive basis and physical risks from nature-related impacts and dependencies will need to be incorporated into valuations of assets, liabilities, revenues and expenses, where these are assessed as vulnerable to nature-related risk. Actuaries will need to incorporate these risks into regular reviews using the core global risk metrics for upstream and downstream operations. Well-prepared financial institutions will try to develop one system that can capture both carbon/climate and nature-related risks.
• Helping the financial sector tackle the challenge of comparing different measures of risks to nature: TNFD proposes a concept of nature capital in four realms: land, ocean, freshwater and atmosphere. A key challenge will be how to move towards consistency in reporting across industries and sectors and, as a data-driven profession, actuaries are well placed to contribute to this conversation.
• Assisting with assessment of opportunities for nature-related activities: While guidance on this is still nascent, examples of opportunities for nature-positive financial instruments include green bonds, biodiversity credits and debt-for-nature swaps. Actuaries should be able to usefully contribute to their valuation and assessment.
• Supporting the work of Australian collectives on nature: Important Australian collectives such as the Australian Council of Superannuation Investors (ACSI), the Australian Sustainable Finance Institute (ASFI) and the Australian Institute of Company Directors (AICD) are publicly supportive of the mission and objectives of TNFD. ASFI is developing a Sustainable Finance Capability Framework including Sustainable Development Goals (SDGs) and TNFD considerations, with the intent to guide financial institutions on the key capabilities required to develop a sustainable finance workforce and leadership. We hope that actuaries' skills and expertise are well represented in this future work.

Acknowledgements: Many thanks to Agatha Postnova and Alan Greenfield for their reviews and input. Any errors remaining in the document are the authors' only, and the views expressed herein are only those of the authors and do not represent the positions of the authors' employers or the Actuaries Institute.