Norges Bank Investment Management, manager of Norway’s sovereign wealth fund, has committed to measuring investee companies’ nature-related risks in its giant portfolio and publishing its own exposure using the Task Force on Nature-related Financial Disclosures (TNFD) framework.
As has sister investor Norway’s KLP, Sweden’s $79 billion AP7 and London-based LGPS CIV, one of eight LGPS asset pools, together comprising a handful of key investors signing up as early adopters of the TNFD recommendations. A process that will increase engagement by asset owners with investee companies and begin to change how financial markets value, price, and approach nature-related risk.
“We will identify those corporates most at risk, using the TNFD to target engagement with companies that we have most exposure to, most influence on and pose the biggest risk on our portfolio,” confirms Jacqueline Jackson, chief sustainability officer at London CIV.
TNFD disclosure recommendations are structured around four pillars (governance, strategy, risk & impact, metrics & targets) consistent with the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB). The framework includes 14 recommended disclosures covering nature-related dependencies, impacts, risks, and opportunities. Since its launch last year, 320 companies, financial institutions and service providers have signalled they will integrate them into their reporting.
The challenge of Measuring intangibLes
Investors adopting the framework face a number of challenges. Unlike climate change where they have been able to focus on reducing emissions in their holdings, nature is complex, intangible, and diverse, making it difficult to hone on a single issue – despite the framework highlighting core global indicators.
“By no means do we yet have a perfect KPI or indicators since there will be no single KPI for biodiversity due to its complexity,” says Flora Gaber, manager, ESG analysis at AP7, already integrating nature and biodiversity loss in its active ownership; conducting TNFD analysis and planning to issue a brief TNFD chapter in its annual report. “The issue of metrics and indicators, as well as targets, will probably be revised many times over in the next few years.”
“Since there is no common indicator for nature like emissions, our approach will vary depending on the company and sector,” Gjermund Grimsby, KLP’s deputy vice president, corporate responsibility, tells Top1000funds.com. “By identifying the key impacts, dependencies, and risks of different sectors, we can find appropriate indicators to evaluate and track companies. We will start with key sectors in our portfolio that we know have material impacts on nature and biodiversity, namely agriculture, aquaculture and fisheries, forestry and paper production, mining and metals, and oil and gas.”
Nature-related impacts and dependencies are also difficult to quantify (particularly for large investors with a diversified portfolio) because they are often localised. “Nature degradation is a global challenge but impacts and dependencies on ecosystems are very often localised, and may even vary depending on the season,” explains Snorre Gjerde, lead investment stewardship manager, NBIM, an active contributor throughout the design and development of the TNFD. “Take for instance the example of water withdrawal: the impact can be considerably higher if the withdrawal takes place in a water-stressed ecosystem during dry season, versus in another location or even just at a different time of year.”
The localised element – in contrast to a universal carbon footprint – also makes accessing data particularly difficult. “You need to understand where a company has its assets, and the value of nature in this location, as well as its condition and whether it is degraded or not. In certain sectors, assessing a company’s value chain has more relevance. For instance, consider the beef supply chain in the retail sector,” suggests AP7’s Gaber.
But investors also note that access to data is getting easier. New reporting frameworks are emerging and technologies such as satellite imaging and remote sensing are producing unseen information on the state of the world’s ecosystems and natural resources. Data providers are also jumping on board.
“Geo-specific data is a top priority for most data providers, so hopefully this won’t remain a challenge for long,” says KLP’s Grimsby who suggests asset owners looking to get started focus first on the type of information they can easily assess, such as whether the portfolio company at risk has biodiversity on its agenda.
“Qualitative analysis can also provide valuable insights into key impacts and risks and serve as a starting point for integrating nature related risks in risk management and governance,” he suggests. “Like with climate risk, we expect quantifying nature risk in monetary terms will improve over time. Building on experiences from climate risk is valuable, so we try to integrate work on climate and nature instead of having two separate work streams,” he adds that KLP is currently building out capacity and knowledge so that as with climate risk the pension fund will ultimately integrate nature risk in ordinary risk management and governance structures.
A milestone in cooperation
And despite its “tricky” and “extensive” reporting, commentators believe that TNFD integration is easier than it looks given its many comparisons with climate disclosures and the fact investors that are reducing emissions in their portfolio will be familiar with the process. “Carbon reporting has been around for a long time and the accounting principles and available data is a lot stronger. In the early days, climate reporting was complex compared to traditional accounting methods, but the market had to tackle climate metrics, and the same will happen with nature-related risks,” predicts CIV’s Jackson.
Moreover, some investors have already engaged on nature because of its interdependence with the transition. NBIM already combines climate and nature in its engagement with food production and consumer goods groups, mining and extractive industries, for example. “This sector is key to obtaining the minerals and metals needed for the transition, but at the same time it is important to ensure that these can be produced in a responsible manner, with appropriate mitigation of significant environmental and social impacts of company operations,” says Gjerde.
“Climate change and nature loss are deeply intertwined global issues: climate change can cause nature loss, and conversely nature can provide climate change mitigation solutions. We encourage our investee companies to consider the toolkit for their own risk management and reporting efforts. As a global investor, it is particularly encouraging for us to see the broad mix of industries and geographies represented among the early adopters, including many of our portfolio companies,” he continues.
CIV’s Jackson also notes a willingness amongst investee companies to adopt the framework, something she links to acute awareness of the vulnerability of supply chains. “As investors we have diversified risk, but supply chain disruption has a massive impact for an individual company, many of which have already felt the reality of managing these issues and a drop in profits and rising costs.”
TNFD’s similarities with other frameworks also signposts a welcome coming together of shared standards in the regulatory landscape.
The International Sustainable Standards Board (ISSB) will be a global baseline of sustainability information, and the TNFD framework is already referenced by the ISSB, and other standard-setters such as the GRI.
“It has been very important for us that the TNFD framework has been designed to have a high level of interoperability with emerging global sustainability standards to ensure consistent and comparable information to financial markets, and to facilitate ease of application for report preparers, as opposed to causing fragmentation,” concludes Gjerde.
