Introduction: The Task Force for Nature-related Financial Disclosures publishes its final recommendations

Biodiversity loss and ecosystem collapse is viewed as one of the fastest deteriorating global risks over the next decade. Despite widespread recognition of the need to address these risks, most companies, investors and lenders do not currently understand their nature-related dependencies, risks and opportunities, and are inadequately incorporating nature in their business strategies.

It is against this background that after two years of consultation, in September, the Task Force for Nature-related Financial Disclosures (TNFD) launched its final risk management and disclosure recommendations for organisations to report and act on evolving nature-related issues. The recommendations are intended for use by a range of stakeholders including companies looking to integrate nature-related risk assessment into their corporate strategy, governance and decision-making processes; and investors and financial institutions to support more informed capital allocation decisions. The recommendations have been welcomed by groups including the Responsible Investment Association of Australasia, whose research indicates that nature is now a key focus for investors.

While the TNFD’s recommendations will remain voluntary for Australian entities until codified under domestic law, they can be expected to trigger increasing scrutiny of nature-related risk management from investors and consumers. They also reflect rising expectations of company directors to consider nature-related risks: a ground-breaking new legal opinion published this month finds that directors who fail to consider such risks could be found liable for breaching their duty of care and diligence under the Corporations Act 2001 (Cth).

In this article, we recap key elements of the TNFD framework, and what the recommendations mean for Australian companies and their directors, in light of the new legal opinion on directors’ duties and nature-related risks.

Key takeaways:

1. The TNFD’s final recommendations were launched in September 2023, with further sector-specific guidance expected for release before the UNFCCC COP28.
2. While reporting under the TNFD framework is technically voluntary for Australian businesses for now, a new legal opinion points to the potential for directors to be under a legal duty to disclose material nature-related risks. Australian businesses may also be subject to EU-based nature-related reporting obligations.
3. Australian businesses across a range of value chains are already subject to material nature-related risks, but currently face challenges in gathering data to support risk identification and management.
4. Australian companies and their directors should act now to identify their companies’ dependencies and impacts on nature; consider what potential risks this may pose to the company; and take steps to ensure that nature-related risks and impacts are disclosed. The TNFD provides an apt framework for going about this process.

How the Taskforce for Climate-related Financial Disclosures’ framework works

The TNFD’s four recommended disclosure pillars – Governance, Strategy, Risk & Impact Management, and Metrics & Targets – mirror the familiar approach of the Taskforce for Climate-related Financial Disclosures (TCFD). However, the final framework contains several additional elements that recognise the complexities associated with identifying and managing nature-related risks, and seek to align the TNFD framework with other recent disclosure frameworks such as the ISSB’s sustainability reporting standards. Here, we highlight these key elements.

LEAP: a guide to identifying, assessing, managing and disclosing nature-related issues

The LEAP approach has been a feature of the TNFD framework since its first beta draft in 2022, and was developed in response to an appetite from market participants for guidance on how to identify, assess, manage and disclose nature-related issues to inform disclosures. Using LEAP is optional and is not a prerequisite to making the TNFD’s recommended disclosures, however its framing provides a useful tool. 

Using LEAP, internal project teams:

1. locate their organisation’s interface with nature;
2. evaluate the organisation’s dependencies and impacts on nature;
3. assess the organisation’s nature-related risks and opportunities (which will stem from the organisation’s dependencies and impacts); and then
4. prepare to respond to, and report on, material nature-related issues, under the TNFD’s recommended disclosures.

One prerequisite to commencing LEAP is for an organisation to decide its approach to materiality: in this way, the TNFD gives organisations flexibility to choose how they define materiality, informed by their particular regulatory reporting requirements and needs of their shareholders and other stakeholders. We explain materiality under TNFD at 'Materiality under the TNFD framework'.

As to how the LEAP approach operates in practice, a recent report (Case Study Report) commissioned by the Federal Department of Climate Change, Energy, the Environment and Water road-tested the draft TNFD recommendations across five different sectors. Applying the LEAP approach to assess nature-related impacts and dependencies in the critical mineral mining sector found that this sector has ‘very high’ value chain impacts relating to terrestrial ecosystem use and water use, and also very high value chain dependencies relating to climate change, flood and storm protection, ground and surface water and water flow maintenance. Risks resulting from these impacts and dependencies are wide-ranging and include reputational damage associated with impacts to terrestrial ecosystems, physical disruption of production processes due to extreme weather, and market risks associated with increasing costs of mineral resource inputs.

The report also identified a number of challenges which Australian businesses who looking to implement TNFD may face, including, for example, engaging specialised expertise to complete LEAP assessments (particularly in the fields of natural science and geo-spatial data); significant investment in gathering reliable data across their operations and supply chains; and identifying reliable indicators, methodologies, and assumptions that can be used to evaluate and track nature-related issues.

Recommended disclosures

The TNFD’s four disclosure pillars align with the structure of the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations, and the TNFD’s recommended disclosures under those pillars incorporate and build on the TCFD’s set of 11 recommended disclosures.

The TNFD recommends three disclosures that are additional to TCFD:

1. disclosure of governance processes relating to human rights policies and engagement activities, to help investors assess whether these policies and activities are appropriate for managing the organisation’s nature-related issues. The Taskforce has released specific guidance to assist businesses with meaningful engagement processes and related disclosures, in recognition of Indigenous Peoples’ critical role in protecting biodiversity, and also their particular susceptibility to adverse impacts from nature loss. It is worth noting that an earlier draft of the recommendations faced criticism from civil society groups for ignoring human rights.
2. disclosure of information on assets and/or activities that are located in 'priority locations'. These are divided into ‘material locations’ and ‘sensitive locations’: material locations are those where the organisation has identified material nature-related dependencies, impacts risks and opportunities in its operations or value chains. Meanwhile, sensitive locations are those where the organisation’s assets or activities interface with nature in particular ways, for example, where they are located in areas important for biodiversity, or of particular importance for Indigenous Peoples, Local Communities and stakeholders. This added requirement recognises the fact that many nature-related risks are location-specific.
3. disclosure of processes for identifying, assessing and prioritising nature-related dependencies, impacts, risks and opportunities in the organisation’s upstream and downstream value chains. This element of the risk management pillar is additional to the requirement to disclose nature-related issues in direct operations. 

The diagram below sets out each of the TNFD’s recommended disclosures (with disclosures additional to TCFD highlighted blue).    

Figure 1 Adapted from TNFD Recommended Disclosures.

General requirements under the TFND framework

The final TNFD recommendations set out six ‘general requirements’ which apply to making any disclosures under the framework:

• Materiality – Organisations should clearly state their approach to materiality.
• Scope – Organisations should describe the scope of their nature-related assessment and disclosures, and how they determined that scope, including the activities and assets that have been assessed. In this way, the TNFD seeks to recognise complexities associated with scope 3 climate reporting and constraints on accessing data from across an entity’s value chain
• Location of nature-related issues – Nature-related reporting is inherently different to climate-risk disclosure: unlike climate, nature-related impacts and dependencies are location-specific and require local and location-specific response. Accordingly, the framework requires consideration of the geographic location of an entity’s interface with nature: for example, where an entity operates across multiple locations, risks associated with water withdrawal will vary by the degree of water stress in each location. When disclosing information about nature-related issues by geographic location, organisations are encouraged to disaggregate this information as much as possible.
• Integration with other sustainability-related disclosures – Entities should integrate their nature-related disclosures with other business and sustainability-related disclosures whenever possible. Integrating climate and nature-related disclosure is particularly important. 
• Time horizons – Like IFRS S1, entities are asked to describe what they consider to be their relevant short, medium and long term time horizons. The TNFD recommends that time horizons need to consider the useful life of the assets or infrastructure and the fact that nature-related risks and opportunities often manifest over the medium and long term.
• Engagement of Indigenous Persons, Local Communities and affected stakeholders – Entities should describe their processes for engaging with these groups about their concerns and priorities in relation to nature-related dependencies, impacts, risks and opportunities in their direct operations and value chains.

Disclosure metrics under the TNFD framework

The TNFD framework sets out significant detail about the types of metrics which entities should use when making disclosures under the four pillars (and which entities should therefore disclose under the fourth ‘metrics and targets’ pillar).

The disclosure metrics are divided into ‘core’ metrics and ‘additional’ metrics.

For example, core global metrics for disclosing nature-related dependencies and impacts include, among others, greenhouse gas emissions; tonnes of pollutants released by the organisation into the soil; volumes of wastewater discharged; and tonnes of hazardous and non-hazardous waste generated. Additional metrics include, for example, land-use intensity; volumes of wastewater reused or recycled; and number of unintentionally introduced species in areas owned.

Meanwhile, core global metrics for disclosing nature-related risks include, for example, the value of the reporting organisation’s assets, liabilities, revenue and expenses that are assessed as vulnerable to nature-related transition risks; and the value of significant fines, penalties received, or litigation action resulting from negative nature-related impacts. Metrics for nature-related opportunities include, among others, the organisation’s increase and proportion of revenue from products and services producing demonstrable positive impacts on nature. Additional metrics include, for example, value of early retirements of assets due to nature-related risks.

What is clear from these various examples is that disclosing against these metrics will involve significant uplift for many companies’ data collection processes, and will require robust approaches to data collection across business operations and supply chains.

How the TNFD fits in with other sustainability disclosure frameworks

A critical feature of the final TNFD framework is its alignment with other global sustainability and nature-related disclosure frameworks:

• Global Biodiversity Framework (GBF) – The TNFD is intended to align with the disclosure target in the GBF, which was adopted by parties to the UN Convention on Biological Diversity in December last year, and provides a roadmap for the global community to address biodiversity and restore natural ecosystems through a series of goals and targets for achievement by 2030. Relevantly, target 15 of the GBF requires parties to take measures to encourage and enable businesses (particularly large and transnational companies and financial institutions) to monitor, assess and transparently disclose their risks, dependencies and impacts on biodiversity. The target is directed toward reducing the negative impacts and increase the positive impacts of business on biodiversity and to encourage more sustainable patterns of production.
• ISSB sustainability disclosure standard – As outlined in our article earlier this year, in June, the International Sustainability Standards Board (ISSB) issued its long-awaited first two International Financial Reporting Standards: ‘IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information’ (IFRS S1) and ‘IFRS S2 Climate-related Disclosures’ (IFRS S2). These standards are intended to provide a single global baseline for companies to report on their sustainability-related risks and opportunities. The TNFD aims to align with IFRS S1, including recommending that reporting entities adhere to the IFRS S1 general requirements, including adopting the IFRS S1 approach to materiality in the absence of jurisdictional guidance. The TNFD’s core global disclosure metrics on greenhouse gas emissions are to be measured in accordance with IFRS S2.
• Global Reporting Initiative (GRI) – GRI requires entities to report on topics that represent an organization’s most significant impacts on the economy, environment, and people. The TNFD framework’s approach to materiality is designed to accommodate this approach (as we explained above).
• Carbon Disclosure Project (CDP) – In September 2023, CDP announced its intention to align with TNFD, and will start this process in 2024. It has also announced that it will fully align with the ISSB’s IFRS S2 climate disclosure standard from 2024. CDP is also looking to ensure its disclosure framework takes on board other impactful environmental reporting requirements where appropriate such as those being developed by, or mandated by, EFRAG, the ISSB, and the US SEC.

Outside of these global disclosure frameworks, the TNFD’s recommendations are also designed to align with emerging European regulations such as the EU Corporate Sustainability Reporting Directive (CSRD).

CSRD, which came into force earlier in 2023, requires in-scope entities (including certain non-EU entities) to report on their impacts and dependencies on sustainability matters, and this includes detailed reporting on biodiversity and ecosystems under European Sustainability Reporting Standard E4 (ESRS E4), which (in line with TNFD) relates to impacts, dependencies, risks and opportunities and which extends to an entity’s value chain. ESRS E4 specifically cross refers to guidance issued by the TNFD and contemplates that a relevant undertaking will refer to (and comply with) TNFD guidance when disclosing in line with ESRS E4, particularly with respect to metrics and targets.It is important to note that CSRD reporting requirements have relevance for many Australian businesses, with recent data suggesting that over 600 Australian companies will be subject to CSRD (and many more could be indirectly impacted, with entities in their value chain having to report and requiring information from companies in Australia).

The CSRD and accompanying nature-related reporting standards are just one facet of the EU’s continuing efforts to combat nature-related risks: importantly, the EU Deforestation Regulation came into force on 29 June 2023 and prohibits operators and traders from placing or making available on the EU market, or exporting from the EU, certain commodities (cattle, cocoa, coffee, oil palm, rubber, soya and wood) and derived products, unless they are “deforestation-free”, have been produced in accordance with the relevant legislation of the country of production, and are covered by a due diligence statement. As such it will have major impacts on non-EU countries doing business in the EU and will apply to in-scope companies from 30 December 2024 (although to micro-undertakings or small undertakings from 30 June 2025).

The Deforestation Regulation is expected to help combat biodiversity loss by promoting the consumption of ‘deforestation-free’ products and reducing the EU’s impact on global deforestation and forest degradation. The Deforestation Regulation is also part of a broader EU legislative agenda tackling supply chains – which includes the proposal for a Corporate Sustainability Due Diligence Directive (CSDDD) and the EU Conflict Minerals Regulation. Many of those caught by the Deforestation Regulation could also be caught by the CSDDD, which, when adopted, will impose much wider human rights and environmental due diligence requirements on both EU and certain non-EU entities in the near future.

What does the TNFD framework mean for Australian businesses?

Reporting under the TNFD framework will remain technically voluntary for Australian businesses until codified in Australian law, and the Federal Government has not yet indicated an intention to introduce mandatory TNFD-aligned reporting: instead, recent efforts have focused on developing a mandatory climate-related risk disclosure framework based on the ISSB standards, that is expected to take effect from July 2024. However, in its consultation paper on Australia’s Sustainable Finance Strategy released last week, the Government noted that it is closely monitoring the development of international sustainability-related financial disclosure frameworks and standards, with a view to establishing other globally aligned sustainability-related financial disclosure requirements (including nature) over time. It has invited stakeholders to give feedback on how the Government, regulators and industry should prepare for global developments in sustainability-related financial disclosure frameworks, including the TNFD.

Meanwhile, other recent nature-related reforms under the Federal Government’s ‘Nature Positive Plan’ have centred on commencing reforms to the EPBC Act, and introducing the Nature Repair Market Bill, which is currently under consideration by the Senate Environment and Communications Legislation Committee.

That said, a significant new legal opinion authored by Zoe Bush and Sebastian Hartford-Davis (Opinion on Nature-related Risks), points to the potential for directors to be under a legal duty to disclose material nature-related risks: the opinion – which considers on the extent to which a director’s duty of care and diligence under the Corporations Act 2001 (Cth) permits or requires company directors to consider, disclose and manage nature-related risks arising from dependencies and impacts on nature – finds that a director ‘should at least identify the company’s nature-related dependencies and impacts, and consider the potential risks this may pose to the company’. It warns that directors ‘who fail to consider nature-related risks could be found liable for breaching their duty of care and diligence’.

As to disclosures, Bush and Hartford-Davis find that companies ‘are required to disclose nature-related dependencies and impacts that pose a material risk of harm to the company in its directors’ report and corporate governance statement’, and may also be required to disclose nature-related impacts that do not pose a material risk of harm in certain circumstances. In the authors’ view, disclosure requirements under ASIC’s ‘Regulatory Guide 247: Effective disclosure in an operating and financial review’, the ASX Corporate Governance Council’s ‘Corporate Governance Principles and Recommendations’, and the ASX Listing Rules all extend to material risks that arise due to a company’s nature-related dependencies and impacts.

As the authors note, although the TNFD is not itself binding, its development reflects increasing investor and stakeholder focus on “nature-related risk” and underscores the utility of “nature-related risk” as a framework for directors to assess threats. They also note the potential for the TNFD to follow a similar trajectory to the TCFD-aligned reporting, which has been adopted in guidance from Australian regulators and is now mandatory in a large number of jurisdictions.

Sebastian Hartford-Davis was one of the authors – along with Noel Hutley SC – of a 2016 legal opinion warning of the potential for directors who fail to consider climate change risks to be found liable for breaching their duty of care and diligence; an opinion that proved instrumental in moving boards to take climate-related risks seriously. While it remains to be seen whether the Opinion on Nature-related Risks will hold the same gravity, some commentators have suggested that it will even have global influence.

What can your organisation do now?

The Opinion on Nature-related Risks indicates the importance of Australian company directors identifying their companies’ dependencies and impacts on nature; considering what potential risks this may pose to the company; and taking steps to ensure that nature-related risks and impacts are disclosed. It also points to the aptness of the TNFD framework for managing and disclosing nature-related risks and opportunities.

Against that background, companies and their boards should: 

• review the TNFD framework and supplementary guidance in detail, as well as the Opinion on Nature-related Risks;
• assess the extent to which they have compliance obligations under the EU’s new frameworks for addressing nature-related risks, including the CSRD and Deforestation Regulation;
• start to grow the organisation’s understanding of nature and its economic and financial relevance. As the TNFD observes, this will be a new topic for many organisations, but the new legal opinion shows that this will be critical, particularly for company directors;
• survey the current reporting frameworks that the organisation currently discloses against (for example, the TCFD, or ASX Listing Rules), and how these can be leveraged to support TNFD disclosures;
• assess current internal data sources relevant to environmental issues and the extent to which the organisation gathers information about nature-related issues. Most organisations will need to collect new types of data – including from their value chains – in order to make the TNFD’s recommended disclosures. Adopting the LEAP approach is one way that organisations can go about identifying what data needs to be collected and how;
• assess current governance processes for managing nature-related risks. Does the board have oversight of nature-related issues?;
• develop a stakeholder engagement strategy. As the Case Study Report notes, consulting with key stakeholders will be important for effectively identifying and assessing nature-related risks and opportunities. Organisations should consider developing a strategy to engage with their relevant stakeholders, including investees, clients, customers, suppliers, researchers, First Nations led organisations and local communities. The Report finds that consultation and collaboration with First Nations people is an important part of the LEAP assessment process for any Australian business.
• look for with opportunities. While the new legal opinion focuses on nature-related risks, organisations should not lose sight of potential opportunities flowing from investors’ increasing interest in nature, including the emergence of biodiversity crediting frameworks, which may enable opportunities to support innovative biodiversity restoration projects.
• monitor for the release of sector-specific guidance from TNFD, which we expect to see around COP28. Businesses should also watch for the emergence of other nature-related disclosure frameworks, particularly from the ISSB, who recently concluded consultations on potential future work priorities, including standards for biodiversity, ecosystems and ecosystem services. The ISSB is expected to announce its priorities in the first half of 2024.

Meanwhile, investors, asset owners and managers and lenders should consider how the TNFD recommendations can better support capital allocation decisions and engagement with the companies they finance. Accordingly, we expect to see investors focus increasingly on nature-related risks and opportunities when evaluating and engaging with their investments.

Authors: Ilona Millar, Emily Morison, Sarah Martin