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How the TNFD recommendations and guidance support corporate sustainability reporting

At a glance:

 

  • Given global nature-related commitments, and increasing stakeholder interest in nature-related matters and recognition that they are directly relevant to value creation, it is important for organisations to identify and understand their nature-related dependencies, impacts, risks and opportunities.
  • The Taskforce on Nature-related Financial Disclosures (TNFD) has published its final disclosure recommendations and guidance, presenting organisations with a voluntary framework to help identify nature-related issues and in turn build resilience and unlock value.
  • For organisations within scope of the EU’s Corporate Sustainability Reporting Directive (CSRD) and accompanying European Sustainability Reporting Standards (ESRS) or those anticipating new disclosure laws aligned with the International Sustainability Standards Board’s (ISSB) IFRS Sustainability Disclosure Standards (SDS), the TNFD disclosure recommendations and guidance provide useful tools to help organisations start thinking about how to identify their nature-related impacts, risks and opportunities, which in turn can inform their sustainability reporting.

"Despite nature being recognised as the new climate, only 1% of companies understand the impacts and dependencies of their value chain on natural capital."

Daniele Strippoli, Deloitte NSE Nature Positive Leader

This article is relevant for CFOs, Board Members, Chief Sustainability Officers, and those responsible for risk and reporting, operating in organisations subject to EU CSRD and ESRS or national rules based on the IFRS SDS.

 

In September 2023, the TNFD published its final disclosure recommendations and guidance for nature-related risk management and disclosure. Fast forward to 2024, and now thousands of multinational organisations in the EU are preparing to publish their first sustainability reports under the CSRD and its accompanying ESRS. Meanwhile, countries outside of the EU, including the UK, Australia, New Zealand and Japan, are – or are committed to – adopting and implementing the IFRS SDS into their own disclosure laws and rules. Organisations operating in these countries are anticipating and preparing for these new disclosure requirements.

As organisations start to consider how to prepare for the regulatory changes under the CSRD and national rules aligned with the IFRS SDS, they are asking:

  • Is my organisation required to report on nature-related issues, and under what regulation? If so, what level of detail and which metrics should be reported?
  • How do I assess my organisation’s impacts and dependencies on nature?
  • Can my organisation use the TNFD disclosure recommendations and guidance to help get ready for mandatory reporting rules?

This article aims to provide clarity for organisations by considering these questions. We highlight where the TNFD’s recommendations and guidance can support in the preparation of nature-related disclosures, for example, in line with ESRS, and IFRS SDS, and set out the practical steps organisations can consider to support their sustainability reporting strategies.

What are the TNFD’s recommendations and guidance?

 

The TNFD’s final disclosure recommendations and guidance support organisations to voluntarily start measuring, managing and disclosing their nature-related impacts, dependencies, risks and opportunities. The recommendations and guidance include a disclosure framework, structured around the pillars of governance, strategy, risk and impact management, and metrics and targets.

The guidance includes the TNFD’s LEAP approach to guide organisations on how to assess and manage nature-related issues and inform nature-related disclosures. The four phases – Locate, Evaluate, Assess and Prepare – are broken down into sub-steps to enable organisations to answer critical questions that emerge from the assessment and disclosure process. (See our previous blog for a more detailed explanation).

How do the TNFD’s disclosure recommendations compare with the EU’s CSRD and ESRS?

 

Alignment between TNFD recommendations and CSRD and ESRS

Organisations in scope of the EU’s CSRD are required to report on sustainability-related information in line with the ESRS. As per ESRS 1, General Requirements, organisations must conduct a double materiality assessment to determine which sustainability topics they need to include in their reporting, which depending on the organisation’s specific circumstances may include those related to nature. There are also specific standards that address specific nature-related topics including:

  • ESRS E1 Climate change (covered in a way that reflects the link between climate- and nature-related issues)
  • ESRS E2 Pollution
  • ESRS E3 Water and marine resources
  • ESRS E4 Biodiversity and Ecosystems
  • ESRS E5 Resource use and circular economy

While not completely consistent, there are many aspects of the ESRS and the TNFD’s recommendations and guidance that are designed to be aligned or overlap in structure. According to comments made by the TNFD and the European Financial Reporting Advisory Group (EFRAG), all 14 of the TNFD’s recommended disclosures are addressed in the ESRS and there is consistency between the TNFD core metrics and related metrics in the ESRS (see table 1 below for further detail).

LEAP as a framework to support organisations within scope of CSRD and, therefore, ESRS

For many organisations subject to the ESRS reporting requirements, a key opportunity for them to get ahead by using the TNFD’s disclosure recommendations and guidance comes from the TNFD’s LEAP approach. The LEAP approach is recognised by EFRAG and referenced in the ESRS. Organisations may consider using the LEAP approach to conduct a materiality assessment on environmental subtopics in their own operations, and upstream and downstream value chain. Since the TNFD’s recommendations and guidance accommodate the use of a double materiality approach, the LEAP approach offers a helpful framework to identify nature-related impacts, opportunities and risk in the value chain as an input to the materiality assessment process required by the ESRS.

The benefits for organisations do not stop there. Using the LEAP approach gives organisations a better understanding of their interaction with nature, which in turn can inform management decisions and help build greater organisational resilience. From identifying different nature dependencies across the supply chain, direct operations and customers, organisations can determine and assess the scale and severity of corresponding nature-related risks and opportunities. These include emerging risks and opportunities stemming from the planned roll out of new nature-related regulation, such as the EU’s Corporate Sustainability Due Diligence Directive (yet to be finalised) and the revised Environmental Crime Directive. These pieces of legislation will push EU and non-EU organisations to develop an understanding of the effect their organisations and their value chains are having on the environment, and roll out steps to rectify concerns. Using the LEAP approach can therefore support other compliance challenges by helping organisations identify corresponding risks and focus attention on adapting risk management processes, strategies and resource allocation.

How do the TNFD’s recommendations and guidance compare with the IFRS SDS?

 

Alignment between the TNFD’s recommendations and guidance and the IFRS SDS

The IFRS SDS are made up of IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2, Climate-related Disclosures. Under IFRS S1, organisations need to report material information about risks and opportunities that could ‘reasonably be expected to affect an entity’s prospects.’ For many organisations, nature-related risks and opportunities are important considerations that may lead to material information. Under IFRS S2, organisations need to report on specific climate-related disclosures. IFRS S2 emphasises the connections between climate and nature. Organisations therefore need to consider climate-adjacent matters when identifying climate-related risks and opportunities.

Although both the TNFD’s disclosure recommendations and the IFRS SDS are based on the architecture of the Task-Force for Climate Related Disclosures (TCFD) and demonstrate a high-level of consistency (see table 1), the disclosure frameworks are not considered interchangeable. The IFSR SDS therefore do not permit the TNFD disclosure recommendations to be used as a disclosure framework. However, the ISSB has expressed its intention to expand its coverage of environmental issues and identified Biodiversity, ecosystems, and ecosystems services as a potential theme to explore in its future workplan priorities. The ISSB has indicated that it will consider the TNFD’s work if it decides to explore this.

Considering the TNFD disclosure recommendations to support organisations within scope of national rules aligned with ISSB Standards

For organisations operating in countries where the IFRS SDS are likely to be the basis of mandatory domestic regulation, the TNFD has content that organisations can consider using to support compliance. This includes, for example, guidance on how to conduct scenario analysis or to set credible nature targets, as well as recommended indicators or metrics to measure an organisation’s interaction with nature. The TNFD’s work can therefore assist in informing an organisations’ thinking and action on nature-related issues.

What are the practical steps your organisation can consider?

 

The TNFD’s recommendations and guidance can be a useful tool to support an organisation’s compliance with mainstream corporate reporting requirements. For organisations to understand how they can best leverage the TNFD recommendations and guidance, a useful first step is to identify whether and when they fall in scope of the mandatory reporting requirements, such as CSRD and/or (prospectively) national level disclosure rules that are aligned with the IFRS SDS. From here, they can consider the following steps:

As outlined in the diagram above, certain organisations are not required to report under CSRD and ESRS or (prospectively) national level rules aligned with the IFRS SDS. Given the complexity of understanding an organisation’s nature-related issues, these organisations may consider whether they would like to start to familiarise themselves with the TNFD’s recommendations and guidelines to help them get to grips with core concepts and understand why and how nature is important to their business. This can help them prepare for their upcoming disclosure requirements, and further their understanding and maturity of risk management practices, as well as generate data and information for better decision-making.

Table 1: High-level overlap of the key characteristics of the TNFD’s disclosure recommendations, CSRD and ESRS, and IFRS SDS, based on the summary table produced by the UNEP FI.

Characteristic

TNFD’s disclosure recommendations

CSRD and ESRS

IFRS SDS

Framework approach
  • Risk management and disclosure framework
  • Sustainability reporting standards
  • Organisations within scope of CSRD must use the standards to prepare their sustainability reports.
  • Information provided is subject to a materiality assessment
  • Standards for sustainability-related financial disclosures, made up of IFRS S1 and IFRS S2
  • S1 provides a set of disclosures for sustainability-related risks and opportunities
  • S2 sets out specific climate-related disclosures and has been designed to be used with S1
  • Information provided is subject to a materiality assessment
  • Jurisdictions can adopt, apply or otherwise be informed by the ISSB Standards to devise national disclosure requirements

Nature focus

  • Dedicated focus on nature-related issues
  • Topic standards that cover nature issues
  • Nature’s intersection with sustainability issues and climate
  • No specific nature disclosures

Compliance approach

  • Voluntary, but can be implemented and mandated by different jurisdictions
  • Mandatory
  • Voluntary, but can be implemented and mandated at a jurisdictional level

Status

  • Final framework published in September 2023
  • Draft sector guidance under consultation
  • Entered into force in January 2024 for the first group of organisations in-scope of CSRD
  • Subject to jurisdictional timeframes to adopt and implement rules aligned with the Standards

Materiality definition

  • Flexible
  • Recommendation to use ISSB’s definition as a baseline
  • Double materiality - impact and financial materiality for environmental, social and governance aspects
  • Matters are material if they could reasonably be expected to affect the entity’s prospects

Value chain

  • Direct operations, upstream and downstream (assessed according to materiality perspective)
  • Recognises that organisations will need to take a ‘deep and narrow approach at first’ and then expand investigations over time to develop a ‘fuller picture.’
  • Direct operations, upstream and downstream (assessed according to double materiality)
  • Direct operations, upstream and downstream (assessed according to materiality)

Assessment of nature-related issues

Dependencies:

  • Reliance on ecosystem service
  • External drivers of change
  • Impact drivers
  • Changes to state of nature
  • Ecosystem services

Impacts:

  • Impact drivers and pressures and related metrics
  • Changes to state of nature (including ecosystem extent, condition and risks) and related metrics
  • Changes to the flow of ecosystem services and related metrics

Risks:

  • Physical (acute and chronic)
  • Transition (policy, market, reputation, technology and liability)
  • Systemic (ecosystem stability and financial stability)

Opportunities:

  • Business performance (resource efficiency, products and services, markets, capital flow and financing, reputational capital)
  • Sustainable performance (ecosystem protection, restoration and regeneration and sustainable use of natural resources)

Dependencies:

  • Reliance on ecosystem service
  • Impact drivers
  • Ecosystem services

Impacts:

  • Impact drivers and pressures and related metrics
  • Changes to state of nature (including ecosystem extent, condition and species risk) and related metrics
  • Changes to flow of ecosystem services

Risks:

  • Physical (acute and chronic)
  • Transition (policy and legal, technology, market and reputation)
  • Systemic (ecosystem collapse, aggregated risks and contagion risks)

Opportunities:

  • Business performance (resource efficiency, products and services, markets, capital flow and financial, reputational capital)
  • Sustainable performance (ecosystem protection, restoration and regeneration, and sustainable use of natural resources)

Dependencies:

  • Reliance on ecosystem service
  • External drivers of change
  • Impact drivers
  • Ecosystem services

Impacts:

  • Impact drivers and pressures and related metrics
  • Changes to state of nature (including ecosystem extent, condition and species risk)
  • Changes in the flow of ecosystem services.

Risks:

  • Physical (acute and chronic)
  • Policy and legal
  • Market
  • Technology
  • Reputational

Opportunities:

  • Resource efficiency
  • Products, services and markets
  • Financial incentives
  • Reputational and relationships with stakeholders

Disclosure of nature-related issues

Dependencies

Impacts

Material risks and opportunities:

  • Description of each risk and opportunity and whether it is likely to materialise in short, medium, and long term
  • How they arise from the organisation’s dependencies and impacts on nature
  • Effects on the organisation’s business model, value chain, and strategy
  • Effects on financial position
  • Quantitative information covering all core global and core sector risk and opportunity metrics and any other relevant metrics,
  • Related targets and transition plans (if applicable)

Targets:

  • Alignment with international goals/policies (whether and how aligned with Post-2020 Global Biodiversity Framework, the Paris Agreement, SDGs, Planetary Boundaries and other global treaties and policies)
  • Target specifications (strategy or risk management objectives that the target aims to address, the targeted value of the metrics, short and medium interim targets, targets in scope that cover changes to impact drivers, improve or maintain ecosystem services and processes related to dependencies and impacts, and proportion of targets that address short-term and long-term risks and opportunities)
  • Target setting process (baseline year and level of metric, methodology to set the target and baseline)
  • Target scope and horizon (timeframe for achieving the target, proportion of timebound and quantifiable targets, and proportion of geographical sites/priority locations that are covered)
  • Monitoring of progress (metrics used to quantify and monitor performance, performance relative to baseline, and explanation of reasons for any revisions or adjustments of the target)

Dependencies

Impacts

Material opportunities and risks:

  • Anticipated financial effects
  • Whether they will materialise in the short, medium or long-term
  • Which impacts and dependencies the risks relate to
  • Critical assumptions used to estimate the effects and the level of uncertainty

Targets:

  • Alignment with international goals/policies (whether aligned by or with Post-2020 Global Biodiversity Framework, Planetary Boundaries and relevant aspects of EU Biodiversity Strategy and other relevant policies)
  • Target specifications (how the target is addressing identified dependencies, impacts, risks and opportunities)
  • Defined target level to achieve, and milestones and interim targets
  • Target setting process (involvement of biodiversity credits, whether and how stakeholders have been involved)
  • Target scope and horizon (geographical scope, operations and value chain covered, and period to which the target applies)
  • Monitoring (performance against disclosed metrics, and metrics used to evaluate performance and effectiveness)

Dependencies that give rise to material risks and opportunities

Material impacts that give rise to material risks and opportunities

Material risks and opportunities:

  • Effects on financial position and cash flows
  • Effects on the organisation’s business model and value chain
  • Effects on strategy and decision making,
  • Whether they are likely to materialise in short, medium and long term

Targets:

  • Target specifications (the specific quantitative or qualitative target set, milestones and interim targets)
  • Target setting process (metric used to monitor progress)
  • Target scope and horizon (time period and base period from which the target is measured)
  • Monitoring of progress (monitoring metrics, performance against each target and analysis of trends or changes, and revisions to the target)

Engagement with Indigenous Communities and relevant stakeholders

  • Yes, engagement regarded as crucial and has accompanying guidance
  • Yes, but limited guidance on how to conduct engagement activities
  • Yes, but no specific guidance

Meet the authors

Simon Brennan

Head

Simon Brennan leads Deloitte’s EMEA Sustainability Regulation Hub. Organisations are setting ambitious targets as they journey to become sustainable. The Hub is a source of critical insight and advice to support businesses to better understand and respond to new regulatory requirements, and to assess how best to transform business strategies and operating models.

Ruth Kilsby

Senior Consultant

Ruth Kilsby is a M12 Senior Consultant within Deloitte’s EMEA Sustainability Regulation Hub. She supports decarbonisation work by researching and analysing the direction and scope of regulations related to green industrial policy, greenwashing, climate transition planning and nature. Before she joined Deloitte, she worked in environmental public affairs and advised clients on a variety of communication projects. She has an MSc in sustainability and management.

Ramon Bravo Gonzalez

Senior Manager

Ramon is Senior Manager at Deloitte’s EMEA Sustainability Regulation Hub. He has more than 15 years of experience in sustainability, economic analysis and public policy. Before joining Deloitte, he worked for Policy Navigation Group, a boutique consulting firm from the Washington, D.C. area, where he managed complex projects across a range of subjects for government, trade association, major corporate, academic, and non-profit organisation clients. These projects ranged from economic and policy analyses for advocacy, to regulatory impact analyses examining the changing nature of legislation and policy regulation. He was involved in a number of subject areas, including: regulatory burden of US federal agencies, economic evaluation of government programs, and economic analyses on the food industries, water regulation, energy efficiency and emerging chemical regulation. Ramon holds a Bachelor's degree in accounting and finance from the Universidad de las Américas Puebla (UDLAP), a M.Sc in Environmental Management and Policy at the International Institute for Industrial Environmental Economics (IIIEE) at Lund University in Sweden and a PhD in Management from the University of Glasgow. During his PhD Ramon was also a visiting scholar at Columbia Business School in New York City. Ramon has also served as an adjunct lecturer in advocacy, policy and marketing at the University of Glasgow’s Adam Smith Business School.