TNFD: Are you prepared for biodiversity reporting?

Key takeaways:

• Voluntary reporting on nature and biodiversity is emerging, with formal requirements rapidly following
• Many banks are leveraging their existing work and disclosures on climate risk, but this makes it harder to assess specific action on nature and biodiversity
• Areas of greatest maturity are in sector policies and asset or client level due diligence, often managed as a reputational risk
• Moving to manage as a financial and credit risk requires substantial work in key areas such as data and scenarios
• To accelerate these efforts, many banks are building capacity through collaborative initiatives – but currently these still leave an ‘ambition to action’ gap, with significant effort required on implementation

Pressures on banks, asset managers and insurers to produce disclosures on natural capital and biodiversity continue to grow, most notably with December 2022’s Kunming-Montreal Global Biodiversity Framework signed by 186 governments committing to “ensure that…financial institutions… regularly monitor, assess, and transparently disclose their risks, dependencies and impacts on biodiversity… along their operations, supply and value chains and portfolios”.

Helping turn that ambition into reality has been the rapid progress of the Taskforce on Nature-related Financial Disclosures (TNFD) which seeks to support consistent disclosure by companies. The 28^th March marks a further step forward in TNFD’s journey, with the release of draft ‘disclosure metrics’ for financial institutions.

Starting to respond to these expectations, many banks have started including nature-related information in their 2022 annual reporting as they have published this over recent weeks. Jamie Tasker and Simon Connell looked at reports from around a dozen banks. Here’s what they found:

Governance: Capability building commenced, but detail is lacking

On Governance, we are transported back to the early days of climate change. Very few banks have Board members with domain experience or expertise in nature and biodiversity, with Westpac being notable for both having three ‘ESG experts’ on its Board and specifically noting “the management of biodiversity” as a skill set they have access to as a result. Some banks are starting to address this skills gap through capability building, with Santander discussing how its Board training on climate change also includes biodiversity content. Despite longstanding approaches to managing nature and biodiversity risks through sectoral policies and due diligence, few banks provide detailed information on senior management’s oversight – with Credit Suisse being a notable exception.

Strategy: Big commitments signalling high ambition, though with integration yet to come

In this context, Strategy shows a mixed picture. With $500 billion a year of transition risk created by the Global Biodiversity Framework’s intention to “progressively reduce” incentives and subsidies harmful to biodiversity by 2030, and $200 billion of opportunity created by new capital mobilisation, nature is undoubtedly a strategic issue. In response, many banks have signed up to initiatives such as the Finance for Biodiversity Pledge or Business for Nature Call to Action which bring expectations of integration into strategy. Moves to achieve this are at an early stage – HSBC has specifically committed to develop a ‘Framework for Nature’ as part of its strategic ‘Climate Transition Plan’. As we saw in the governance pillar, many banks are taking enabling steps - with Santander undertaking a nature and biodiversity impact assessment, and Lloyds Banking Group noting it is building capabilities to “better understand and act on nature related risks and opportunities” whilst Deutsche Bank used its recent Sustainability Deep Dive to announce the formation of a ‘Finance for Nature’ expert group.   

Risk and Impact Management: Areas of maturity, but data remains a barrier

Central to action and disclosure will be access to biodiversity scenarios, and their gradual integration into climate scenario analysis. This will help accelerate action on Risk & Impact Management, where approaches remain focussed on mature tools such as the Equator Principles, application of IFC Performance Standard 6, and client level environmental due diligence approaches leveraging sector policies. Many banks have updated these, such as Citi’s new criteria for deforestation and biodiversity loss in agriculture. However, across the banking sector, many sector policies remain grounded in managing non-financial risks, rather than financial risks such as credit risk. Data remains a significant barrier in enhancing this and achieving impact management, especially when moving from asset focussed transactions through client relationships to sector portfolios. Lloyds Bank leveraged data from ENCORE and the UK’s Natural Capital Accounts to direct its focus on the agriculture sector. Westpac assessed impacts and dependencies and disclosed the top 10 sectors for each, and Barclays has noted its’ role in “development of emerging methodologies”, whilst HSBC have begun sample stress testing using nature-related scenarios. Banks are increasingly looking to partnerships to support their ambition, with Lloyds identifying the FAIRR initiative as “a key mechanism to collaboratively engage on biodiversity”, and Credit Suisse working through the Global Canopy and Zoological Society of London Aligned Accountability project. In many ways the data landscape feels like an echo of the early days of Taskforce on Climate Related Financial Disclosures (TCFD), where financial institutions are heavily reliant on their clients to disclose information and where client outreach and engagement will be critical to achieving this.

Metrics & Targets: Much work to do

The Metrics & Targets pillar unsurprisingly shows least progress – even the TNFD’s illustrative metrics for financial institutions in the v0.3 version represented a significant shift from current progress. Citi discloses that its Global Data & Insights team has explored the biodiversity data landscape and “has begun to consider how it can integrate such information across our business”, including as part of the TNFD Data Catalyst Group. There is hope that TNFD’s metrics can be used in sustainability linked financing structures and thus play a central role in unlocking private capital flows, as evidenced by Westpac who has already issued a sustainability-linked loan to North Queensland Airports with biodiversity and natural capital Key Performance Indicators (KPIs). However, despite these examples of progress, none of the banks we reviewed provided replicable metrics or targets on nature and biodiversity, contrary to the asset management sector where forward-thinking managers have already published them, such as BNP Paribas Asset Management reporting the results of its biodiversity footprint.

To learn more about how Baringa can support you on nature related financial disclosures, please get in touch with us.