Climate change: TNFD guidance will support the green aims of pension trustees

The 14 recommendations state that: "nature is no longer a corporate social responsibility issue, but a core and strategic risk management issue alongside climate change”.

The TNFD said nature needs to be brought into the strategy, risk management and capital allocation decisions of business and finance, with fully integrated climate and nature considerations. It added that investing in the health and resilience of nature is good business practice, both as sound risk mitigation but also as a source of business opportunities.

Charlotte Cartwright, partner at Eversheds Sutherland, welcomed the guidance, and said: “The publication of the TNFD recommendations is a key step forward in supporting pension trustees with integrating nature-related considerations into their investment work.

“Nature is inherently linked to climate change and these recommendations and related guidance will be a valuable tool to answer the ‘how’ trustees can unite those two aspects of their environmental, social, and corporate governance (ESG) work.”

'Sheer volume' of ESG reporting

However, she added that pension trustees still remain constrained by their legal duties, and the relative lack of decision-useful data – compared with climate change more generally – remains a key hurdle that the industry is working hard to overcome.

Cartwright added: “There is also a risk that the sheer volume of ESG reporting – from legislative requirements and voluntary initiatives – is continuing to take up valuable time that could be spent taking action on the ground.”

The TNFD requires investors and companies to be aligned with the global policy goals and targets in the global biodiversity framework, including reporting their impact on the environment.

Michael Jones, partner at Eversheds Sutherland, said: “This should help to provide better visibility of investor companies’ exposure to and impact on environmental factors. Double materiality also feeds into, and supports, the universal owners concept, which says that large institutional asset owners (such as pension funds) own such a representative slice of the economy that it is impossible to diversify away from large system-wide risks.

“However, this two-way assessment will require far more granular data disclosure because investors and companies need to assess risk on a geographic, localised level, which is reliant on significant improvements in data coverage and data quality – this is the main challenge in the short term.”

The TNFD initiative has been led by 40 taskforce members who represent over $20trn in assets under management, it will now encourage voluntary market adoption of the recommendations and will track its progress every year.

David Craig, co-chair of the TNFD and founder and former CEO of Refinitiv, said: “Nature loss is accelerating, and businesses today are inadequately accounting for nature-related dependencies, impacts, risks and opportunities. Nature-risk is sitting in company cash flows and capital portfolios today.

“The costs of inaction are mounting quickly. Businesses and financial institutions now have the tools they need to take action.”

What are the TNFD recommendations

Recommendations for governance: 

A. Describe the board’s oversight of nature-related dependencies, impacts, risks and opportunities. 

B. Describe management’s role in assessing and managing nature-related dependencies, impacts, risks and opportunities. 

C. Describe the organisation’s human rights policies and engagement activities, and oversight by the board and management, with respect to indigenous peoples, local communities, affected and other stakeholders, in the organisation’s assessment of, and response to, nature-related dependencies, impacts, risks and opportunities. 

Recommendations for strategy:

A. Describe the nature-related dependencies, impacts, risks and opportunities the organisation has identified over the short, medium and long term. 

B. Describe the effect nature-related dependencies, impacts, risks and opportunities have had on the organisation’s business model, value chain, strategy and financial planning, as well as any transition plans or analysis in place. 

C. Describe the resilience of the organisation’s strategy to nature-related risks and opportunities, taking into consideration different scenarios. 

D. Disclose the locations of assets and/or activities in the organisation’s direct operations and, where possible, upstream and downstream value chains that meet the criteria for priority locations. 

Recommendations for risk & impact management: 

A(i) Describe the organisation’s processes for identifying, assessing and prioritising nature-related dependencies, impacts, risks and opportunities in its direct operations. 

A(ii) Describe the organisation’s processes for identifying, assessing and prioritising nature-related dependencies, impacts, risks and opportunities in its upstream and downstream value chains. 

B. Describe the organisation’s processes for managing nature-related dependencies, impacts, risks and opportunities. 

C. Describe how processes for identifying, assessing, prioritising and monitoring nature-related risks are integrated into and inform the organisation’s overall risk management processes. 

Recommendations for metrics & targets: 

A. Disclose the metrics used by the organisation to assess and manage material nature-related risks and opportunities in line with its strategy and risk management process. 

B. Disclose the metrics used by the organisation to assess and manage dependencies and impacts on nature. 

C. Describe the targets and goals used by the organisation to manage nature-related dependencies, impacts, risks and opportunities and its performance against these.