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Improving investor understanding when it comes to nature

ESG

21/10/2024

Whitepaper #3: Standards, frameworks and tools relating to nature

Michael Lewis

Head of Research, ESG

Steffen Kutscher

Lead Sustainability Frameworks

Otar Sarishvili, Sustainability Frameworks Specialist

Otar Sarishvili

Sustainability Frameworks Specialist

Senior Sustainability Strategy Manager

Annekathrin Mueller-Lohmann

Senior Sustainability Strategy Manager

a image depicting group of people

IN A NUTSHELL

  • In recent years, there has been a noticeable uptick in the evaluation by investors of businesses' dependencies and impacts on nature. We expect this trend will continue helped by action at the upcoming COP16 Biodiversity Summit in Colombia this month.
  • This is being accompanied by an increasing number of nature-related standards and frameworks such as the Task Force on Nature-related Financial Disclosures (TNFD), the Science Based Targets Network (SBTN) and the Finance for Biodiversity Foundation’s (FfB) Nature Target Setting Framework.
  • These frameworks are helping investors to incorporate nature-related risks and opportunities into the investment decision-making process. However, there remains a notable disparity when it comes to company reporting in the realm of nature compared to climate.
  • Despite the challenges, materiality heatmaps and biodiversity footprint analysis are readily available tools that can be deployed to assess nature dependencies and impacts at a portfolio level.
  • Of the many dependency and impact drivers on nature, one of the most important is freshwater use, particularly in the agricultural, chemicals, metals & mining and oil & gas sectors. This explains the increasing efforts among investors to assess and manage the water dimension from an investment standpoint.
  • While there is work underway which aims to improve the scale of nature-related reporting, more work needs to be conducted to capture nature-related dependencies and impacts in a company’s supply chain.

 

Introduction

In our third paper in this biodiversity series[1] we explore how nature-related standards and frameworks aim to improve investor understanding when it comes to nature. The paper is organized into four sections. The first section examines the steps investors are taking to understand and assess nature-related risk and opportunities at a portfolio level. The second section explores the efforts underway to address the challenges faced by investors to integrate nature-related risks and opportunities. The third section then examines some of the tools available for investors to assess the materiality of nature at a portfolio level. Following the conclusion, the appendix provides an overview of how the main nature-related standards and framework compare.

1 / Scoping nature from an investor perspective

1.1 Frameworks to support investor understanding of nature

In recent years, there has been a noticeable uptick in the need to evaluate businesses' dependencies and impacts on nature. According to a study conducted by GARP[2] approximately 30% of financial institutions (FI) participating in the study indicated that regulators are now mandating the disclosure of their nature-related risks and opportunities. This figure is expected to rise over time, driven by Europe’s Corporate Sustainability Reporting Directive (CSRD), the Sustainable Finance Disclosure Regulation (SFDR) and initiatives by central banks such as the Network for Greening the Financial System (NGFS)[3]

While there is no one-size-fits-all approach to the incorporation of sustainability factors such as nature into an asset managers’ investment process, global initiatives such as the Taskforce on Nature-related Financial Disclosures (TNFD), the Science Based Targets Network (SBTN) and the Nature Target Setting Framework[4] developed by Finance for Biodiversity Foundation (FfB), are supporting financial and non-financial organisations to incorporate nature considerations into financial and business decision-making processes.

Of these, the TNFD focuses on improving corporate reporting on nature with the aim of businesses incorporating nature-related risks and opportunities into their strategic planning (Refer to Table 1 in the appendix). The SBTN helps companies set and achieve targets to reduce negative impacts on nature while the FfB’s Framework provides asset managers and asset owners with recommended strategies and methodologies for setting nature-related goals, along with assistance in guiding their investment and capital allocation decisions to address nature loss.

1.2 Understanding, assessing and target setting

Investors typically need to adopt a three-step process of understanding nature-related exposures, first at a sector level and second at a location level. This then allows investors the ability to consider setting targets for relevant key performance indicators (KPIs).

The TNFD framework offers guidance on identifying, assessing, managing, and disclosing nature-related dependencies, impacts, risks, and opportunities. This includes the LEAP assessment, which encourages organizations to:

  • Locate its interface with nature.
  • Evaluate its dependencies and impacts on nature.
  • Assess its nature-related risks and opportunities.
  • Prepare to respond to nature-related risks and opportunities and to report on material nature-related issues.

To better serve the specific requirements of FIs, the TNFD has enhanced the LEAP approach for financial institutions, creating LEAP-FI. This guidance recommends that FIs disclose all core global risk and opportunity disclosure metrics, along with two core sector disclosure metrics.

 

Improving investor understanding when it comes to nature
Click here to download the full article
1

DWS Research Institute (December 2023). Nature-focused regulations start to get serious; DWS Research Institute (April 2024). Why companies are waking up to nature-s value *We wish to thank Dr. Katja Kirchstein and Matthias Kopp of WWF Deutschland for providing comments on a draft of this report

2

GARP (March 2024). Global survey of nature risk management at financial firms. The GARP survey covered 48 firms comprising 37 banks 7 asset managers and 4 insurers around the world https://www.garp.org/hubfs/Website/GRI/PDF/GRI%20Nature%20Risk%20Survey%202024_032524.pdf

3

NGFS (September 2023). Nature-related financial risks: a conceptual framework to guide action by central banks and supervisors.

4

Finance for Biodiversity (July 2024) Nature Target Setting Framework for Asset Managers and Asset Owners https://connect.financeforbiodiversity.org/hubfs/Docs/FFBI_ExeSummary_Guidance_on_nature_target_setting.pdf

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