The state of nature-related disclosures in high-risk sectors

Nature and biodiversity are quickly becoming an important agenda item for policymakers, businesses and capital markets. In December 2023, the United Nations Climate Change Conference (COP28) grappled with the complex and inextricably linked challenges of climate change and nature loss, acknowledging that protecting nature and biodiversity is critical. With greater focus on the issue from policymakers, businesses and finance have similarly followed suit, realising that nature and biodiversity are critical to climate action.

The science agrees but has flown under the radar until now. Nature is being degraded at rates unparalleled in human history and as threats to biodiversity exponentially increases, so does the impetus for organisations to take responsibility and act.

In response to mounting investor demand, the Taskforce on Nature-related Financial Disclosures (TNFD) launched a voluntary nature reporting framework in September 2023 for corporates and financial institutions. This framework provides recommendations for reporting on nature-related impacts, dependencies, risks and opportunities, supporting financial institutions and corporates to integrate nature-related issues into decision making. Commitments for nature reporting in line with the TNFD framework is gathering momentum, with 416 adopters recorded as of 30 June 2024.¹

Nearly a year since the TNFD launched its framework, we sought to understand the current state of nature-related reporting: to what extent do nature-related disclosures by firms already align with the TNFD reporting requirements? What is the maturity and quality of firm disclosures on nature? How will firm disclosures likely evolve to meet emerging expectations?

Our latest report, ‘State of Nature-Related Disclosures: Assessing TNFD alignment of nature-related disclosures by firms in high-risk sectors’, spotlights 16 firms that are pushing the boundaries of current practice to provide investors with examples of sector-based benchmarks and identify gaps and challenges, with a goal to inform their company engagement on this topic.

We assess current nature-related reporting of the 16 firms against the TNFD’s 14 Core Disclosure Recommendations, focusing on two from each of the TNFD’s eight priority sectors of Extractives & Minerals Processing, Resource Transformation, Consumer Goods, Transportation, Food & Beverage, Infrastructure, Health Care, and Renewable Resources & Alternative Energy.

Firms have made strong progress in aligning disclosure practices with the TNFD since the launch of the framework in 2023; all 16 firms assessed have set relevant nature-related targets and nine out of 16 disclose information across the TNFD’s 14 Core Disclosure Recommendations relating to Governance, Strategy, Risk Management, and Target-Setting. We identified firms in each sector that were leading and lagging, as well as areas where disclosures by all firms in all sectors had satisfied all core recommendations or required improvement. An overview of insights across the priority sectors is outlined below: 

Governance

• The Board has ultimate responsibility for nature for firms in all eight sectors assessed, with clear oversight in reviewing and guiding the nature strategy for firms in seven out of eight sectors.
• Executive remuneration in five out of eight sectors is linked to assessing and managing nature-related dependencies, impacts, risks and opportunities, highlighting the growing roles that executives play in this area.
• Most firms did not demonstrate evidence for fully integrating engagement with Indigenous Peoples and local communities into the assessment and management of nature-related issues. 

Strategy

• The majority (60%) of firms assessed are already disclosing current and financial effects of nature-related issues, with the effects most pronounced in the firms from Extractives & Minerals Processing, Resource Transformation, and Consumer Goods.
• At the nature-loss driver level, land use change, exploitation of raw materials, and water scarcity are the most pressing nature-related issues faced by the firms assessed
• No company has assessed the resilience of its business to nature-loss.

Risk & impact management

• Ten firms from six sectors apply a double materiality lens, firms from Resource Transformation, and Food & Beverage did not state they applied a double materiality lens.
• Firms in six out of eight sectors are disclosing the phases in the risk management cycle for at least one nature-related issue
• Risk management processes are most clearly articulated among firms from Resource Transformation, Food & Beverage and Health Care.
• Disclosures on monitoring mechanisms are weak for most sectors and issues assessed, revealing a lack of accountability for nature-related key performance indicators.

Metrics & targets

• All firms assessed have set relevant nature-related targets.
• Firms assessed from Consumer Goods and Food & Beverage are partially to fully reporting at least 80% of the TNFD Recommended Core Global Metrics, compared to 60-70% by firms from Extractives & Minerals Processing, Infrastructure, Renewable Resources, and Resource Transformation. Firms assessed from Health Care & Transportation are collectively reporting on less than 50%.
• Firms in half of the sectors (50%); Consumer Goods, Renewable Resources & Alternative Energy, Food & Beverage, and Infrastructure have set ‘no deforestation’ and/or ‘no land clearing’ targets for upstream activities such as raw materials sourcing. 

Our report provides a snapshot on how firms are navigating and responding to the unique set of challenges, pressures and threats to business resilience that is arising from nature loss, how they are assessing these issues and the actions they are taking to respond. Here, we provide an overview of the key sector insights.

Firms have made strong progress in aligning their disclosures with the TNFD Core Recommendations in the short time since its launch less than a year ago. The First Sentier MUFG Sustainable Investment Institute, an independent research institute that develops research papers that are relevant to use, if appropriate, by First Sentier Investors’ investment teams and the broader sustainable investment community has outlined key recommendations to help in navigating this complex landscape, applicable to all sectors, to strengthen nature-related disclosures. These recommendations include:

• Disclosures should describe both the actions the organisation is taking in response to nature and the processes informing those actions
• Deepen understanding of how nature-loss is likely to impact business strategy resilience, ideally through scenario analysis
• Report transparently on how engagement with affected stakeholders, including indigenous and local communities, is integrated into the assessment and management of nature-related issues
• Ensure all nature-related targets align with SMART (specific, measurable, achievable, relevant, time-bound) criteria, with a focus on improving specificity and ambition
• Strengthen and clarify the language used in policy documents and codes of conduct so that it is clear what nature-related expectations are being imposed on the firm and its suppliers 

We also aim to provide guidance for investors to engage with companies on nature-related issues in their stewardship activities. 

¹ https://tnfd.global/engage/tnfd-adopters/#TNFD-Early-Adopters