TNFD recommendations for nature-related risk management and disclosure: what does it mean for pension schemes?
The Taskforce on Nature-related Financial Disclosures (TNFD) has published the final version of its recommendations on a framework to identify, assess, manage and disclose nature-related issues.
The TNFD aims to do for nature what the Task Force on Climate-related Financial Disclosures (TCFD) did for climate, with the aim being to “position nature risk alongside financial, operational and climate risk and help to shift capital flows to nature-positive outcomes”. For these purposes, “nature” encompasses land, ocean, freshwater and atmosphere – and so goes further than the concept of “biodiversity”.
TNFD recommendations in a nutshell
The TNFD recommendations are based on the same four pillars as the TCFD:
- Governance: the governance processes, controls and procedures the organisation uses to monitor and manage nature-related issues.
- Strategy: the approach the organisation uses to manage nature-related issues.
- Risk and impact management: the process used by the organisation to identify, assess, prioritise and monitor nature-related dependencies, impacts, risks and opportunities.
- Metrics and targets: the metrics and targets used to assess and manage material nature-related dependencies, impacts, risks and opportunities.
Each pillar is accompanied by a set of recommended disclosures, similar to how the TCFD is structured.
The TNFD has also published guidance for financial institutions, which sets out specific guidance for banks, assets managers and owners, and insurers.
You can read more about the TNFD recommendations in this blog post written by our ESG team.
What does it mean for pension schemes?
The TNFD is a voluntary framework. However, there is a growing awareness that nature-related risks can amount to financial risks. As a result, it will often be appropriate for trustees to consider these risks when making investment decisions in the same way as they consider other ESG factors. Pension schemes may therefore wish to consider adopting the recommendations as a useful method for identifying, assessing, managing and disclosing nature-related risks.
As to whether the TNFD recommendations will be incorporated into pensions law (and therefore become a legal requirement in the same way that TCFD is for larger pension schemes), the position is currently uncertain. The Government announced in its Green Finance Strategy published in March this year that it will explore in Q4 how the final TNFD recommendations should be incorporated in the UK. However, there has been no indication to date as to whether the same approach will be taken to pension schemes as was taken for TCFD.
We will continue to monitor developments closely. In the meantime, if you would like to discuss the issues raised in this blog post, please speak to your usual Linklaters contact.