Taskforce on Nature-Related Financial Disclosures

The Taskforce on Nature-Related Financial Disclosures (TNFD) is an international initiative that builds on a model developed by the Taskforce on Climate-Related Financial Disclosures (TCFD).

The TNFD focuses on natural and environmental risks, including the loss of biodiversity and the degradation of ecosystems. In comparison, TCFD focuses on climate risk, an interdependent but distinct issue.

TNFD has recently published its disclosure framework’s fourth and final beta version. Launched in June 2021, the TNFD was tasked with developing an integrated risk management and disclosure framework for organisations to report and act on evolving nature-related risks.

The TNFD aims to provide a framework for organisations to report risks from biodiversity loss and ecosystem degradation.

Unlike climate risk with a measurable metric like global temperature, natural risk has no precise measure. The draft disclosures seek to change that and highlight disclosures and metrics related to core global disclosure metrics, core sector disclosure metrics, and additional disclosure metrics.

TNFD retains the four pillars of TCFD — Governance, Strategy, Risk Management, and Metrics and Targets. The diagram below highlights the key disclosures from TNFD.

With both TCFD and TNFD disclosures comping up, the non-financial reporting will likely become more comprehensive. The flip side would be increased reporting costs.

Image: TNFD website

Carbon Insetting

There is a lot of talk about carbon offsets, but little is heard about carbon insets. Carbon inset is a less controversial and equally powerful mechanism for carbon reduction. Carbon insetting is a powerful tool to achieve global net zero targets.

According to the International Platform for Insetting, “Insetting is a strategic mechanism used to scale effective nature-based solutions, enabling businesses to deliver against ambitious climate and sustainability goals and harmonize their operations with the ecosystems they depend upon.” Carbon inserting is often defined to be outside scope 1 and 2 emissions.

Compared to carbon offsets that involve buying carbon credits from unrelated third parties, companies invest in carbon reduction or removal projects along their own supply chains.

Three key features emerge: (a) it operates within the company’s value chain; (b) it utilizes nature-based solutions; and (c) does not require external markets.

Take the case of Nestle. It plants trees in and around its plantations. These trees protect crops, reduce water reliance and support workers on the very farms the company sources materials from. The trees not only capture carbon from the atmosphere but also generates credits to be used against their climate targets.

  Another example is Burberry. Luxury fashion firm Burberry has created a regeneration fund to support a new portfolio of carbon insetting projects that aim to deliver regenerative agriculture practices across its supply chain.

Carbon insets attack the root cause of the problem and are a better option. Carbon offsets should be used as the last resort.

Net Zero: Strategy and Reporting

A recent report by CDP suggests that less than 1% of the 18,600 companies surveyed by CDP have credible climate change plans to net zero. This result is surprising because achieving net zero is critical to the planet’s well-being. Without getting into a methodological debate, here are some thoughts on why this would be so:

  1. Many companies that provide CDP/sustainability disclosures provide them simply because others are doing so. They do not want to be left behind the competitors. 
  2. Providing such disclosures are short-term oriented and aim to gain brownie points from investors by improving their ESG ratings and scores.
  3. Customers, particularly in the B2B space, push for sustainable products and actions. This helps the customers improve their Scope 3 emissions performance. Many buyers have supplier policies that mandate sustainable actions by suppliers.
  4. Many a times, regulations require presenting of sustainability data. For instance, BRSR is a requirement, and required information needs to be provided. The intent is just to give enough information to keep the regulators and the investor community happy.

Building a sustainability strategy is hard and weaving it into the business strategy harder. However, if we need to achieve net zero targets, we need to take action now.

Climate Change and Superbugs

A recent UNEP report, Bracing for Superbugs, examines the relationship between climate change and superbugs. Antimicrobial products kill or slow the spread of microorganisms. They are an essential tool in battling infectious diseases. However, their effectiveness is now at risk because several antibiotic, antiviral, antiparasitic and antifungal treatments no longer work because of antimicrobial resistance (AMR). These bacteria, viruses and fungi that do not respond to antimicrobials are called superbugs.

Source: Bracing for Superbugs report

WHO estimates that by the year 2050, up to 10 million deaths could occur each year due to AMR and has significant implications for economic development and may push many people into poverty. 

AMR can be linked to the triple planetary crisis – climate change, biodiversity loss and pollution and waste.

Climate change: higher temperatures are associated with a higher frequency of horizontal gene transfer, a process that includes spreading antibiotic resistance genes among bacteria. The climate crisis also contributes to the emergence and spread of AMR in the environment due to the continuing disruption of the environment due to extreme weather patterns.

Biodiversity loss: Biodiversity and ecological systems are necessary for planetary health. Human activity and climate change have altered soil microbial diversity in recent decades. The loss of microbial diversity could lead to antibiotic resistance. 

Pollution and waste: It has been found that antimicrobial resistance genes are highly correlated with contaminated environments leading to higher AMR. The environmental contamination comes from discharges of both treated and untreated human and animal excreta; releases of chemical waste (including those from pharmaceutical manufacturing), and disposal of unused and expired antibiotics. Plastic pollution also harbours resistant microbes. 

The impact of AMR can be seen across several SDGs – 14. Life below water; 15. Life on Land; 1. No Poverty; 10. Reduced inequalities; 8. Decent Work and Economic Growth; and 17. Partnerships for the goals. 

Market Reaction to Corporate ESG News

Photo by Adeolu Eletu on Unsplash

A recent paper by George Serafeim and Aaron Yoon explores the market reaction to different ESG news. They analyze the market reaction to ESG news for 3,109 companies. They find that prices react only to financially material ESG news, and the reaction is larger for news that is positive, receives more news coverage, and is related to social capital issues. They conclude that investors are motivated by financial rather than nonpecuniary motives as they differentiate in their reactions based on whether the news is likely to affect fundamentals.

This paper has important implications:

  1. ESG news contains value-relevant information.
  2. Portfolio managers who integrate ESG ratings into their investment decisions will likely generate better returns.
  3. Investors need to understand that the market does not react to all types of ESG news equally; hence, specific types of news become important in generating returns.
  4. Given that price reaction is larger for positive ESG news, which receives more news coverage, and relates to social capital issues relative to natural or human capital issues, a market participant can focus on these news types in their capital allocation decisions.

Paper by Serafeim and Yoon: https://www.hbs.edu/ris/Publication%20Files/WP21-115_397685a0-a044-4f86-8e6a-e4b9a0769cc7.pdf