Podcast transcript: How can TNFD bring transparency on a path to save biodiversity?

Bruno Sarda

Hello, I'm Bruno Sarda and welcome to the EY Sustainability Matters podcast, our regular look at ESG and sustainability topics, and how they impact businesses around the globe. In this episode, the second one in our miniseries about ESG disclosures, we're going to talk about biodiversity and the emergence of natural capital accounting and nature-based disclosures. Today, we will be focusing particularly on the Taskforce on Nature-related Financial Disclosures, or the TNFD for short. The majority of focus in the sustainability space to date has been on the climate crisis, in part due to increased attention from investors and regulators, with biodiversity and depletion of natural resources receiving less attention from most companies.

However, biodiversity and natural capital play an important role in achieving a net-zero future, among other key roles. And businesses need to begin to recognize the strong dependency our economy and their companies have on nature. Most recently, the United Nations Biodiversity Conference, COP15, held in Montreal in December 2022, showcased this increased focus on developing nature-positive ambitions, with 15,000 total participants and representation from 188 governments and over 1000 companies. This was a welcome contrast from the limited attendance and representation from companies at previous biodiversity COPs, and COP15 ended in a historic agreement: the Kunming-Montreal Global Biodiversity Framework (or GBF) being signed with four overarching long-term goals to 2050, and 23 action-oriented global targets to be delivered by 2030, including to protect and restore 30% of the earth's land and water. So, as businesses and their stakeholders start to recognize biodiversity as a business priority, and begin to consider their impact and reliance on nature, there will be an increasing need for transparent natural capital disclosures to help achieve these global biodiversity targets. This is where the TNFD comes in. It was launched in 2021 and built on the success of the TCFD, the Taskforce on Climate-related Financial Disclosures, to help businesses move toward investments and decision-making that have a positive effect on nature and biodiversity, by paving a way for companies to assess, disclose and manage nature-related financial impacts and dependencies. The TNFD framework is said to be finalized in September 2023, and this past November 2022, the taskforce — which is a body of 40 individual taskforce members representing financial institutions, corporations and market services providers — released a third version of the TNFD beta framework and invited businesses to provide feedback on the framework. So today, with me, to discuss the importance of biodiversity, of the TNFD and its potential impact on businesses, I'm delighted to welcome Alexis Gazzo, a fellow EY member firm partner based in Paris, France, who is a member of the TNFD taskforce, as well as Marine de Bazelaire, Group Advisor on Natural Capital at HSBC and also a member of the TNFD taskforce. Welcome to both of you. So, Marine, let's start with you maybe for our listeners that may not be as familiar with biodiversity and natural capital. Could you provide an overview of what biodiversity and natural capital are, and the challenges facing both of these topics and their role in a net-zero future?

Marine de Bazelaire

Thank you very much Bruno, and Alexis, for inviting me on this podcast, and that, yes, I mean thank you also for starting with this question, because actually there's a lot of different terms that need to be defined for us all to understand how to tackle the issue. So, to start with, what do we mean by nature? Well, nature is a quite easy one. It refers to land, ocean, fresh water and atmosphere. When you hear atmosphere, you already hear climate. And so what is natural capital? Well, it consists of the stocks of nature-related assets like food, like water, like shelter, etc., and that capital gives rise to what we call flows of benefits to people and the economy, in other words, to ecosystem services like crop renovation, water purification, etc. And actually, the value of those so-called ecosystem services is estimated to be worth US$125–US$140 trillion by the OECD (Organisation for Economic Co-operation and Development). And so, what is biodiversity in all that? Well, biodiversity is what enables those ecosystem services delivered by nature to be productive, resilient and adaptable. That's how the Dasgupta report has actually defined biodiversity. I mean, we all know here that value does not mean price, and actually most of the value that is incurred by those ecosystem services is not priced in economic models. I mean, we get the price when we have a cost, and as a consequence, biodiversity is degrading at an unprecedented rate. And this poses a systemic risk to the global economy, and this is one of the reasons why the TNFD that you presented earlier was actually needed. Your last question was actually on the climate-nature nexus. Well, there is no net-zero without halting nature loss. Meaning you cannot envisage the global economy to reach the Paris agreement if you don't tackle at the same time nature-related issues. And the thing is that, given its depletion, if we don't reallocate capital now toward nature, protection and restoration, there's no chance that we will limit the temperature rise as we all want to.

Sarda

Well, thank you for this framing, Marine. I think that was extremely helpful to put a very complex set of topics, I think, in the frame of our conversation. So, Alexis, maybe if you can then explain to us in the context of all of these variables, what is in fact the Taskforce for Nature-related Financial Disclosures, or TNFD, and how is it seeking to address the challenges facing biodiversity loss and natural capital erosion?

Alexis Gazzo

Yes, thank you, Bruno, for the question, for inviting me, of course. Well, the TNFD is a voluntary initiative, as you mentioned, that is a bit walking in the same steps as the TCFD. So, the idea is really to provide a framework both for investors and corporates to understand, and to define risks and opportunities related to biodiversity and nature in general. So, the objective of the taskforce is to provide a toolbox, basically, of items that will support both issuers and investors to, on one hand, have an approach to be able to define their exposure to risks, dependencies, impacts in terms of biodiversity, and to support and identify a number of criteria and metrics also to manage these risks and opportunities. So, for the moment, the TNFD is trying to stay rather consistent with the way in which the TCFD was built. The idea is not to multiply too much frameworks for issuers and investors, but committed to have a consistency in the way in which the two initiatives are structured. It's an iterative process as you indicated, so there will be a next release of the beta framework at the end of March, which then will follow a last round of iteration so as to lead to a final release in the autumn of 2023. So, for me, it's a very structuring framework which will provide much more information on how to manage this subject matter of biodiversity, which, as Marine explained, is quite complex and largely very strategic for businesses. Although all don't know it as yet.

Sarda

Great. Well, thanks for that explanation. So, maybe bringing those two things together then, Marine, when based on all of the dimensions you describe which were really, you know, planetary, societal constructs in the TNFD ultimately is a mechanism for organizations to report on things. What does the TNFD in fact measure? What data will companies have to collect and report in order to align with it?

de Bazelaire

That's a very good question, and as Alexis said, it's still a work in progress. So, the final metrics that will be recommended to the ones adopted by the TNFD framework are not settled yet. There's obviously no lack of data. There's a really large pool of data that corporates can use to assess their exposure to nature-related risk, but the data is insufficient, and you need metrics and targets, actually, and so this is still a work in progress. The way the framework has been built for now is using what is called a LEAP approach, meaning an approach that is turning around locate, evaluate, assess, and prepare (LEAP) – locate your interface with nature, evaluate your dependencies and impacts, assess your risks and opportunities, prepare to respond to nature-related risks and opportunities, and report. And actually, that question of locating and evaluating, assessing, is around conducting a materiality assessment to start with, and it will really depend from one corporate to another, from one financial institution to another. It depends on what your footprint is, where are your relationships with nature, and actually we think that the Taskforce for Nature-related Financial Disclosures is giving the right path for corporates and financial institutions to start understanding their impact and dependency in relation to nature.

Sarda

Great. Thank you. So, both of you, as I mentioned earlier, were fortunate to have been two members of the TNFD taskforce. So, can you maybe tell us how organizations have so far been reacting to the beta framework, and how can, or should, businesses get involved to influence, maybe, the final stages of the framework. Maybe Alexis, let’s start with you.

Gazzo

Yeah, I think the TNFD framework is attracting a lot of attention. And we've seen already that at COP15, there was really a step change in the level of involvement, and of commitment too, of corporate and investors around this topic because COP15 was a bit similar to COP21 for climate, the first COP where you see a really massive contribution from the private sector. So, I think today, a lot of organizations are following quite closely how the TNFD is developing the beta framework. I think it’s several hundreds of corporates and investors as well which have engaged. Obviously, there are some righteous concerns about the possible burden in terms of additional metrics and data to manage.

You know, Marine mentioned there's no shortage of data, but actually the quantity of data to manage can be very important given the complexity of biodiversity, given the location-specific aspect of many impacts and dependencies on biodiversity. So, it's quite complex and obviously I think it creates some concern about the feasibility of applying these frameworks, knowing that, again, what is being developed in TNFD comes in articulation with other developments which are also very important around the International Sustainability Standards Board (ISSB), around the Corporate Sustainability Reporting Directive (CSRD) in Europe. So, I think on one hand, there is concern about the feasibility, to be very frank, of these new developments, and there's also a lot of interest on how to be a step in advance in understanding one's exposure to these risks and dependencies, and taking the right first steps to correctly identify, assess, evaluate these risks. And I think on that, the LEAP approach is one good way to get started, basically. I think the LEAP approach that Marine presented provides for issuers in particular, a way, basically, to guide the first steps to try to get a correct understanding of one's exposure. We are seeing a number of corporates who have engaged in deploying pilots with the TNFD, which is an interesting approach to get involved. So, I think there are many ways, either to really work by developing a pilot with TNFD, or simply to implement the LEAP approach on one side. And we are seeing a number of comments from different sectors which is interesting, getting their paths around the LEAP approach. So, I think it's very promising for the next stages knowing that today there are some very key questions such as what metrics we should use, how we can fix a target. Well, many of these questions are still pretty open because we don't yet have a completely harmonized view on what should be the metrics, how can we fix the target? I mean all these are work in progress.

Sarda

Great, thanks Alexis, and of course, Marine, you have an interesting position that the financial sector is both a producer of information, but also then the intended recipients of a lot of these disclosures. So, can you say from your perspective both from within HSBC and other financial institutions, what has that involvement with the beta framework and TNFD been so far?

de Bazelaire

Thank you for this question. We haven't seen a lot of financial institutions participating in the first beta framework. Then we've seen more with the second one. Even more with the third one. Now there's like more than 40 pilots that involve financial institutions. Yes, the topic is complex. Things that as we have said earlier, it's a systemic risk for the global economy. The Network for Greening the Financial System has released a report last year that is actually demonstrating that. More than half of the global economy is directly dependent on nature, actually. I mean, the global economy is fully dependent on nature, but half of it is directly dependent on nature, and so in any case, this topic needs to be addressed and I think that the approach of the TNFD is quite a smart one. It's like a software approach with this iterative process, with everyone being invited to test it, so to refine it, to understand a tradition with nature and to start to plan. We're not going to end up with a perfect solution in September. Hopefully, we're going to end up with a robust framework to engage in that approach and then it's a phased one. Remember for TCFD, the time frame was five years. We're going to see with TNFD how many years we propose companies to align with, when deciding to adopt the TNFD framework. Coming back to your question, there's more than 40 financial institutions that are now testing the beta framework to understand what is the impact of nature loss on their portfolio in different parts of the world?

Sarda

Great. Now thanks for that update, that's very interesting. So, as we talked about earlier, you know this COP15 that just took place at the end of 2022 and it was a historic agreement — that Kunming-Montreal Global Biodiversity Framework with the intent to protect and restore nature. And Alexis, you mentioned it was maybe the equivalent of what COP21 was for the climate movement, or that led to the Paris agreement and became truly a big inflection point in climate action. How do you see COP15 and this new agreement influencing private sector action in this space in the adoption of the TNFD? Marine, do you want to weigh in on that question?

de Bazelaire

Well as Alexis said, it's the first time that for a COP on biodiversity, the private sector is really there, represented, and asking to have clear goals and enablers to tackle that risk. And I think that the GBF, the Global Biodiversity Framework, came up actually with that overarching goal to a 2050 vision and a clear ambition for the global economy to halt and reverse nature loss by 2030. This target in itself is very important for the private sector. It's a first target. Then if you look at the 23 underlying targets to achieve that goal to halt and reverse nature loss by 2030, there's a lot of sub targets. And if you look at, for example, the subsidies that are harming nature, it has the power to change business models, and actually, it has also in itself, I mean, risks and opportunities for financial institutions to reallocate capital toward that kind of economy. If you look also, actually, as one that is very much aligned with the TNFD Target 15, it's certainly an enabler going forward for large corporates and financial institutions to start to understand what I've said earlier: that relation to nature. So, Target 15 is specifically saying: governments ensure that large corporates and financial institutions access, manage and report on their impacts and dependencies, and risks linked to nature along the value chain. And all those terms are the overarching principles of TNFD, except that in TNFD you add opportunities. But otherwise in the exact same words. So, I think it's supporting the thinking that is behind the TNFD. It's helping regulators to already turn toward an existing framework, even if it's still work in progress, to enforce that target going forward, and it's actually giving a clear signal to the global economy that they will have to assess that risk going forward.

Sarda

Yeah, great, thanks Marine. Maybe if I can follow up then, Alexis, on the question. So Marine just mentioned the Target 15, which is about asking governments to encourage companies. You mentioned in your earlier comments, some of these other framework developments, I think you referenced the ISSB, the International Sustainability Standards Board, as well as the CSRD, the Corporate Sustainability Reporting Directive, that itself has a bunch of underlying standards, some of which relate to biodiversity. How is the TNFD aligned with some of these other frameworks, maybe others like the SBTN, the Science Based Targets for Nature, or other standards, what efforts are being discussed, are underway to try to harmonize all of these different frameworks to ensure business, ultimately, adoption and comparability of data?

Gazzo

Yeah. Before I answer this question, I'd like just to say a word about the GBF and Target 15 and to complement what Marine said. It's really striking for me to hear a lot of companies and organizations saying that the GBF is at last the international framework that they were waiting for, to really have the structure on again what we are aiming for in terms of long-term biodiversity targets, and not only does it fix, well, goals and targets, and I already explained that, but it also comes with a number of supporting monitoring measures, the idea that at every COP, countries will come back to measure progress, to countries will need to build national biodiversity strategies and so forth. So, it's a whole package which I think is very encouraging in the objectives of where we’re targeting for 2030. And yes, Target 15 for me is also very interesting because it's specifically aiming at a private sector corporation and investors, which is not necessarily usual in international agreements like this. I mean you don't have a target like that in climate agreements. So, it's really interesting to see the Target 15 which, as you said, is asking governments to take policy measures so that companies will regularly monitor, assess and transparently disclose risk dependencies and impact. So again, I'm a bit repeating what Marine said but I think it's worth it because it's really something which is out of the ordinary. And yes, I think this will put pressure on more companies and I think these feed well with the TNFD which, you know, as we said earlier, is that you provide guidance on how you actually disclose and monitor your exposure. So, to come back to your question at last, so yes, the TNFD is a flexible framework. I mean it's there to provide guidance but to stay flexible so that it can be articulated with different jurisdictions, with different sort of rules that may exist. And so, there is a whole process from the start that has been developed to liaise with teams from ISSB, European Financial Reporting Advisory Group (EFRAG), CSRD, with SBTN on target setting and, again, you see some of the terms used by TNFD in the GBF, see some reference in TNFD that are also used at ESRS E4 and so on. So, there are connections with different teams working on these different initiatives. It's a good thing because again consistency is important, and again, the TNFD is being flexible because all these different initiatives are also work in progress. So basically, we're driving the car as we build it, and so you need to keep this form of flexibility and connectivity.

Sarda

Great, thank you for that, Alexis. So, I think as we start looking to wrap this conversation, I want to bring it back down to the fact that many of our listeners and many of the organizations looking to what the future means are in fact trying to sell for this at the organizational level. So maybe, Marine, if I can start with you, how is HSBC, as such a large global financial institution, preparing for all of these voluntary frameworks and standards and regulations coming up?

de Bazelaire

So, for now, we have conducted preliminary assessment using the ENCORE database which is a UNEP-WCMC initiative that enables any kind of financial institution to run part or full of its portfolio, so to understand what is its exposure to nature-related impacts and dependency. So that's the first exercise that we have done, for a third of our large corporate loan book.

Then finding out that that portfolio was mostly exposed to water-related risks, we have conducted specific stress tests of a very small part of our portfolio of heavy industry in Asia to understand what would be the impact and the financial impact of a three-month water containment, such as the one that happened in Cape Town a couple of years ago, which is a realistic scenario in the region where those industries were located. And we found out that a third of that portfolio would move to investment grade, meaning that that risk that we've never assessed before, that we've never looked at before, probably already occurred without us making the link between nature and that risk, and that we need to prepare to tackle it. So, we don't have all the answers yet, but we are starting to pilot that. Following those exercises, we have agreed to participate in four different pilots; one led in Asia, in the real estate sector along with WWF and EY; another one with UNEP FI on our continental Europe portfolio to see the impact of natural rubber on our portfolio in Europe. It was really a question of value chain, where we are able to track the right data to assess the impact of the tire industry, actually, and the automotive industry, its exposure to that risk. Then we've also joined another pilot with Phoenix, for our joint venture with Pollination, which is called Climate Asset Management, specifically on nature-related real assets, forestry, and agriculture, and see the resilience between different types of assets to nature-related risks, and then a fourth one, to assess the resilience of our agri-food portfolio in Europe. So, all of those are enabling all of us to understand how to assessthe risk, the result we can have before actually getting a larger approach that is still ahead of us in what is going to be the phased approach for our group going forward.

Sarda

Thank you so much for these very concrete examples. I think that'll give a lot of very practical insights to those listening. Alexis, you lead a lot of this work for EY, you work with many organizations that are not necessarily as far along. How can companies that aren't quite as mature, far along, on this as HSBC, begin to prepare for biodiversity and for capital disclosures? Where do you usually advise for them to start?

Gazzo

Well, I think there’s always a first step which is try to educate and to familiarize the management with biodiversity concepts, tools, frameworks. Always, I think, an important step in terms of trying to get a better understanding from the C-suite, basically, of the company, on what the topic is about, why does it matter, why is it a risk and opportunity as well, but also a risk for a number of businesses and the value chain? I think the other stuff is to try to use the existing frameworks, the existing guidance and here obviously TNFD is an important item. It may not be the only one; there are other sources which are interesting. But I think TNFD is a good way to basically map the different steps that you can embark in. And the first step of that LEAP approach developed by TNFD includes, is about the location aspect. And so, locating the different activities and trying to map potential impacts of these activities on different ecosystems in which they are located are very important. Obviously, it means that you need to manage both geographical data from your sites, but also data maybe in terms of purchasing, and other aspects which are more operational data from your sites. And you need to connect that with a number of data sets on the ecosystems. So that's a lot of data to manage, but that's why we're seeing more and more digital solutions to help navigate this.

And then beyond that, I think, the next steps will be, really, to try to continue on the LEAP approach, but in parallel to develop skills and technologies that would be useful going forward, because you get this process that you're embarking in, not just for a few days or weeks, but rather for a few years' time. We're really at the start of the curve in terms of the learning process. Many items are still missing, as we said, in terms of converging and fully accepted metrics or long-term scenarios. All this is not fully built, but it's important straight away, I think, to get a correct understanding of what this is about, and so educate and at least shape the LEAP approach, and this starts by beginning a very operational assessment of your sites and their exposure to different risks and dependencies.

Sarda

Well great, thanks for that Alexis, and this is such a rich topic, I could keep you both here for hours and not run out of things to learn, and things to unpack, but for the interest of time, maybe, to wrap up this insightful conversation, what are both of your hopes for how business in the private sector will support the achievement of this biodiversity goals and targets agreed at COP15? Maybe, Marine, start with you?

de Bazelaire

I mean, I think we're on the right track. I think there has been in a very short time period a lot of tools, enablers for the global economy to understand what's happening. I mean, remember the IPBES Report that was ringing the red light, was in 2019, and then the Dasgupta Report that made, for the first time, the comprehensive link between nature loss and the economy is from 2021, and now end of 2022, we have comprehensive global agreement with a lot of central banks actually looking at it to prepare for regulation, for large corporates and financial institutions to understand how to tackle that risk. So, I have hope, and I think that if I could give one advice is just to start, test it, start.

Sarda

Alexis.

Gazzo

Yes, on one hand, we took probably two decades to sort out the climate agenda, we fixed long-term targets, we fixed methodologies, tools, etc., and here we're trying to do a bit of the same thing for biodiversity in just a few years. So, you can say it's mission impossible, but I think, on the contrary, these two decades have taught us how to do it. So, there's a lot of things that are applicable. We mentioned the TCFD, which is the basis for the TNFD, and also, I think now there is a sense of urgency that is much more shared. And I think a lot of corporates, investors, policymakers, understand the fact that these risks are actually material, that we're seeing them, that they're impacting our businesses, our communities, and that we need to act now.

Sarda

Wonderful. Well, thank you again both for such a fascinating discussion and giving us real insight into this important area of the disclosures landscape. Thank you so much for joining us. This was so insightful and interesting, and I could literally go on all day.

As I said at the beginning of the episode, this is our second in our disclosures miniseries. You can find the first episode on ey.com or wherever you get your podcasts, as well as all past episodes of Sustainability Matters, and thank you for listening. If you enjoyed this episode of Sustainability Matters, we'd love for you to subscribe, and ratings, reviews and comments are also very welcome. And please also visit ey.com where you can find a wide range of related and interesting articles and reports that will help put these bigger topics in the context of your business priorities. I look forward to welcoming you on the next episode of Sustainability Matters. My name is Bruno Sarda. You can find me on LinkedIn, and feel free to connect with me there. Thanks so much for listening.

The views and opinions expressed in this episode are those of the individuals and do not reflect the official policy or position of EY or any other organization.