TCFD and TNFD
The prominence of environmental, social and governance (ESG) values in the financial sector is rapidly developing and the integration of these values into finance has had and will continue to have significant ramifications for the allocation of capital for years to come. Developing alongside this global trend is the common objective shared by Taskforce on Climate-related Financial Disclosures (TCFD) and the Taskforce on Nature Related Financial Disclosures (TNFD): to contribute to greater ESG integration via effectively streamlining ESG disclosure metrics.
Established in 2015 by the Financial Stability Board (FSB), the TCFD was designed to address the financial risks associated with climate change. It provided necessary frameworks for companies to provide climate related information in their financial filings. It also allows financial institutions to effectively assess and disclose the potential risks of climate change on their overall business structures, as well as operations and supply chains. The framework involves a number of key areas,e.g., governance, strategy and risk management. The streamlined nature of the taskforce, as well as its structure and collaborative identity could means increased consistency in sustainability reporting and the facilitation of more frequent climate related disclosures, allowing capital market participants to make well informed decisions .
A review of the TCFD by the Financial Conduct Authority (FCA) speaks to the success of the framework. By collating quantitative and qualitative data from over 100 companies, the FCA were able to assess whether the framework had been successful in streamlining climate reporting standards or not. There was a significant increase in the number of companies that made disclosures aligning partially or mostly with the TCFD framework in 2022, as compared to the previous year. (Review of TCFD-aligned disclosures, FCA). The progression of the framework, with the engagement of financial institutions and businesses, has aided the development of industry towards a more positive impact on climate change.
Launched a number of years after the TCFD, the TNFD recognized the importance of biodiversity and nature-related risks. It was created as a contemporary version of the TNFD, and encouraged businesses to disclose their nature related risks and biodiversity opportunities. The integration of nature related disclosures into financial reporting facilitates better decision making by financial institutions and businesses. This could lead to investments that support the conservation of biodiversity and more sustainable industry practices.
The TNFD has continued to develop its original beta framework, releasing second, third and fourth iterations. Its March 2023 version included a tiered approach to disclosure metrics. Whilst it was built on the design of the TCFD, the TNFD has more than made its own mark on the financial industries. Endorsed by market participants and other stakeholders, and with over 200 companies implementing the draft strategy, the TNFD continues to drive towards its ultimate goal of “directing capital funds into nature related investments.”
Both the TCFD and the TNFD recognize and emphasise the importance of sharing climate and nature related information in managing and assessing ESG risks in the financial industry. The two taskforces together allow organisations to align their policies and strategies with sustainability goals through the provision of easy-to-follow metrics, emphasizing the desire to create a credible commitment to ESG management. The incorporation of both the public and private sectors in creating such taskforces is a testament to the shift in attitudes towards climate change from both the financial sector and their clients: “ongoing collaboration with our standards development partners and with regulators will also be critical to help codify the Taskforce’s recommendations so that nature-related reporting becomes standard business practice over time” (Elizabeth Mrema, TNFD Co-Chair and Deputy Executive Director of UNEP).