How FIs are faring with the finalized TNFD recommendations

Explore the analysis of 50 global FIs examining how FIs nature-related disclosures align with the TNFD.

In brief

• Sixty-two percent of the TNFD’s recommendations are covered in FIs’ reports but the average quality of these disclosures is low at 18%.
  
• Progress also needs to be made to fully implement the TNFD and embed nature-related considerations into decision-making processes.
  
• FIs should assess the TNFD recommendations and consider how to develop transparent disclosures on their nature impacts, dependencies, risks and opportunities.

In an era marked by environmental challenges and mounting concerns over biodiversity loss, financial institutions (FIs) find themselves at the nexus of a global transformation. Human activities have pushed the boundaries of our planet, with six out of nine planetary boundaries – environmental limits within which humanity can safely operate – already exceeded.1 The services and benefits humanity and businesses derive from nature, underpin our economy with direct benefits alone amounting to an estimated US$125t annually, nearly 1.5 times the global GDP.2 The continued decline in these nature-based services poses not only systemic risks to society but also threatens economic and financial stability. 

Capital flows continue to support activities driving nature loss, compounding the risk of climate and nature-linked tipping points. The estimated biodiversity financing gap stands at an average US$711b per annum,3 highlighting the pressing need for a profound transformation of capital flows. The FS sector must therefore play a pivotal role in redirecting investments towards nature-positive activities. 

The challenge of nature-related disclosures

Until recently, the identification, assessment and management of nature-related impacts and dependencies were not widespread across the FS sector. This was partly due to the absence of clear, consistent and standardized market guidance.

However, the launch of the Taskforce on Nature-related Financial Disclosures (TNFD) in 2021 marked a turning point. More firms are increasingly focusing on the topic of nature and biodiversity. The TNFD, finalized on 18 September 2023, now provides comprehensive guidance for organizations, including FIs. To mark this milestone, EY teams analyzed the nature-related external disclosures4  from a global sample of 50 banks, insurers, asset managers and private equity firms. These institutions were evaluated on the quality5 and coverage6 of their disclosures across the four TNFD pillars: governance, strategy, risk and impact management, and metrics and targets. Here are the key findings:

Governance is the current focus

The TNFD aligns with the Taskforce on Climate-related Financial Disclosures’ (TCFD) four pillars but adds impact management to the risk pillar;

• Research conducted by EY teams reveals varying disclosure quality across pillars, with "Governance" scoring highest and "Metrics and targets" lowest in both quality and coverage.
• The lower performance for “Metrics and targets” can be explained by the historical lack of clear guidance on standardized biodiversity metrics for reporting and the limited data availability for FIs to report on their nature-related impacts and dependencies.
• High governance scores are consistent across sectors and mirrors firms' TCFD approach. Improving governance structures often marks the starting point for mobilization, applying lessons from climate-related responses.  

TNFD early adopters perform better

• FIs that have joined or endorsed TNFD score twice as well on both coverage and quality of disclosures compared to non-endorsing firms.
  
  
• Early adoption of TNFD recommendations correlates with a more mature approach to addressing nature-related issues. This also reflects learnings from TCFD where we have found that those FIs who have been disclosing for the longest and have the most iterations of reports score better, a trend likely to continue overtime with the TNFD. However, later adopters do have the benefit of more example disclosures to learn from and therefore will typically have a steeper improvement curve.

Digital tools are at the forefront

• Over a third of FIs are using specific tools as part of the TNFD’s “LEAP” (locate, evaluate, assess and prepare) approach to assess their impacts and dependencies on nature, and the associated risks and opportunities.
  
  
• Leading pilots draw on a mix of different tools and datasets to ensure a holistic assessment and are often partnerships or collaborations with a diverse set of organizations such as NGOs, corporates, other FIs, technology providers and specialist consultancies.

• Firms that harness tools and frameworks tend to have better-quality disclosures and higher coverage of disclosures.

• Widely used datasets and tools include Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE), Integrated Biodiversity Assessment Tool (IBAT), the World Wide Fund for Nature’s (WWF) Biodiversity and Water Risk Filters, Iceberg and the Global Biodiversity Score – the use of specialized data is expected to increase as firms integrate nature-related risks and opportunities into their decision-making.

Conclusion

The finalization of the TNFD framework represents a significant milestone in the journey toward greater awareness and action in the financial sector regarding integrating nature-related risks and opportunities into decision making. Although many challenges remain, including the lack of data on location relating to FIs’ financing activities and limited reporting by corporates on nature-related metrics, the result of this analysis demonstrates that there is action that the sector can take today.

Those that are seen to be leading have already taken steps to:

1. Educate and upskill key management teams and boards on biodiversity concepts, frameworks, and tools.
2. Identify and assess their nature-related impacts, dependencies, risks and opportunities, prioritising key areas of focus.
3. Develop a response and strategy to reduce impacts on and enhance biodiversity including identifying specific data requirements to ensure the ongoing oversight and management of risks and opportunities.

This is just the beginning of a longer journey. It’s unlikely there will be the same runway as there was for climate, so acting early will allow FIs to develop a considered and appropriate response.

FIs must continue to enhance the quality and coverage of their disclosures, align their governance structures, and develop strategies that contribute to halting and reversing biodiversity loss. By doing so, the FS industry can play a pivotal role in safeguarding our planet's natural capital while sustaining economic and financial stability for future generations.

This article is co-authored by Sean MacHale, Partner, Financial Services Climate Change Advisory and Sustainability Service, Ernst & Young Chartered Accountants; Laura Moss-Bromage, Senior Manager, Financial Services Climate Change and Sustainability Services, Ernst & Young LLP; Nicola Todd, Assistant Manager, Climate Change and Sustainability Services, Financial Services, Ernst & Young LLP; Hugh Garbutt, Assistant Manager, Climate Change and Sustainability Services, Financial Services, Ernst & Young LLP; Sujay Natson, Senior Consultant, Climate Change and Sustainability Services, Financial Services, Ernst & Young LLP; and Dylan Green, Senior Consultant, Climate Change and Sustainability Services, Financial Services, Ernst & Young LLP.