investment viewpoints
The TNFD: bringing nature onto the balance sheet
In this second Q&A of a series with LOIM experts, Portfolio Manager Alina Donets considers what the Taskforce on Nature-Related Financial Disclosures (TNFD) framework means for companies and investors. The first Q&A insight discussed how the TNFD standardises guidance to support business and finance in integrating nature into their decision-making.
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Q1. What is the remit of TNFD? Is there value for corporations or investors?
Corporations have focused on growth and profits for centuries. A decade ago, attention shifted to sustainability. The first step was to understand the misuse of carbon and how this impacts the planet as well as companies’ income statements. Previously, this was a theoretical exercise; fast forward to today, when significant risks and opportunities are emerging from climate change, in turn shifting profit pools and the cost of capital.
Looking forward, we need to recognise the wider scope of environmental challenges, and consider nature holistically. The TNFD is an important tool in this context. It enables corporations and investors to understand the scope of the challenges, the source of the opportunities and the speed of progress towards nature-positive investment.
Putting these considerations at the fore for companies and investors will allow for more effective allocation of capital. For corporates, the framework will bring more information about business risk assessments, investment prioritisation, and the ability to capture success. For financial institutions, it will play an important role in risk management, capturing pockets of opportunities and determining asset allocation, while serving as a tool to accelerate the transition to nature-positive world.
Q2. What is the business case for nature, both in terms of opportunities and risk?
Nature is an essential input in the global economy as physical capital and as an ecoservice. With this input deteriorating, both in quality and quantity, GDP runs the risk of declining.
First, we need to understand the main risks inherent in corporations. The TNFD allows for flexibility – while grounding the guidelines on scientific principles – in defining materiality and risk exposures to single businesses. These insights, we believe, will serve their purpose internally within the organisations themselves as a result of the incremental risk exposure they uncover.
Second, when seeking opportunities, companies will be able to have a more systematic approach to capital allocation priorities. During our engagement activities, we have already witnessed companies internalising frameworks like the TNFD to better align and merge innovation and business-management practices. Building further on this understanding will equip companies well to prioritise growth investments – we believe that financial metrics will be increasingly tightly correlated with the nature-positive characteristics.
Q3. How should investors approach the TNFD?
As investors, we have a fiduciary duty to our clients and a responsibility to the planet. A tool like the TNFD helps achieve these responsibilities more effectively by providing better systematic insights into corporate activities and their impact on nature.
Investors can utilise the data from TNFD-aligned disclosures to improve their financial performance. This arises from investors assessing risk exposure in their portfolios more consistently, observing comparable metrics and benefitting from increased disclosure. Equally, investors can potentially enhance their returns by targeting additional alpha that could emanate from shifts in profit pools toward solutions that resolve or adapt to a nature-protective economic model.
As a consequence, investors can make conscious decisions to allocate capital to areas of perceived challenges such as: prioritising investments in the bio-economy, or protecting water resources, or using disclosure and lagging performance in active engagements as a tool for driving change.
The effect of directing investments to certain publicly listed companies results in a lower cost of capital, creating powerful effects that should not be underestimated: it unlocks greater opportunities for growth and innovation for the beneficiary companies.
Q4. How can companies use this initiative to advance a nature agenda?
It is important to understand the nature of the TNFD’s metrics, no pun intended. The main questions for corporates should be: what the initiative means for the business, and how it can be translated into financial benefits. We hope to see companies taking responsibility for the outcomes of the information gathering, and making strides to capture the opportunities unveiled.
As with any data, the true value will be created over time as corporations and capital providers can track progress and draw conclusions from the data provided.
Q5. How is LOIM’s Circular Economy strategy well-aligned with the principles of the TNFD recommendations?
As investors, LOIM welcomes the TNFD’s unified approach to key parameters and its more systematic approach to disclosing important nature-related information. The latest recommendations reinforce our conviction that the economy is transitioning towards a CLIC® economy – that is circular, lean, inclusive and clean – and geared towards leveraging the value creation opportunities that the environmental transition offers.
Our Circular Economy strategy invests in companies that are harnessing the productive and regenerative power of nature via the circular bioeconomy and preserving natural capital by transitioning to leaner forms of industry. By facilitating more transparency and risk management, the TNFD should help promote more circularity and, in turn, nature-positive outcomes.
As such, the metrics from TNFD disclosure will help support our investment theses with structured and comparable disclosures, and, we hope, galvanise more investment in the bio-economy and circular solutions. The design of our Circular Economy strategy is well-positioned to capture the opportunities.
What we’re trying to do essentially is bring nature onto the balance sheet, and recognise that there’s natural risk on company balance sheets and in investment portfolios today. Companies need to see that risk in order to respond to it. And so the TNFD is providing tools in order to do that.
Tony Goldner, executive director at the TNFD
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