TNFD
Taskforce on Nature-related Financial Disclosures:
The Next Big Assignment for South Korean Companies
2024.07.01
Biodiversity, nature, and climate emerged as top topics in 2023, especially at COP28 in the UAE. Nature, in particular, received increased attention with the launch of the Taskforce on Nature-related Financial Disclosures' (TNFD) final recommendations for corporate disclosure. These subjects are expected to remain high priorities in 2024.
Importance of Nature and Biodiversity for Businesses
Why Do Companies Care About Nature and Biodiversity?
Many companies, including those in Korea, often underestimate their dependence on nature, yet economic activity is deeply intertwined with natural systems. Approximately 55% of global GDP, around $58 trillion (76 quadrillion won), shows a moderate to high dependency on nature, according to PwC research. In reality, all economic activities rely on nature to some degree.
A stark example is the Korean National Institute of Fisheries Science reporting the highest recorded maritime temperatures on the Korean Peninsula in 2023. This led to the death of 36,221,000 farmed organisms, marking the second-largest die-off since 2018's 63,909,000. Such events highlight commercial vulnerabilities due to the interconnection between climate and nature crises. Climate change disrupts biological cycles and biodiversity, while the loss of biodiversity threatens ecosystem services essential to the economy.
< Percentage of GDP Reliant on Nature >
*Source: ENCORE database, EXIOBASE, S&P Capital iQ, PwC analysis
How Does Nature Impact Our Industries?
All sectors depend on nature and biodiversity to varying extents. The construction, agriculture, and food and beverage industries are the most dependent, collectively generating nearly $8 trillion in value, according to the World Economic Forum. Many other sectors, although less obvious, also rely on biodiversity. These dependencies range from direct extraction of natural resources to benefits like climate regulation, flood and drought protection, and pest control.
The TNFD Framework and Its Growing Support
Emerging Initiatives for Nature-related Financial Disclosures
Initiatives such as the TNFD are encouraging companies to manage the economic risks and opportunities arising from interactions with nature. TNFD, established in 2021, is the sister initiative of the Taskforce on Climate-related Financial Disclosures (TCFD), known for prompting companies to disclose their climate impacts.
A New Framework for Disclosing Nature-related Information
The TNFD represents a market-driven effort to integrate nature into financial and business considerations, aiming to redirect financial flows away from harmful practices. Comprising 40 members from corporate entities, financial institutions, and market service providers, the TNFD oversees assets exceeding $20 trillion (2.6 quadrillion won).
Over the past two years, the TNFD has developed a voluntary framework for companies and financial institutions to disclose their dependencies and impacts on nature. The finalized framework, released on September 18, 2023, follows a four-pillar approach to disclosure, requiring companies to report how they address nature-related risks and opportunities in governance, strategy, risk management, and impact management. This includes reporting established metrics and targets, applicable to all businesses across all sectors.
Additionally, the “LEAP” approach is an integrated assessment process for nature-related risk and opportunity management, which is different than the TCFD:
your interface with nature
your dependencies and impacts on nature
your nature-related risks and opportunities
to respond to nature-related risks and opportunities and to report on your material nature-related issues
This framework directs companies to conduct comprehensive assessments to identify and evaluate the impact of nature-related factors, encompassing both risks and opportunities.
Public and Private Support Growing Rapidly Worldwide, How About Korea?
Since its creation in late 2021, the TNFD has garnered support at nearly twice the pace of the TCFD during its development. As of December 2023, close to 1,400 global businesses have joined the TNFD Forum, demonstrating significant backing. Endorsements come from a wide range of international organizations, including the Network for Greening the Financial System, a group of central banks. However, Korean companies are lagging, with only 17 having joined the TNFD.
< Korean Corporations Registered to the TNFD >
Name of Organization | Sector | Type of Institution |
|---|---|---|
Association for Supporting the SDGs for the UN | Professional & Commercial services | Market association & consortia |
HLB | Professional & Commercial services | Financial Institution |
Hana Financial Group | Asset Management & Custody Activities | Financial Institution |
International ESG Association (IIESGA) | Education | Market association & consortia |
KB Financial Group Inc. | Commercial Banks | Financial Institution |
KT&G Corporation | Tobacco | Corporate |
POSCO | Metals & Mining | Corporate |
POSCO Chemical | Industrial Machinery & Goods | Corporate |
POSCO ENC | Engineering & Construction Services | Corporate |
POSCO Holdings | Iron & Steel Producers | Corporate |
SK Telecom | Telecommunication Services | Corporate |
Samsung Card Co. Ltd. | Consumer Finance | Financial Institution |
Samsung Fire & Marine Insurance | Insurance | Financial Institution |
Samsung Life Insurance | Insurance | Financial Institution |
Sinhan | Commercial Banks | Financial Institution |
University of Seoul | Education | Academic-Scientific |
Woori Financial Group | Commercial Banks | Financial Institution |
*Source: TNFD
The rising membership underscores a growing awareness of nature's importance and a recognition that engaging in voluntary initiatives positions businesses better for future regulatory changes. Similar to the TCFD, more companies are expected to join the TNFD, with the hope that Korean companies will follow this trend.
Challenges and Future Directions
An Emerging Framework Among Others
The TNFD is part of a broader landscape of financial and non-financial reporting frameworks, including CDP, TCFD, the Global Reporting Initiative (GRI), and the International Sustainability Standards Board (ISSB). These frameworks provide guidance and standards for companies to disclose their impacts on both climate and nature.
The TCFD has been integrated into the ISSB as part of the International Financial Reporting Standards’ comprehensive “S2” guidance. The TNFD is expected to follow a similar path over the next two years: gaining support, refining its guidelines based on feedback, and eventually integrating into the ISSB to influence regulated nature-related disclosure.
TNFD guidelines are anticipated to become standard practice for many companies. According to sample responses collected by TNFD in the summer of 2023, an average of 75% of Forum members plan to start disclosing using 2024 data by the financial year 2025. Although biodiversity and nature risks may currently seem distant for the Korean market, it is essential for Korean companies to consider these options as other markets begin integrating TNFD guidance into their reporting regulations.
Complexity and Challenges
Reporting on nature introduces complexities for firms, unlike climate reporting, which uses a universal metric for emissions, carbon dioxide equivalent. Nature reporting involves multiple considerations of biomes, species, natural resources, and human rights. The Taskforce aimed to balance academic rigor with business preferences for simpler metrics, allowing firms to choose metrics suitable for their sector and location. However, this flexibility has faced criticism for potential lack of standardization, making it difficult to compare companies.
These inconsistencies can negatively impact investors, regulators, and the companies themselves. Concerns about disclosure fatigue arise, particularly for Korean small and medium enterprises, which may struggle with the resources to implement another framework. Similar concerns were present with the TCFD, but it became clear that the costs of inaction outweighed those of disclosure.
Embracing Nature Reporting
While implementing TNFD in the Korean market presents initial challenges, embracing nature reporting will ultimately benefit corporations, investors, and lenders. Stakeholders are increasingly concerned about biodiversity and nature impacts within their supply chains and portfolios. Forward-thinking institutions recognize the risks associated with partners exposed to biodiversity damage from pesticides, water resource over-exploitation, and activities in high conservation value areas.
Choosing not to disclose nature and biodiversity-related activities for short-term gains may result in substantial future losses. Embracing the TNFD framework can prepare companies for upcoming regulatory changes and demonstrate a commitment to sustainability, enhancing their long-term resilience and reputation.