Jane: [00:00:00] Hello and a very warm welcome to the LSEG Sustainable Growth Podcast, where we talk to leading experts on issues that touch on sustainability and finance. I'm Jane Goodland, and this week I had the pleasure of talking to Tony Goldner, who's the Executive Director of TNFD, or in long form, the Taskforce for Nature-related Financial Disclosure. We covered what TNFD is trying to achieve, the link between nature, business and finance and what TNFD is doing in Davos this week. But before we listen to the conversation, a quick reminder to follow us so you don't miss any future episodes. And also, don't forget to rate us on Spotify, Apple Podcasts, or any other platform you use right onto the main event.
Hi, Tony, thanks so much for joining us on the LSEG Sustainable Growth podcast. We really appreciate you dropping in, because I know you're in the middle of what is a very, very busy week for you. So, let’s get stuck in. Now, when I was preparing for this conversation, I did the thing that everyone does is I Googled TNFD, and it came back with an enormous amount of search results. In fact, it was something like getting on to 700,000 search results. So instead of us looking through the internet, why don't you tell us in your own words what is TNFD and why is it so important?
Tony: [00:01:22] Well, I think some of those search results might be for the Tilton Northfield Fire Department in New Hampshire.
Jane: [00:01:28] Quite possibly.
Tony: [00:01:29] But I think most of them are us. So, the Taskforce are Nature-related Financial Disclosures were set up following the precedent of the TCFD for Climate-related Disclosures. And we started our work in 2021, with the support of the G20 governments. And essentially our mandate was to create a corporate reporting framework and set of recommendations that cover the rest of nature other than just climate change. So, of course, TCFD, started in 2015, has done a great job and really set the pace and I think really changed both the mindset and the actions around corporate reporting on climate change. But they only cover half a dozen gases into the atmosphere. And so TNFD was born out of a growing recognition that we've got to cover the rest of nature, our economies and our businesses and our financial portfolios, our loan books are 100% dependent on the natural world. In the sciences, these are called ecosystem services. The flow of these benefits from nature that go into our business models and create value for companies and value for investors. We're 100% dependent on them. Without them, we would have no businesses whatsoever, whether it's water or pollination services from bees, whether it's soil quality or biomass from trees. These are the things that we use to create the goods and services in our economy. So, we have to start factoring those into business decision making. And with nature loss accelerating globally, not just from climate change, but from other, anthropogenic causes, we have to start looking at these other sources of nature related risk, not just the rising temperatures in the atmosphere and the consequences of that. So that was the rationale for TNFD's existence. We were launched two years ago, and we've followed essentially the playbook that TCFD created. We wanted to provide something that builds on the TCFD recommendations explicitly. So, we sort of shamelessly copied the approach, the language, the structure. Because frankly, that's what the market expected. That's what the market asked for. It's been quite a journey for most companies to start getting their climate reporting together. And it was very clear at the outset small changes in approach and language have big consequences for companies and investors. So, whatever we could do to provide consistency of approach, would be great. And so, we've really anchored in the TCFD approach. And of course, now if we fast forward two years to early 2024, TCFD has unsetted, those standards have gone into the global reporting baseline that's now being created. And so, we've also developed our recommendations to look ahead to the new sustainability landscape that's emerging. So that's how we've gone about building TNFD. And now, companies have got the climate and the rest of nature framework to be assessing risks to their organisation and their portfolios.
Jane: [00:04:22] Good. Thank you. That was that was a very, very comprehensive, answer to what is TNFD. That's great. And just to clarify, I suppose that, you talk about the fact that TNFD started up in 2021, who was behind that in the first place? Because I think that that perhaps is a little bit different to TCFD. So, tell me about who the originators were.
Tony: [00:04:43] Yeah. So, I think there was a few people coming up with similar ideas at the same time. There was a group of people at WWF who were thinking about, obviously, nature and the experience and the early work of TCFD and what else needed to be covered. There was also a gentleman called Andrew Mitchell at Global Canopy who was also looking at these issues. The UNDP was thinking about these issues in the UN context. And fortuitously, those people came together and realised there was there was something in this, and they brought those efforts together into what became a proposal to explore the idea of a TNFD. There was a 12 month scoping phase, if you like, which involved a very wide range of stakeholders from business, finance, government, science, community. Think over about 75 people were involved in that preparatory phase. And that's what gave birth to the beginning of the task force, the appointment of our co-chairs, David Craig, of course, formerly at LSEG and Elizabeth Marima from UN Environment Program. And then the task force members were appointed in late 2021.
Jane: [00:05:47] Great. Thank you. So, the next question, I suppose is, one that many people ask when we start talking about nature, is what's the link with capital markets and business. Now, you've talked about the fact that all businesses are dependent on nature in some way, shape or form. And so, we better start understanding that and being able to talk about that in more real terms for business and investors, but help us understand the link, because I'm sure that there's listeners who are thinking, I just can't really get my head around how a company, in any sector, how does this really make sense to ultimately their decisions around capital allocation or investment or how do investors think about companies in the context of nature? Have you got kind of a company or a case study, you can help us work that through?
Tony: [00:06:36] Yeah. Great. And I think look, the key new word in this conversation, which hasn't really featured in the climate discussions around climate risk, the word is dependency. So, on the nature side, the key word and the key question, the opening question, I would invite all companies and all investors to start asking is how is our business or how is our capital portfolio dependent on nature? And that one question I think will trigger a very productive line of inquiry. So, let's just take some practical examples. Think of a beverage company obviously has a critical dependence on a flow of steady, clean water from nature into their bottling plants and then into their products. Their products are inherently water dependent. So, if they are extracting water from areas where there's growing water stress, investors need to be aware of that risk facing the beverage companies. And of course, in a watershed, there are lots of different uses in a watershed. So, they all have a shared dependence on the same resource. And the actions of another player in that watershed may also impact on the on the actions of the beverage company. If there's a cement factory upstream and it pollutes the water, that that would have a material potential financial risk to the beverage company, let alone any changes in the water levels and the inherent resilience of that of that watershed itself. So that's just one example. But we often tend to think, well, this is just an issue for agriculture, forestry, fishing, things like the beverage industry. But let me give you another example. Semiconductors. Semiconductor stocks this year have skyrocketed on the back of interest in artificial intelligence and gaming, etc. but the production of the chips is inherently dependent on, again, the flow of steady supply of water as well as electricity. Without electricity and water, you can't make semiconductor chips. And the entire global economy is now dependent on access to semiconductor chips. In most of those chips come from East Asia, from Taiwan and South Korea. And in the last few years, those two countries have experienced unprecedented levels of drought. And the water that goes into the manufacturing plants comes from dams. And those dam levels have been at record low levels, in Taiwan, as low as 7 and 11% of the dam capacity. Some of the leading chip manufacturers, like TSMC, have been actually having to truck water into their facilities to keep production going. So those are just two examples, completely different sectors that dependence on a similar natural input. But the question is, are investors thinking about these risks to their returns to their capital portfolios and to the investment decisions they're making in companies and most companies? Most companies are not. And we're encouraging people to start asking those questions and doing that analysis.
Jane: [00:09:25] And I think that's the thing that's quite interesting about the nature debate is the timelines associated with these dependencies, some of them might be actually quite well, obviously, there's a permanent dependence on these resources, but the way in which that might then manifest as a risk to that business could be long term, short term, it could be any time. Right. So, I think there is a there's an urgency for investors and companies to be able to get a greater understanding about these dependencies quite quickly.
Tony: [00:10:10] There is and a lot of investors, of course, are now very familiar with, we've all educated ourselves over the last 5 to 10 years on climate science, and everyone's looking at parts per million and tracking that. Now the interesting thing with, the climate science is that a lot of it, we can see fairly linear progressions in levels in the atmosphere. So, there's an ability to forecast that out. And there's a lot of science that does that, and that informs investment decision making. A lot of the other nature issues that we have to now be thinking about, we have this added variable. It's like a wild card of this notion of tipping points, where an ecosystem can suddenly cross a threshold and go into accelerated decline. And the scientists are still exploring this and trying to figure this out. But that presents an additional layer of complexity for thinking about, for example, a watershed or a tropical rainforest ecosystem. As the science gets better around this notion of tipping points, that's going to be really important to inform decision making because investors could easily get caught by surprise. They may think something's on a long term, steady trend. And then suddenly the suddenly the vectors change, and the risk is much nearer to them than was anticipated. So, these are the things we all have to start coming to terms with.
Jane: [00:11:13] And I think, obviously information is the basis to all of this. And it's difficult to have a sensible conversation about this unless you've got decent information. So that's where TNFD comes in and starts being able to create the structure and the framework for information collection. So, let's move on to the TNFD. Now you published recommendations back in September. Tell me about how you got to that that point. Because that seems like you did that very quickly because, agreeing internationally, applicable reporting frameworks is notoriously difficult. So how did you guys do it so quickly?
Tony: [00:11:50] Well, there are a couple of elements to the approach we took. One, we committed to moving fast. Because the situation we face in terms of nature loss requires it. Number two, we had the great advantage of building on the approach, the language, and the structure of TCFD. And there was a very strong commitment from the outset, and I think a market expectation that we would do so. So, we had some of the basic architecture and building blocks from TCFD to build off, which was terrific. And number three, we knew that the 40 task force members themselves wouldn't be able to have all the answers and figure this out ourselves. So, we adopted what we call an open innovation approach, where we said, let's do this in a sort of software development mode, where we're putting out prototypes and inviting lots of feedback from the market and testing ideas. So, we issued four prototype versions of our recommendations and our framework. We had a huge amount of input from market participants from around the world, which is why we've got 780,000 web links because of the level of engagement. And I think that was the key to how we were able to come up with this in two years. And the market reaction since then has been really encouraging since September. People were very familiar with what we had developed because they'd participated in it, and they'd seen it evolving in stages. And I think there's a very strong sense that what we've come up with is both science-based but also practical to implement. So, at the core of it are 14 disclosure recommendations. That includes all 11 of the TCFD disclosure recommendations, which we thought were applicable to nature. And we just simply carried them over. So, we've only really added three new disclosures. The other 11 are familiar. And the great benefit of that is that if companies are already doing TCFD reporting, they're actually incredibly well placed to start doing TNFD reporting. And the idea is to try and move towards integrated disclosure statements covering climate and nature together, not two parallel sets of disclosure requirements, which, of course would be costly and duplicative.
Jane: [00:13:50] I was going to say that is going to be music to people's ears, that if they're already doing TCFD, then they're already well positioned to do TNFD. I was just going to ask, and I don't want to kind of put you on the spot, but the three additional recommendations, what are they, what are the three additional?
Tony: [00:14:08] Yeah. So, one of them is an additional governance requirement to describe the company's engagement with stakeholders, in particular indigenous peoples and local communities who are now the custodians, remarkably, of 80% of the world's remaining biodiversity. So, we thought that was particularly important for companies to be able to describe how they are considering and how they're engaging with the perspectives and the knowledge, the custodial knowledge, the knowledge of land by indigenous peoples and local communities when they're thinking about accessing resources in those territories because there is so much knowledge that's critical to retaining what we need to keep and preserve and then build back. So that's the first one. The second one relates to any activities or any locations where a company is interfacing with very sensitive parts of the world. So, ecologically sensitive areas, protected areas, those sorts of things. And we think that's important for two reasons. One, it's important from a public policy perspective because they've been designated sensitive areas for a reason. The second reason is that if you're in those sensitive locations and they are fragile, then that may be important material information for an investor signalling that there's a particular exposure in a fragile area. And so, there's legitimate questions there about is the company going to stay in that area? Is it going to try and relocate to an area that's less fragile, because there may be revenue attached to the operations there that could be at risk? So that was the second one. And the third one relates to disclosures around supply chain. So up and down supply chains. And of course, everyone's finding scope three reporting on the climate side hard. And so, we've spent quite a lot of time thinking about how we get people started on looking at supply chain issues in relation to nature.
Jane: [00:15:55] I was going to come on to supply chain, actually, because I think for lots of companies, they are likely to be one step removed from the first line of interaction with those fragile areas or that kind of natural resources. And so, I think that guidance around how you, deal with your supply chain, and think about this through the full value chain is really, really valuable because it gets a bit difficult for, let's say organisations like LSEG, and we've been doing work on our own nature based, assessment. And so, I can say first hand that actually it's quite a lot to get your head around when you're a global organisation. But not necessarily on the first line of kind of using and drawing those natural resources from the environment. So, I will be looking more at the guidance on that for sure. Let's talk about how TNFD fits with other reporting initiatives. And I come at this question from the perspective, you've already talked about TCFD and the alignment there, which is great. And of course, that is sort of moving into the ISSB world. So, I'm sure our listeners will be familiar with that. But I think, many people are hoping for a simplified corporate reporting regime around sustainability in the future. And for those companies who are impacted by the European CSRD directive, probably more so than most really thinking about how do we simplify this so we get to ultimately a set of sustainability accounts that meet the needs of all interested stakeholders. So tell me about kind of how much you think about the interaction between different frameworks and how closely you're working with some of those out there?
Tony: [00:17:35] Yeah. Well, interestingly, TNFD was launched a few weeks before the Glasgow COP26, and so was the ISSB. So, we both embarked on our journeys at the same time, and we've said right from the outset that we want to reinforce the notion of a global reporting baseline. And the ISSB, or the IFRS has been one of our 20 knowledge partners since the outset. So, we've been working very closely with the ISSB. We've been tracking what they've done on the S1 and S2 climate standards. And we had the great benefit that those standards came out a few months before our recommendations. So, we were able to fit, and adjust our language to make sure that it's as consistent as possible with the new S1 and S2 standards. And we were delighted to see on our launch in September at the New York Stock Exchange that the IFRS issued a press release saying, we welcome the TNFD recommendations and they're consistent with, the ISSB's new standards. So, we worked very hard to do that. And I think we'll continue to work closely with the ISSB to reinforce and support their efforts. And they've also signalled that they may be moving into Nature Standards later this year. And so, if and when they make that decision, we'll be there to fully support, and those efforts are leveraging the TNFD recommendations. The second the second thing, of course, that's been around for a long time are the GRI impact standards. And we've been also working very closely with GRI since the beginning. Another one of our knowledge partners and the GRI team is updating their biodiversity standards. We've been talking together closely about that so that the TNFD recommendations and the new GRI biodiversity standards are also going to be aligned, and we're hoping to have something to publish around that in the coming months. You mentioned CSRD and the new landscape in Europe. We've also been working with EFRAG, the European body, developing those standards since the outset. And even though the European standards came out before the TNFD recommendations, because we were working together, in parallel on the development of our respective efforts, there's been a lot of work done to make them aligned and consistent. I can share with you today, Jane, that we will be publishing before the end of January, a joint paper with EFRAG, on the alignment between the TNFD and the ESRF standards in Europe. And essentially it reinforces the consistency, but it provides European reporters with a very granular level of understanding about which bit connects or maps across to the various European standards. So overall, we've been working extremely well and extremely hard with our partners to make sure that our recommendations and TNFD is not providing standards. We're a recommendation provider, so we've been working really hard to make sure that our recommendations will cascade down into current, and new standards as they continue to evolve.
Jane: [00:20:28] That's good to hear. And, and long may this collaboration and alignment last. So, we've got to the point where you've got some recommendations out and obviously you want organisations to start using them. I mean, I would argue that obviously the last couple of years must have been incredibly hard work to get to this point. But really, the hard work really starts now because recommendations are great, but they're even better if people use them. Right? So, what are you going to do to try and get people to jump on the TNFD bandwagon? And how do you build momentum around the framework?
Tony: [00:21:04] So the good news, Jane, is that this week in Davos, we've announced a first cohort of early adopters of the TNFD recommendation. So, the market is actually already moving. And we're delighted that we've secured the support of over 250 organisations around the world. Just four months after the release of the recommendations. And those organisations are committing to starting to disclose using the TNFD recommendations in the next couple of financial years. FY 24 and FY 25. And so, the journey, the journey is starting. The disclosures will start coming through in the next reporting season. In fact, there's a few companies saying they're already working on disclosures based on FY 23, which is particularly exciting. So, the good news is the market's already moving. And I think this is a great validation of both the fact that the recommendations are science based and decision useful to investors, but also practical to use. And of course, that's really important because this is new. And we worked really hard to make sure that we created something that people could start acting on now. And so, we're really excited that over 250 organisations around the world have basically said, yes, we can get going. And that includes 100 financial institutions, including a number of the systemically important banks. It includes some of the world's biggest asset owners and asset managers and companies from real economy sectors around the world and from over 50 countries. So, we're really happy with the with the fact that everything's kicking off. So, phase two is definitely underway.
Jane: [00:22:37] I think that's a really important point that you make, which is about, you don't have to do everything all at once because it can be daunting for organisations who are who are only starting to think about nature and their business. So, for companies who are interested, I'm assuming that you'd say, take a look at the TNFD website. And if you do want to signal that you have an ambition to start, disclosing along those lines, you can sign up and, and put the company's name and indicate which financial year that you expect to start reporting in that way. So, it'll be great to see how those numbers tick up over time. But more importantly, actually over the next 1 to 2 years, see some of those reports actually coming out and being available for stakeholders to review and look at and get some inspiration from, hopefully.
Tony: [00:23:21] Yeah. And a number of companies have contacted us in the last few weeks saying, we're really excited about this, and we want to sign up, but we're not quite there yet in terms of the internal decision making, but we won't be far behind. And so, we will be announcing a sort of second cohort of additional companies and organisations signing up, at Cop 16, the CBD Cop 16, which will be in Colombia later this year. So certainly, have a look at the website. Contact us if you want to have a chat about where you're up to and then we will be celebrating a second group of adopters later this year for those who are interested.
Jane: [00:23:57] Great. So, as we wrap up, tell me, what's the next key steps for TNFD? If we're looking at 2024, what's the next big milestones for you guys?
Tony: [00:24:05] Yeah. So, there are three big priorities for us now that the recommendations are out. The first is continuing to scale market awareness that the recommendations are there and that there are risks unattended to on balance sheets and in investment portfolios related to nature that people really need to now be focused on. So, there's an education and awareness piece which we’ll be continuing to drive on. The second piece is going to be around encouraging and scaling market adoption, voluntary market adoption. Worth also mentioning that while we're a market led initiative encouraging voluntary market adoption, we don't have any regulatory power in any way. Governments are paying a lot of attention to TNFD, and our recommendations have been welcomed by many governments around the world. So as part of our market engagement and adoption program, we're also expecting to have more conversations with governments as they want to learn about what this might look like on a longer term trajectory into regulation. And then the third thing, of course, is, this is a new topic. People have struggled to get on top of climate. It's been a long journey for some. Their teams are small, and so we're very committed to helping to build market capabilities and the capacity in the market to start to absorb and assess and act on these issues. So, we've got a very exciting program of capability building initiatives that we're putting together with a range of partners, from education and training providers to the audit and assurance profession to stock exchanges. So, we're looking forward to collaborating with others to help the market build the capacity it needs to bring this on board and bring it in house. We recognise we're all starting from a low base. This is a new topic, but there's plenty to get started on and lots of work to do. And we're very committed to helping to catalyse an ecosystem of players to provide those services in the market.
Jane: [00:25:54] Sounds incredibly pragmatic and sensible, actually, giving people the information and knowledge and capability to do all of this. So, I, for one, am going to look out for that because I think that everyone could benefit from that. Indeed. So Tony, it's been lovely speaking to you. Thank you so much for spending time. What I know is a really super busy time for you. So good luck with the next steps, and I think the future is bright for TFND. Thank you so much. Indeed, Tony.
Tony: [00:26:20] Thanks so much, Jane. Great to be with you.
Jane: [00:26:24] So that's it for this week's episode of the LSEG Sustainable Growth Podcast. What a fascinating chat that was, and a big thanks to Tony for sparing his time to be with us today. So, if you've got questions, comments, or someone that you'd want us to talk to, then do get in touch by email at fmt@lseg.com. That's all from me but watch out for the next episode very soon.
