Biodiversity loss is one of the greatest challenges facing humanity. This series of blogs, from the IFoA’s Biodiversity Working Group, explores how this could impact companies, countries, and economies.
In this blog series:
International organisations, regulators, and corporates are working on the development of reporting standards for biodiversity and nature-related risks. Their efforts are part of a wider focus on sustainability risk reporting that aims to ensure a consistent approach to disclosures.
In part 3 of this series, we consider some of the more advanced initiatives on biodiversity risk reporting. We start with a business-led initiative and end with recent development in EU regulation.
The Taskforce on Nature-related Financial Disclosures (TNFD) is a global, market-led initiative, supported by the UN and backed by the G7 and G20. Its mission is to deliver a risk management and disclosure framework for organisations to (voluntarily) report and act on evolving nature-related risks and opportunities.
The framework could be used by business and financial institutions of different sizes, sectors, and jurisdictions, irrespective of their preferred or required approach to materiality. The aim is for businesses to support the halting and reversing of nature loss, achieve nature-positive outcomes, and mitigate and manage nature-related risks. They would do this by collectively and consistently identifying, assessing, managing, and disclosing nature-related dependencies, impacts, risks, and opportunities.
In Q1 2022 the TNFD released its draft framework for biodiversity risk reporting. In November 2022, they published the third beta version of its prototype risk management and opportunity disclosure framework (version 0.3).
The TNFD’s complete recommendations (version 1.0) will be published in September 2023.
The Financial Conduct Authority (FCA) in the UK have said they will consult in Q3 2023 on proposals to make TNFD reporting mandatory.
In 2021, the IFRS Foundation announced the formation of the International Sustainability Standards Board (ISSB). The aim was to provide a baseline standard for sustainability reporting that can be adopted by companies globally, with an initial focus on climate disclosures.
The ISSB decided during its October 2022 meeting they will research incremental enhancements that complement the Climate-related Disclosures Standard (S2), including relating to natural ecosystems.
In its session on 13 December 2022, the ISSB then agreed how to describe sustainability. It clarified that a company’s ability to deliver value for its investors is inextricably linked to:
The decision builds on concepts from the Integrated Reporting Framework, which helps companies articulate how they use and affect resources.
To deliver this, the ISSB will consider the work of the TNFD and other nature-related standards and disclosures where they relate to investors’ information needs.
The ISSB standards on sustainability risks disclosures are expected to be published in 2023.
EU regulation on sustainability reporting is among the most ambitious. EU law requires all large European companies (about 50,000 in total) to disclose information on their risks and opportunities arising from social and environmental issues. It requires the same for the impacts of their activities on people and the environment.
On 5 January 2023 the Corporate Sustainability Reporting Directive (CSRD) came into force. It will apply for the first time in financial years 2024 for reports published in 2025. This new directive modernises and strengthens the rules about the social and environmental information that companies must report (including biodiversity and ecosystems). The directive will apply to the consolidated group position for entities with operations of more than €150 million in 2028 for reports published in 2029.
Companies subject to the directive will have to report according to the European Sustainability Reporting Standards (ESRS). These outline reporting requirements across 12 issues, 5 of which focus on the environment. That is, climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use, and circular economy.
The standards introduce the principle of double materiality in their reporting practices. This means that in their reports, companies will need to cover one of 2 types of activities. One is activities that have a material impact on sustainability areas (for example, on biodiversity and ecosystems). The other is activities that are financially impacted by a sustainability area. For a definition of double materiality see: [Draft] ESRS 1 General requirements (780 KB PDF)
The standards are developed by the European Financial Reporting Advisory Group (EFRAG), an independent body gathering various stakeholders. It was appointed by the European commission.
The latest version of the standards was approved by EFRAG in November 2022. The European Commission and EFRAG are working with the ISSB to agree a framework for maximising interoperability of their standards and aligning on key disclosures.
