This is the first in a series of blogs about nature-related risk from the IFoA’s Biodiversity Working Party. The Taskforce for Nature-related Financial Disclosures (TNFD) is developing a nature-related risk and opportunities management framework. Its aim is to help financial institutions analyse their nature-related impacts and dependencies.
In March 2022, TNFD published a beta version of its proposal.
We’ve drawn on the TNFD’s definitions for the most commonly used terms in nature-related analyses. You can also view the TNFD’s definitions diagram.
Nature is considered a construct of four realms: land, ocean, freshwater and the atmosphere.
Natural capital is defined as the natural resources that provide benefits to us. On this basis, nature consists of stocks of environmental assets from which associated benefits flow to people and the economy.
Biomes are various regions of our planet distinguished by the type of plant life that the regions support. They reflect average rainfall and temperature patterns – for example, tropical rainforests, open ocean, waters, deserts or lakes.
Environmental assets are naturally occurring living and non-living components of the Earth – for example, forests, wetlands, coral reefs and agricultural areas. Ecosystems are an important part of these assets. The TNFD defines them as a dynamic complex of plants, animals and microorganisms interacting with each other and their non-living environment.
Ecosystems support the provision of ecosystem services, which deliver benefits to business. These services fall into three categories:
These are the contributions to benefits that are extracted or harvested from ecosystems – for example, timber in a forest and freshwater from a river.
These result from the ability of ecosystems to regulate biological processes and to influence climate, hydrological and biochemical cycles. They thereby maintain environmental conditions beneficial to individuals and society.
Provisioning services depend on these regulating and maintenance services. For example, the provision of freshwater depends on the ability of forests to absorb carbon and regulate climate change.
These relate to the perceived or actual qualities of ecosystems whose existence and functioning contribute to various cultural benefits. These include the recreational value of a forest or a coral reef for tourism.
Professor Sir Partha Dasgupta defines biodiversity as “the variety of life in all forms, and at all levels including genes, species and ecosystems”. (This definition appears in the 2021 report for the UK government ‘The Economics of Biodiversity: The Dasgupta Review’.)
Biodiversity is also sometimes used to refer to the living components of natural capital, such as species and habitats. It’s an essential characteristic of nature, critical to maintaining the:
An organisation that is reliant on ecosystem services to function (for example, reliable clean water supply, pollination of food crops, and flood protection) is dependent on these ecosystem services.
Organisations also impact environmental assets and ecosystem services and these impacts may be positive or negative. Short-term impacts that materially affect environmental assets could have medium and longer-term implications for the organisation if they are dependent on those assets.
Nature-related risks are the potential threats posed to an organisation linked to its own and other organisations’ dependencies on nature and their impacts on nature. These include both short and longer-term risks, which can be further categorised into physical and transition risks.
Nature-related opportunities are activities that create positive outcomes for organisations and nature by avoiding or reducing negative impact on nature or contributing to its restoration. Nature-related opportunities can occur:
The latter includes implementation of nature-based solutions (or support for them through financing or insurance).
We will cover how an organisation is affected by these nature-related risks and opportunities in another blog.
To find out more about the work of the Biodiversity Working Party, visit our website.
