On 21 March 2022, the US Securities and Exchange Commission (SEC) released a watershed proposal for global companies to disclose their climate-related risks to investors. In the same month, the global Task Force for Nature-related Financial Disclosures (TNFD) released its beta framework for companies and investors to report on their nature-related risks.
It is clear that the global climate and nature crises have secured their place as key areas of concern for the world’s corporations and investors. In this article, we explore this new era of risk disclosure and the opportunities it will create for teams restoring nature.
Central Banks and major financial regulators are putting pressure on global corporations to disclose their climate related risks. Early estimates indicate that unpriced climate risk spread across global capital markets exceeds US$50 trillion — making climate change the largest source of systemic financial risk in history.
The global Task Force on Climate-Related Financial Disclosures (TCFD) has identified two types of climate-related financial risk: (1) physical risk and (2) transition risk. Physical risk relates to negative financial outcomes caused by extreme weather events and expansion of tropical pests in temperate climates. Transition risk, in the context of climate change, is the risk inherent in changing strategies, policies or investments as society and industry work to reduce its reliance on carbon.
The accelerating loss of global biodiversity has also earned a seat at the table. Leading companies recognise that a prosperous business relies upon nature and the ecosystem services it provides. Evolving global trends in consumption, economic growth and structural inequalities are creating long-term nature-related risks for financial institutions to manage.
The Task Force on Nature-Related Financial Disclosures (TFND) is developing a framework to guide companies and investors on how best to report on nature-related risks. In March 2022, the TNFD released the latest version of the draft framework with a final version expected to be released in September 2023.
“Nature loss poses both risks and opportunities for business, now and in the future. More than half of the world’s economic output is moderately or highly dependent on nature.”
For many financial institutions, the process of reporting on climate and nature-related risk has already begun. Organisations are engaging external consultants to identify risks embedded within their portfolios and are exploring ways to report findings back to external stakeholders.
These emerging risk management activities are delivering new funding opportunities for teams developing nature-based solutions (NbS):
As global carbon emissions rise above 50 billion tCO2e, our global economy continues to be profoundly carbon intensive. The process of identifying, pricing and managing climate risks across capital markets will lead to the biggest repricing of assets in history. As organisations look for new ways to manage climate-related risk, experts predict that carbon will become the world’s single largest asset class.
As demands for nature-related risk mitigation increase, so too will investments into natural assets that support a variety of ecosystem services beyond carbon. This accelerating flow of private capital will play a fundamental role in establishing natural capital markets that incentivise the regeneration of biodiversity.
In this new era of climate and nature-related risk reporting, investors and companies will require extraordinary amounts of information to support mitigation strategies. Data will play a fundamental role in pricing risk and thus will have a sizeable impact on how fast new natural assets are developed, financed, and maintained.
NbS financiers now expect delivery partners to showcase an ability to deliver high integrity natural assets that successfully mitigate climate and nature-related risk. The days where teams restoring nature could deliver manual project performance reports via powerpoint and lengthy email threads are over. Moving forward, those wishing to compete for investment in NbS origination will require robust, real-time and dynamic data management and reporting systems that meet the needs of a growing pool of concerned stakeholders.
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