This is an excerpt from 'The Future of ESGTech 2024' report.
Over the last decade, there has been a growing awareness of the financial risks posed by environmental factors. This led to the creation of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 and the Task Force on Nature-related Financial
Disclosures (TNFD) in 2021.
These initiatives aim to enhance transparency in capital markets regarding how climate change and nature loss can affect organisations' financial stability. The frameworks outline disclosure recommendations to encourage organisations to incorporate climate
and nature considerations into their risk management and strategic planning.
Additionally, investors can use these disclosures to allocate capital toward more eco-friendly endeavours. TCFD has become a global climate reporting standard with over 4,000 supporters worldwide and is now part of mandatory disclosure rules in various regions,
including the US, UK, and EU among others.
While the two frameworks share similarities, they also share a few fundamental differences, for instance, the frameworks have distinct origins and organisational structures.
The TCFD was established by the Financial Stability Board (FSB) at the request of the G20, with Michael Bloomberg as its chair, making it industry led but closely tied to financial regulators. In contrast, the TNFD was founded by a diverse group of financial
institutions, corporates, and market service providers and is not formally linked to the FSB or G20. However, it receives funding from public agencies and international entities like the UN Development Programme.
Both task forces have similar member compositions, including representatives from financial institutions and corporates. Each operates with a dedicated secretariat, with the TNFD's secretariat managed by the UK's Green Finance Institute and the TCFD's by
Bloomberg L.P.
Laimonas Noreika, CEO and co-founder of HeavyFinance explained that the alignment and delivery of the TNFD and other frameworks are instrumental in addressing the interconnected challenges of climate and nature. “The TNFD and TCFD frameworks both recognise
the vital role that nature and climate play in financial risk management and disclosure. By considering the guidelines on nature-related risks, global finance gains a more comprehensive understanding of environmental impact.”
Noreika furthered that taking this holistic approach helps institutions better assess and manage their exposure to climate and nature-related risks, ensuring the long-term sustainability of their investments in projects related to sustainable cities.
“The standardisation of reporting sustainable risk management and disclosure frameworks is gaining traction globally,” Noreika added. “These efforts enhance transparency and comparability across financial institutions, enabling investors and stakeholders
to make informed decisions. The frameworks help streamline reporting processes, reducing the reporting burden on institutions while improving the quality of information available to stakeholders.
Noreika continued: “Crucially, these frameworks address the pressing sustainability challenges faced by financial institutions. They enable institutions to assess and disclose their impacts on the environment, foster green investments, and navigate the transition
to a more sustainable and resilient financial system. By integrating climate and nature considerations into their strategies, financial institutions can play a pivotal role in supporting the development of sustainable cities and the broader transition to a
low-carbon, nature-positive economy.”
Daniel Stephens, senior partner, McKinsey & Company, explained that in the US, while these voluntary frameworks have been helpful in catalysing and structuring voluntary reporting, the industry is waiting for clarity on required reporting, especially from
the SEC, which, because of the scale of US markets, will be a critical component of eventual standardisation or reporting. “Our perspective is that the most critical part of reporting will be investor actionable data – in other words, information that can
give an investor a better understanding of the forward-looking growth prospects and risks of a given company based on its climate and nature footprint.”
What are the differences and challenges between frameworks?
Speaking to the difference between the two frameworks, Sasja Beslik, senior advisor for data analytics at Rimm Sustainability explained that TCFD is focused solely on disclosure of climate-related risks and opportunities, while the TNFD recommendations encourage
companies to produce integrated climate-nature disclosures, rather than just nature disclosures, and also to develop appropriate risk management processes. Some of these differences can be seen in the visual below.
Generally, frameworks provide good guidelines for companies, however lately there has been an overload of frameworks in this space. TNFD goes beyond climate into nature and in order to disclose on this nature assets need to be priced, which is not the case
today. I think it makes sense to have it as an indication of what companies will be expected to do but the level of complexity is so deep,” observed Beslik.
Michael Sheren, president of MVGX, noted that despite having some positive attributes, these frameworks are not binding and do little to actualise concrete progress.
This issue is not limited to the TCFD and TNFD, and is faced by other disclosure or standard-setting groups — such as climate accounting, the Integrity Council for the Voluntary Carbon Market (IC-VCM), and the Voluntary Carbon Markets Integrity Initiative
(VCMI) among others.
“Given that voluntary standards and disclosure requirements have failed to catalyse the climate transition at pace and scale required to meet Net Zero by 2050, policymakers should deliver binding policies to be integrated into the global and sovereign regulatory
regimes in order to accelerate climate action,” argued Sheren.
How will guidelines on nature-related risk impact global finance?
Nature-related risk frameworks like the TCFD and TNFD aim to transform global finance by enhancing transparency regarding climate and naturerelated risks. They encourage organisations to disclose and manage these risks, guiding investors toward eco-friendly
investments. Their influence on sustainability reporting, risk management, and strategic planning can lead to more resilient financial systems and support the transition to a low-carbon, nature-positive economy. However, pricing nature assets and achieving
binding policies are challenges they must address to make a substantial impact on global finance.
Beslik suggested that only assets with a measurable price and those available for trading are typically considered. For instance, the value of ecological functions and population in the Congo Basin or the price of a well-diversified fish stock isn't well-defined.
Therefore, the absence of clear pricing for nature makes it unlikely to significantly affect global finance at present. Beslik also highlighted a major challenge for finance in the context of sustainability: many sustainability issues are currently regarded
as external factors with no direct influence on financial performance. seen as externalities with no particular impact on the financial performance. “Unless we change this, any frameworks or reporting will not have any material impact on the changes we need.”
Kirsteen Harrison, environmental advisor at Zumo explained that the global finance market has a strong part to play in the transition to a more sustainable future. Mandates including the Corporate Sustainability Reporting Directive (CSRD) and International
Sustainability Standards Board (ISSB), will require sustainability reporting alongside financial reporting, in addition to the TCFD. “These vital frameworks call for transparent and audited data, and ways for corporates to measure and report on carbon footprints
at scale.”
This is where technology and innovation can come to play a meaningful part of the transition. Harrison stated that this is an area in which blockchain and tokenisation have a very strong use case — both in the tracking and showcasing of data, and in broadening
the accessibility and tradability of tokenised instruments such as energy attribute certificates or carbon credits.
“At Zumo, we continue to actively explore the tokenised use cases for ESG assets, and some members of our team are part of the founding members of the ETST, the Emerging Technologies Sustainability Taskforce, with the goal of providing robust input into
standard-setters’ organisations so that emerging technologies companies have what they need to ensure they adhere to sustainability practices.”
TCFD and TNFD looking forward
The past decade has witnessed a growing recognition of the financial risks associated with environmental factors, leading to the establishment the TCFD and TNFD. These frameworks aim to enhance transparency in capital markets, highlighting the impact of
climate change and nature loss on financial stability.
The role of these frameworks in driving sustainability and their alignment with evolving standards will play a critical part in the transition to a more sustainable global finance market. Additionally, technology, particularly blockchain and tokenisation,
can facilitate this transition by providing transparent and audited data and expanding the accessibility of ESG assets. This demonstrates the potential for innovative solutions to contribute to sustainability practices and standards.