Financial materiality of nature-related risks now clear: TNFD

A new paper from the Taskforce on Nature-related Financial Disclosures (TNFD) demonstrates the financial consequences of nature-related risks are already being felt by businesses and the global economy.

The report, jointly authored by the University of Oxford (as part of the Resilient Planet Finance Lab) and Global Canopy, found that while not adequately or consistently measured, the evidence of financial effects of nature-related risks for businesses and the economy is extensive.

It includes case studies that look at the impacts of water scarcity and stress increasing operating costs and capital expenditure, freshwater flooding leading to capital destruction, water shortages resulting in stranded assets, the fourfold increase in costs of biological invasions per decade, pests and pathogens destroying crop yields, deforestation increasing flood risks, and monocrop tree plantations reducing flood protections, among other things.

As a result, the report made several recommendations for different stakeholders.

For researchers and data providers, it said future research should include studies that consider whole causal chains to assess the financial materiality of such risks, a wider range of transmission channels and their financial effects, and complex and cascading compounding effects.

"There is a need for greater transparency among data providers on which nature-related impacts, dependencies and risks are included within data products, and which are excluded," it said.

For corporates and financial institutions, it said the findings emphasise the importance of assessment, management and disclosure of nature-related issues; a structured, integrated approach to materiality assessment; and integrating climate and nature within risk assessments.

It's also important to build capacity across organisations; strengthen company level data collection; establish clear materiality thresholds; and financial companies engaging with those in their portfolios on their own nature-related risk assessments.

"There is extensive evidence to demonstrate that information on nature-related risks is increasingly important to investors and that omitting, misstating or obscuring such information could reasonably be expected to influence investors' decisions," the report reads.

"The evidence in this report further supports the need for standardised reporting frameworks and clear scenarios to be provided by regulators and supervisors."

"This report lays out a clear base of evidence for what is surely becoming ever more plain to all: the increasing degradation and destruction of nature poses a financially material threat to businesses and financial institutions." Global Canopy executive director Niki Mardas said.

"In a rapidly heating world, nature degradation triggers and worsens floods, wildfires, droughts and other extreme events that cause significant financial damage. And the connection between nature and the economy is all-encompassing - investors who think they can simply diversify away from this risk are bringing old paradigms to a new problem.

"The snowballing impacts of nature risks are already affecting the insurance sector, leading to the threat of higher premiums and a growing arc of uninsurability. For companies, financial institutions, regulators and fiscal policymakers alike, the most effective way to mitigate these risks is to act now - to shift financial flows away from activities that harm nature, toward those that can maintain, restore and regenerate it. They will find they are in good company."