Should nature be your next priority for ESG disclosure?

Authors: MLT Aikins ESG practice group

As Canadian regulators move to mandate corporate ESG disclosures on climate and supply chain due diligence, nature has emerged as a next key disclosure priority.

Beyond regulators, nature-related risks, like deforestation, are gaining scrutiny from shareholders. In recent weeks, the CEO and board members of Procter & Gamble (P&G) have come under renewed pressure from concerned shareholders and activist investors over their “failure to respond to shareholder concerns regarding risks posed by forest degradation.” The letter specifically references a complaint filed with the SEC in 2022 asserting that P&G’s claim to prohibit forest degradation is materially misleading to investors.” Demands include removal of the CEO or other board members and indicates that a report of the company’s efforts to eliminate deforestation and reduce supply chain-related risks is well over due.

Launched during New York Climate Week on September 19, 2023, the Task Force on Nature-Related Financial Disclosures (TNFD) recommendations and guidance are intended to assist companies in disclosing nature-related risks and opportunities to investors and other stakeholders.

The TNFD recommendations were developed over the last two years with four draft versions released for extensive public comment over that period. Importantly, the TNFD recommendations are built off market-leading frameworks like the Natural Capital Protocol published in 2016 to assist organizations in assessment and measurement.

The release of the TNFD recommendations comes 10 months after adoption of the Kunming-Montreal Global Biodiversity Framework (GBF) in December 2022 which pushed biodiversity loss to the forefront and set global targets to be achieved by 2030 and beyond. The TNFD recommendations are intended to help businesses operationalize Target 15 of the GBF to “assess and disclose biodiversity dependencies, impacts and risks, and reduce negative impacts.”

Continued Alignment with TCFD (and ISSB) Structure

Similar to the recently released International Sustainability Standards Board (ISSB) standards, IFRS S2 and S2, the TNFD Recommendations follow the Task Force on Climate-Related Financial Disclosures (TCFD) structure, with corporate disclosures under the categories of Governance, Strategy, Risk Management and Metrics and Targets. Alignment with the structure of the TCFD recommendations continues to be observed across many proposed ESG reporting rules, including the Canadian Securities Administrators’ (CSA) Proposed National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107) and the U.S. Securities and Exchange Commission’s proposed rule on climate-related disclosures.

Integration with ISSB Priorities and Standards

Following public release of the TNFD recommendations, the ISSB issued a congratulatory press release. In the release, the ISSB states that they will “look to the TNFD recommendations – where it relates to meeting the information needs of investors – in its future work.” The ISSB has recently completed a public consultation on its future priorities for sustainability research and standard-setting, with nature – specifically biodiversity, ecosystems and ecosystem services (BEES) being one of the top identified priorities. It is reasonable to expect that a future ISSB standard, aligned with the TNFD recommendations is likely to be developed. More details from the ISSB are expected in early 2024.

Key Nature-Related Topics and Metrics

To date, companies have struggled to make meaningful, consistent and comparable corporate disclosures on nature – both their impact on and impacts from nature across complex and diverse regions, sectors and regulatory landscapes. Through its work, the TNFD reviewed “over 3,000 nature-related metrics” from historical standards and frameworks but ultimately focused on key drivers of positive or negative change in nature including:

  • land/freshwater/ocean use change
  • climate change
  • pollution/pollution removal
  • resource use/replenishment
  • invasive alien species introduction/removal

The TNFD Recommendations identify three tiers of nature-related disclosure metrics:

  • core global metrics that will be required on a comply or explain basis,
  • core sector metrics for sector comparability, and
  • additional metrics for use where relevant and decision-useful.

There are 14 core global metrics which can be used a starting point for nature-related disclosures for all organizations. Core sector metrics were issued in draft for consultation purposes and are expected to be finalized later in 2023 or early 2024. The “climate-nature nexus” features prominently as one of the guiding principles of the TNFD and integrated climate-nature reporting is encouraged. In conjunction with the recommendations, the TNFD has provided guidance by sector and biome as well. Guidance on target setting has also been provided in alignment with the Science Based Targets Network (SBTN).

Engagement, Perspectives and Criticism

During the development of their recommendations, the TNFD attempted to engage with Indigenous Peoples and local communities through partnership with the International Union for Conservation of Nature. In response to feedback, the final TNFD recommendations include disclosures on the human rights policies, engagement activities and board oversight around assessing and responding to nature-related impacts, risks and opportunities for Indigenous Peoples, Local Communities, affected and other stakeholders. Feedback is pending from Indigenous organizations and communities on how well the final recommendations meet their diverse expectations and priorities.

The TNFD is a “market-led, science-based and government-supported global initiative” with the “Taskforce” consisting of 40 senior executives from financial institutions, corporations and market services providers. As part of the consultations for development of the TNFD Recommendations, over 1,000 organizations, including 47 organizations based in Canada, participated in the TNFD Forum. Companies like West Fraser Timber Co Ltd. state “in 2022 we joined the Taskforce on Nature-related Financial Disclosures (TNFD) Forum to understand how our governance processes and priorities can reflect those emerging requirements.” In what the TNFD describes as an “open innovation project,” 240 global organizations piloted the framework to inform the final recommendations and guidance materials.

Excitement around the release of the TNFD Recommendations at New York Climate Week has been tempered by outstanding concerns over the Taskforce’s ties to corporations, potential for it to facilitate corporate greenwashing and lack of regulatory involvement. Earlier in 2023, a joint letter from 62 environmental organizations was sent to the TNFD leadership, expressing concern that the TNFD framework is “distracting from, and undermining, real and sustainable solutions.” Similar to climate-related disclosures and the TCFD, until the TNFD recommendations are broadly used across the market and incorporated into regulatory requirements, these concerns will remain.

Implications for Canadian Business

Nature-related disclosures are certainly gaining prominence but the pathway to mandatory reporting for Canadian businesses remains unclear. As discussed in our previous article, Canadian regulators such as the CSA and the Office of the Superintendent of Financial Institutions (OSFI) have indicated their support for the ISSB and their intent to adopt ISSB requirements, either in whole or in part, in the future. As such, it is likely that nature-related disclosure requirements will originate from a standard developed by the ISSB in alignment with the TNFD and refined for the Canadian market by the Canadian Sustainability Standards Board (CSSB). This process is likely to take several years.

Given the complexity and lack of maturity in nature-related disclosure for most Canadian organizations, the next few years can be wisely used to understand and pilot the application of the TNFD recommendations. The TNFD has provided a “Getting Started” guidance document to assist companies in this pursuit and is encouraging organizations to publicly sign on to their early adopters program.

The MLT Aikins ESG practice group has wide-ranging and multi-disciplinary experience advising clients in all industries on their ESG strategies. Even if your company has substantial experience in public disclosure of ESG and nature-related information, it is worth taking a fresh look at the legal risks around your disclosures in light of upcoming mandatory reporting requirements. Contact us to learn how we can help.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.