Biodiversity reporting is on the way, and it’s going to be way more complex than climate reporting…
Biodiversity reporting is coming.
Are you ready for it?
You may already be familiar with the reporting requirements that UK firms (including banks) will need to comply with as a result of the Taskforce on Climate related Financial Disclosures (TCFD) requirements in support of COP-26. In short, companies will need to disclose
- GHG Emissions Absolute Scope 1, Scope 2, and Scope 3: 34 emissions intensity
- Transition Risks Amount and extent of assets or business activities vulnerable to transition risks
- Physical Risks Amount and extent of assets or business activities vulnerable to physical risks
- Climate-Related Opportunities Proportion of revenue, assets, or other business activities aligned with climate-related opportunities
- Capital Deployment Amount of capital expenditure, financing, or investment deployed toward climate-related risks and opportunities
- Internal Carbon Prices Price on each ton of GHG emissions used internally by an organization
- Remuneration Proportion of executive management remuneration linked to climate considerations
Clearly reporting on these areas is a substantial challenge to many organisations, which are not used to having to measure these metrics. In particular whilst Scope 1 (direct) and Scope 2 (indirect energy-related) GHG emissions may be relatively simple to calculate, many organisations such as banks will find that the majority of the GHG footprint comes from Scope 3 (other indirect) as a result of the emissions in their supply chain, or which they are financing. Scope 3 GHG emissions are far more difficult to measure, especially for financial institutions that may have tens of thousands of customers, each of which will have their own emissions profile.
However, the good news is that whilst some care may be needed to avoid double counting the Scope 1 and 2 emissions with the Scope 3 of an entity elsewhere in the supply chain, this is essentially an additive exercise – in essence TCFD requires the reporting of the emissions and impacts of a relatively small number of molecules, wherever that may occur.
Following in the footsteps of TCFD comes the Taskforce on Nature related Financial Disclosures (TNFD) which seeks to take a similar approach for biodiversity in support of COP-15.
Biodiversity is important for the world because the collapse of the biosphere will have serious and long-lasting repercussions for all life on Earth. However, in pure economic terms it can also be measured and is found to have a high value with around $44tn (52%) of the world economy having either a high (15% of global GDP) or moderate (37% of global GDP) dependency on nature. All economies are embedded within nature, not external to it but most corporates, investors and lenders today are inadequately accounting for nature-related risks and opportunities.
TNFD recognises that there is a strong interplay between climate risk and nature risk – we cannot mitigate climate change without also protecting nature’s ability to store carbon.
The TNFD framework is due in September 2023 and the TNFD has already identified data as being a significant challenge, with v0.1 of the framework stating that
“High-quality data is essential to enable effective risk and opportunity management and disclosure.”
The taskforce is following a 4 stage approach to disclosures, known as LEAP
- Locate your interface with nature;
- Evaluate your dependencies and impacts;
- Assess your risks and opportunities; and
- Prepare to respond to nature-related risks and opportunities, and report to investors.
There are two main factors that drive the scale of this challenge from a data perspective – geography and complexity. It’s clear that data will be a challenge, even to complete the first “Locate” step of this approach.
Why is Data such a challenge for TNFD?
Any assessment of biodiversity impact is highly reliant on geospatial data in order to understand where a given economic activity is taking place and to tie that back to the relevant datasets on biodiversity. Regardless of industry, there are substantial challenges in accurately locating where an organisations activity is taking place. In the case of second-order industries such as financial services, where it is necessary to understand the precise location where any funding may be being used, and precisely what activities will take place there, this becomes extremely difficult.
Whilst TCFD is seeking to collect data on the emissions of a small number of GHG molecules and risks related to a handful of climate-related scenarios (such as heatwave, wildfires, coldwave, flooding, hurricane and water stress), TNFD is seeking to collect data on the impact of millions of species of plants and animals and consider risks that include all of the climate related risks but also extend to areas such as loss of genetic diversity, invasive species, destruction of habitats, isolation of habitats, disease and moreover the systemic effects (both positive and negative) of this across multiple species within an ecosystem – rendering this more complex that a simple additive calculation.
The good news here is that there are a wide number of datasets already in existence from government, NGO and commercial sources. However, the data is of variable quality, completeness and consistency across these sources, in many cases has not previously been combined and no central register of these exists, meaning that there is substantial work required to fully understand the coverage and content of each before it can be used.
Both the location and the complexity aspects are compounded by the fact that there is incomplete data in both areas, and that the datasets that do exist may be highly heterogenous in nature and may not easily combine (for example consider combining Earth Observation satellite data modelled as a proxy for some measures, individual ecosystem analysis of others, and a bank’s lending data – there will be overlaps, gaps and definition challenges). In addition, the precise biodiversity data required will vary based on both location and activity (for example the data required to understand the impact of waterborne effluent from an industrial site may be very different to that required to understand the impact of deforestation at a specific agricultural site).
Finally, there is little overlap between individuals with experience using and understanding all of these differing datasets which means that there will be a resourcing challenge once work starts in earnest (for example, how many banks have a resident biologist on staff?).
So from a data perspective, this means that collecting data on Nature Related impacts and risks is orders of magnitude more complex than doing so on Climate Related impacts and risks.
With all of the focus right now on Climate related data it’s not hard to see why as yet there is little in the way of concrete plans to tackle biodiversity impacts, but with the complexity that will be required, this task will be substantially larger and will require sustained effort to achieve.
The final draft of TNFD’s finding isn’t due until September 2023 and there will be interim drafts in June 2022, October 2022 and February 2023. You can get access to the beta framework at https://tnfd.global but regardless of the detail that is ultimately required, all organisations should be starting to think about how they capture and hold geospatial data on their activities, assets and customers because one thing that is clear at this stage is that this location data will be key to unlocking the datasets required for TNFD reporting.
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