ESG investment
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New reporting standards recommended by an international task force on nature and biodiversity risk could represent a window of opportunity for Canadian issuers.

The G20-backed Taskforce on Nature-related Financial Disclosures (TNFD) finalized its recommendations last September with the aim of establishing a framework for financial institutions to incorporate nature-related risks and opportunities into decision-making.

Issuers that embrace those recommendations could position themselves as pioneers in the emerging field of nature and biodiversity risk, said Ryan Riordan, director of research with the Institute for Sustainable Finance at Queen’s University in Kingston, Ont.

Canada’s abundance of natural assets — including forests, wetlands, rivers and grasslands, which traditionally are absent from balance sheets — will make domestic firms prime candidates for TNFD-aligned reports, Riordan said.

Riordan has detected plenty of interest on the subject from Canadian financial institutions, and encourages them to commit to the process soon.

“If you’re one of the first 10 or 20 to make a disclosure, people will remember that 10 or 20 years from now,” he said.

Montreal-based Millani Inc.’s 2024 study of ESG sentiment found that 63% of institutional investors integrated nature-related considerations into investment decision-making processes.

Meanwhile, 47% of asset managers placed biodiversity among their top three ESG issues — a threefold increase over results reported in June 2022, when just 16% were as focused on the issue.

With financial disclosure in the area at a nascent stage, Riordan urges companies to avoid letting perfection be the enemy of a good nature-related risk report.

“People are going to be forgiving,” Riordan said. “If you’re making mistakes in your first-ever nature-related disclosure, nobody is holding that against you, as long as it’s not malicious. It’s crazy to have assets that could be on your balance sheet that you’re ignoring.”

Anyone familiar with the similarly named Task Force on Climate-related Financial Disclosures (TCFD) may get a sense of déjà vu while reading through its nature-related equivalent. The TNFD document mirrors the structure and some text of the original TCFD guidelines, which were released in 2017. (The TCFD disbanded in October 2023 and its remit taken over by the IFRS Foundation.)

The similar recommendations are no coincidence, said Maia Becker, senior director of the responsible investment team with RBC Global Asset Management Inc. She views the path forged by the TCFD as a track to wider and faster TNFD adoption.

“It’s priming the pump a little,” she said: terms that first appeared in the TCFD, such as “physical risk” and “transition risk,” have since become part of the mainstream financial lexicon. (See story, “Adjusting portfolios to manage climate risks“.)

“The TNFD is doing something similar in setting that common language for how you talk about nature,” Becker added. “You’re looking at nature-related risks, opportunities, impacts and dependencies from the perspective of governance, strategy, risk management, and metrics and targets.”

Clues about the next stage of the TNFD’s development can also be found in the TCFD’s maturation process, during which a host of detailed quantitative reporting standards emerged, said Alyson Slater, managing director and head of sustainable investment in Canada, public markets, with Manulife Investment Management Ltd.

Slater said the original TCFD recommendations proved a useful starting point for company boards to demonstrate their awareness of climate-related risks and outline strategies for dealing with them, but there are limits to this kind of qualitative information.

“In the end, what we want to do is get our hands on data and run that to see how that might impact the valuation of the company or might impact the credit of the company,” Slater said.

Still, the parallels between climate risk and nature risk are far from perfect. Becker warned that it will be more difficult for governments, regulators, investors and issuers to agree on methods for quantifying biodiversity loss and other nature risks in the same way they’ve coalesced around measurements for greenhouse-gas emissions.

“When it comes to climate, you know what you’re measuring: a molecule of carbon is the same regardless of where it is released,” Becker said. “A nature-related risk in Brazil is going to be different than in the Canadian boreal forest. So, you have to be able to take into account location-based factors as well, which is very new relative to climate.”

Montreal-based infrastructure investment manager Cordiant Capital Inc. will be taking a keen interest as TNFD standards are refined, said Cédric Garnier-Landurie, managing director of agriculture.

“The ultimate hope is that these key performance indicators can be a bit more sector-specific because I think that’s where you get the real value,” he said.

Cordiant was the only Canadian-headquartered financial institution on the TNFD’s list of 105 early adopters that have committed to making disclosures in compliance with its recommendations by 2025.

“A lot of our economy depends on nature, and when there are some nature risks that haven’t been underwritten, you get a false sense of the underlying risk that you are undertaking and therefore the financial return you’re going to achieve,” Garnier-Landurie said. “If you’re willing to really look at the data and the science, it can also become a great opportunity.”

The TNFD is a voluntary framework, Slater said, but that status could change if the International Sustainability Standards Board (ISSB) follows through on its interest in the subject. (See story, “The state of climate disclosure“.) The ISSB’s climate standards have been incorporated into proposed mandatory disclosure regimes by both the U.S. Securities and Exchange Commission and the Canadian Securities Administrators. Slater said she envisions a time when public companies are required to make formal disclosures regarding their nature-related risks.

In the meantime, Slater said, her team is approaching nature loss as a systemic risk and wants potential investees to show they understand their potential exposure.

“Investor demand is going to be key, letting [issuers] know what information we want and why, and using our opportunities for engagement,” Slater said. “I think we’re going to see more shareholder resolutions on this with people asking for TNFD reporting.”

This article appears in the March issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.