Final TNFD Framework Launched, SEC Adopts ESG Names Rule, and More

September 22, 2023

The top five climate risk and disclosure stories this week.

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Final TNFD disclosure framework launched

The Taskforce on Nature-related Financial Disclosures (TNFD) published its final recommendations for nature-related risk management and disclosure on Monday.

Two years in the making, the recommendations and accompanying guidance are intended to shine a light on the financial risks linked to biodiversity loss and ecosystem destruction. TNFD-aligned disclosures are also intended to help investors direct capital toward nature-positive outcomes that align with the United Nations-backed Global Biodiversity Framework.

The final 14 TNFD recommendations build on those out of the Task Force on Climate-related Financial Disclosures (TCFD), the world’s premier climate reporting framework, and are organized across the same four pillars — governance, strategy, risk management, and metrics and targets. They are also consistent with the International Sustainability Standards Board’s global sustainability reporting requirements and the Global Reporting Initiative’s impact materiality approach. 

This overlap ensures the TNFD framework aligns with both single materiality approaches to disclosure, which exclusively focus on the financial impacts companies face from nature loss, and double materiality approaches, which capture companies’ impacts on nature. The recommendations also align with the Global Biodiversity Framework’s Target 15, which calls for the assessment and disclosure of nature-related risks, impacts, and dependencies.

“Nature loss is accelerating, and businesses today are inadequately accounting for nature-related dependencies, impacts, risks and opportunities,” said David Craig, the TNFD’s co-chair. “Businesses and financial institutions now have the tools they need to take action.”

The final recommendations include some changes from the beta version of the framework, which was published in March. Significantly, the governance pillar now includes a recommendation for companies to disclose their human rights policies, engagement activities, as well as their oversight by the board and management with respect to Indigenous and local communities in the context of their nature-related risk and opportunity assessments. 

The final recommendations also incorporate feedback from stakeholders who are looking to make the framework more accessible, implementable, and clear on details, like the level of granularity required from companies disclosing nature risks in their value chains.

The TNFD will now drum up support for the voluntary adoption of the recommendations and track market adoption annually through status reports beginning in 2024. Companies like pharmaceutical giant GSK have already promised to produce TNFD disclosures, with more firms expected to announce similar intentions in the coming weeks. The TNFD will release an inaugural list of its adopters at the World Economic Forum in Davos, Switzerland in January 2024.

The TNFD is led by 40 members that represent over US$20trn in assets under management and has received input from stakeholders in almost 60 countries.

SEC adopts rule to fight greenwashing by investment funds

The US Securities and Exchange Commission (SEC) approved a rules update that targets greenwashing and investment funds’ misleading marketing practices on Wednesday. 

The revised “Name Rule” requires 80% of a fund’s portfolio to reflect the characteristics advertised in its name. For example, funds that reference one or more environmental, social, and governance (ESG) factors in their names need to ensure four-fifths of their assets align with these factors. 

The update also requires funds to review assets covered by the 80% rule on a quarterly basis at minimum and introduces specific time frames for becoming compliant with the rule if a fund’s assets dip below the threshold.

“As the fund industry has developed over the last two decades, gaps in the current Names Rule may undermine investor protection,” said SEC Chair Gary Gensler. “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”

The rule will become effective 60 days after it’s published in the Federal Register. Fund managers over US$1bn in size will have 24 months to comply with the updated rule, while smaller managers have 30 months.

Climate group warns 1.5°C target likely to be missed

Average global temperature increases are likely to breach the 1.5°C warming target that was set out in the Paris Climate Agreement by the 2030s, elevating investors’ systemic risks, a United Nations-backed climate policy forecasting group says.

The Inevitable Policy Response (IPR), a consortium that prepares institutional investors for climate transition risks, based its latest projection on a study of over 300 climate policies and insights from more than 100 climate policy experts. While policy action is accelerating, the report says global net-zero carbon emissions are likely to only be achieved by 2060 and net-zero greenhouse gas emissions are likely to only happen by 2080. This would lead to an average global temperature increase of between 1.7°C and 1.8°C, which is still consistent with the “well below 2°C” Paris Agreement objective and would increase investors’ systemic risks at the same time.

“While there is a long road to Paris, we are now well under way,” said Jakob Thomä, IPR’s project director. “The pessimism about missing 1.5°C no overshoot should not overshadow the fact that policy acceleration over the past 2 years increasingly highlights the central climate outcome is now 1.8°C warming. No time for complacency, but perhaps time for some optimism relative to previous temperature projections, despite the growing evidence of the systemic risk that comes with overshooting 1.5°C.”

The IPR analysis shows 90% of climate policies in advanced economies and 40% in emerging markets support the group’s projections. Effective climate policy is lacking overall in Russia and with respect to coal power in both China and India.

Significantly, the IPR also projects that the use of bioenergy carbon capture and storage (BECCS) will contribute just one gigaton of CO2 captured by 2050. “BECCs does not appear as a significant long-term solution given the pressure around land use and more competitive alternatives across most sectors,” the IPR says.

US Treasury issues net-zero guidance for financial institutions

US financial institutions that commit to net zero should develop and execute “robust” transition plans and utilize “credible” metrics and targets, new guidance published by the Treasury Department says.

Released Tuesday, the nine voluntary “Principles for Net-Zero Financing & Investment” are intended to help banks, asset managers, insurers, and other financial institutions implement their net-zero commitments in a consistent and credible manner. The principles also say financial firms’ net-zero pledges should align with the goal of limiting global warming to 1.5°C and be accompanied by a host of “goals, actions, and accountability mechanisms” that will lead to reductions across their Scope 3 financed and facilitated greenhouse gas emissions.

“Our goal is to affirm the importance of credible net-zero commitments and to encourage financial institutions that make them to take consistent approaches to implementation,” said US Treasury Secretary Janet Yellen. “Our work will also help institutions that have not yet made commitments see what doing so might entail.”

The principles also encourage financial institutions to “consider transition finance, managed phaseout, and climate solutions practices when deciding how to realize their commitments,” as well as to assess their clients’ and portfolio companies’ alignment to their own targets and the 1.5°C warming limit.

With the release of the principles, top philanthropic organizations — including the Bezos Earth Fund, Bloomberg Philanthropies, and ClimateWorks Foundation — committed US$340mn over the next three years. This investment will support research, data availability, and technical resources that help financial institutions establish and operationalize robust net-zero commitments. The funding will also facilitate the transition planning efforts of non-financial sectors of the economy.

In addition, the Rocky Mountain Institute Center for Climate-Aligned Finance will introduce frameworks for the aluminum and aviation sectors, while the Partnership for Carbon Accounting Financials will train and support financial industry professionals on greenhouse gas accounting methodologies and reporting.

WWF unveils AI tool to combat greenwashing

The World Wildlife Fund (WWF) debuted an AI-powered tool designed to help financial supervisors, asset managers, and financial institutions assess the credibility of companies’ net-zero transition plans. The tool aims to identify potential greenwashing practices that can mislead investors and hinder the global transition to a low-carbon economy.

Regulators and investors are pushing companies to produce transition plans that align with a 1.5°C warming limit. However, the WWF says there is a “serious gap” in the formation and disclosure of “ambitious, credible, and feasible” plans. In addition, there is currently no common understanding and comprehensive methodology for assessing the credibility of transition plans, which opens the door to potential greenwashing by companies.

The WWF’s tool, developed with the University of Zürich and the University of Oxford, can identify inconsistencies and pinpoint greenwashing in companies’ transition plans. By red-flagging companies with questionable plans, the tool could help central banks, investors, policymakers, and regulators conduct more in-depth assessments and engage directly with  companies whose transition plans are in question.

“Greenwashing threatens financial stability because market participants are relying on misleading claims to price transition risks,” said Maud Abdelli, who leads the WWF’s Greening Financial Regulation Initiative. “Finance for transition must take a dynamic and forward-looking view, taking into account all sectors, in particular the most climate and environmentally harmful industries. It is therefore of crucial importance to properly assess the credibility and ambition of corporate climate transition plans.” 

The WWF will support the universities of Zurich and Oxford in testing the red flag indicators framework with a number of companies later this year. The results will be published in December to help financial regulators and institutions better understand the levels of ambition in companies’ transition plans.