Why nature can’t be neglected any more

Disclosing nature risks could be mandatory within three years. It’s an opportunity to advance a more sophisticated and holistic approach to risk management, writes Ed Roud, chief financial officer at global built environment consultant Mott MacDonald.

For Mott MacDonald and other built environment consultants, nature presents limited material risks. But for our clients the risks are significant.

Our future is intertwined with theirs, which is why it is fundamentally important that we support them in understanding and addressing the challenges.

We have been assessing our direct impacts on nature and exposure to nature-based financial risks in anticipation of a new governance framework that was launched on 25 September by the Taskforce on Nature-Related Financial Disclosures – the TNFD.

It is estimated that some $44tn of economic production, more than half the world total, is dependent on nature. Natural systems have become conspicuously stressed and resources increasingly depleted by economic activity. Yet “businesses today are inadequately accounting for nature-related dependencies, impacts, risks and opportunities. Nature-risk is sitting in company cash flows and capital portfolios today. The costs of inaction are mounting quickly,” said taskforce co-chair David Craig at the launch event.

Disclosure enables investors to assess a company’s level of risk awareness, its exposure, how capable it is to mitigate the risk, and whether mitigation measures are working. The resulting picture informs investors’ decision-making: to invest in companies with a low risk profile; to pressure for improvement in companies able to change; and to divest from those that appear unsustainable because they can’t or won’t change.

What is the TNFD?

The TNFD is an international cross-sector initiative funded by the governments of the world’s 20 leading economies (G20), the United Nations, and several philanthropic organisations. Financial industry supporters manage some $20tn of capital. The TNFD is modelled on the Taskforce on Climate-Related Financial Disclosures (TCFD), created by the Financial Stability Board, an international body that monitors and advises on the global financial system.

Since the TCFD’s launch in 2017 as a voluntary framework, TCFD-aligned reporting of climate-related risks has become mandatory in Canada, all European Union countries, Japan, New Zealand, Singapore, South Africa and the UK. Across all economic sectors, it is accelerating efforts to quantify carbon emissions and reduce them towards net zero, and to understand and adapt to the physical impacts of climate change.

While TNFD reporting is voluntary for now it could become mandatory within the next three years. It is aligned with the standards and approaches of the International Sustainability Standards Board, the Global Reporting Initiative, and the European Sustainability Reporting Standards.

The TNFD has recommended that companies assess their exposure to nature-related financial risks by making 14 disclosures, grouped under governance, strategy, risk and impact management, and metrics and targets. The four ‘pillars’ and 11 of the 14 recommended disclosures are common to both the TNFD and the TCFD.

The similarities will be helpful. We and our clients will be able to call on many of our climate disclosure processes and learnings.

That is not to underestimate the scale and complexity of the challenge ahead.

Carbon is complex, nature more-so

Our own ongoing progress towards net zero carbon is illustrative. Our consultancy business has a relatively small carbon footprint. Emissions principally arise from our purchased goods and services, travel and running our offices. We have a 1.5°C aligned carbon reduction target that has been validated by the Science Based Targets initiative, an independent advisory and certification body.

However, even within our limited supply chain there are challenges in quantifying emissions. We need to know if and how we are ‘buying’ carbon through the goods and services we procure, so are working with suppliers to improve their measurement and reporting. We expect our suppliers to support our goal of achieving net zero. But for most organisations there is significant work still to do.

The challenge of quantifying and controlling emissions is amplified on major projects, with their much more extensive and complicated supply chains. Suppliers across potentially many tiers need to produce robust, interrogable data – else how can infrastructure clients and contractors determine where they are on the route to net zero?

Scope 3 emissions (those outside a client’s direct control) are something we are examining as part of the Net Zero Infrastructure Industry Coalition of clients, contractors, investors, professional bodies and consultants (NZIIC).

For us and all companies, much more carbon detail is still required. And carbon is well-understood next to the many other criteria that must be considered when disclosing and managing nature-based risks.

Opportunities as well as risks

Yet, as Mott MacDonald’s team of nature services experts points out: “There is enough data to start, and it’s not hard to work out the right direction of travel.”

Our industry shares responsibility for environmental impacts, over many decades, that are rebounding on society, the economy, our clients and our projects – all inextricably reliant on nature: Nature provides land and resources, and is still used for waste disposal. Natural events affect input costs, project and asset performance, safety and productivity, revenue and reputation.

The standards governing climate, nature and broader sustainability reporting are starting to be described as ‘interoperable’ by organisations such as the UK’s Green Finance Institute, a public-private initiative to promote sustainable investment. Nature must become part of a more sophisticated and complete way of viewing our industry, operations and responsibilities.

At Mott MacDonald we are already examining our nature-based risks and opportunities. And we are supporting our clients to manage their impacts, risks and opportunities too – the area of our operations where we have no direct control but potentially large influence.

Reviewing our direct and indirect impacts alike, we’re aware of the synergy between nature, carbon, resilience and socioeconomic outcomes.

As the TNFD comes into effect over the coming months, we and all in our industry need to step-up and get joined-up.