All companies depend–in some way, at some point in their value chain–on nature and ecosystem services. But the natural world is declining faster now than at any other point in human history.
Global regulators, investors, and business leaders are beginning to recognize how interdependent nature and business are, and taking steps to incorporate ecosystem health into corporate decision-making. This represents an attempt to capture the full environmental impacts of business activity, in addition to the specific climate impacts.
In 2023, the EU finalised the Corporate Sustainability Reporting Directive (CSRD) that includes a section on biodiversity and ecosystems (ESRS E4) that thousands of companies will need to report on. Around the same time, the Science Based Targets Network (SBTN) launched a voluntary nature-based commitment similar to the climate-based SBTi’s science based targets.
More recently, at Davos in January 2024, 320 companies committed to reporting on the new Taskforce for Nature-related Financial Disclosures (TNFD), a disclosure framework that companies can voluntarily report on. GRI (Global Reporting Initiative) just launched a Biodiversity standard and later this year, the International Sustainability Standards Board (ISSB) will likely release a biodiversity, ecosystems, and ecosystem services standard that would be integrated into environmental reporting requirements around the world.
These regulations and frameworks use nature and biodiversity interchangeably, but broadly define nature as every natural thing on Earth, and biodiversity as the variability among living things.
These regulations and standards intentionally reference each other and were created as a part of a concerted effort to use the same framework components wherever possible. But there are differences to keep in mind as you consider disclosures.
To help navigate these new standards, we’ll break down the relationship and overlap between TNFD, the primary voluntary disclosure, and the CSRD’s Biodiversity standard (ESRS E4).
How your company might rely on nature (i.e., why nature is material)
For some companies, it’s obvious how they could impact biodiversity, like a wooden furniture manufacturer or a large-scale commercial fishing operation. Many companies, though, don’t fully understand how reliant on nature they are, or how large their potential impacts might be.
Companies that handle or rely on soy, beef, palm nuts or oil, leather, meat, chocolate, coffee, glycerol, rubber, or wood (including paper) are particularly likely to have material impacts on nature and biodiversity. Many of these commodities are already regulated. For example, industries with particularly large risks of significant deforestation or impacts on nature are in scope of the EU Deforestation Regulation.
Some reliances on nature are less obvious. A company might have a large and expanding physical footprint that requires clearing undeveloped land for construction. Another company might release pollutants into a waterway, impacting the species living there. Crucially, these impacts might not be in direct operations; they often concentrate towards the top of the value chain.
How to approach materiality in the TNFD and CSRD Biodiversity Standards
The TNFD recommends that companies use their jurisdictions’ approach to materiality, which in many places will be a “single materiality” approach. In the CSRD, companies need to take a “double materiality” approach, meaning companies need to consider both the impact nature can have on a company’s financial, and the impact a company’s operations have on nature.
The TNFD lays out a process for assessing materiality called “LEAP” that the CSRD’s ESRS explicitly references. Given that the ESRS mentions it, most companies are aligning with the LEAP approach when assessing their impact on nature, be it for the TNFD or the CSRD. To actually assess materiality, the LEAP process prescribes first:
- Locating your interfaces with nature, which typically involves mapping sites across your value chain and owned operations, and understanding how those interface with nature and sensitive locations.
- Next, companies should Evaluate their dependencies and impacts on nature in those locations.
- Then, companies should Assess risks and opportunities to understand which dependencies and impacts hit the materiality threshold that a company has decided to use.
- And last, companies will Prepare their reports, be it a TNFD or CSRD disclosure.
Most companies are working with external partners to assess materiality across the CSRD, while some are running these processes internally.
TNFD and CSRD Biodiversity Standards: What are the differences and similarities
TNFD and CSRD have a high degree of overlap – both ask for disclosures on transition plans, material nature-related dependencies, impact, risk and opportunity, trackable metrics, and policies & targets. Both frameworks also require assessing impact on nature in direct operations as well as the value chain.
There are a few differences. Some of the components in the CSRD are either subject to a phase-in period granting a delay on reporting, like some value chain information, or are entirely voluntary, like the biodiversity transition plan.
In terms of metrics (i.e., quantitative information that gets disclosed), TNFD provides a global set of “core” metrics. These look at nature broadly, covering climate change, land-use / freshwater-use / sea-use change, pollution, and resource use as key drivers of nature change.
In the CSRD, ESRS E4 more narrowly focuses on biodiversity metrics such as number (or area) of sites in or near biodiversity-sensitive areas as it covers (while acknowledging there will be interdependencies) the topics of climate change, pollution and resource use in other topical standards.
How to prepare for the biodiversity standards in CSRD and TCFD
As global regulations take flight, investors turn to focus on nature, and consumers begin to expect more on the topic, more companies are beginning to prepare sharing nature-related information through mandatory and voluntary disclosures. But—many don’t know where to start.
To begin, it’s best to understand your current value chain with an eye for three types of information: first, what types of products your value chain produces and uses (with an especially close eye on high-risk commodities like wood and palm oil), and second, where those are produced, and third, who produces them. This process is also referred to as “mapping” your value chain and lays the groundwork for analysing risks and impacts your company faces.
From there and in tandem with a materiality assessment, you can turn your focus to specific metrics that you may need to measure.
To understand how your company can measure those metrics in a rigorous way with Watershed, get in touch.
