The TNFD Framework Could Help Drive the Potential of Biodiversity ETFs

Upon the adoption of the Kunming-Montreal Global Biodiversity Framework (GBF) at COP15 in December 2022, the global community has committed to 23 targets by 2030 to halt and reverse nature loss. While the GBF sets the goals and targets and identifies action areas, much of the implementation details are left to the discretion of UN member states. Helpfully, the Taskforce on Climate-related Financial Disclosures (TCFD) framework was born to facilitate a shift from nature-negative activities to nature-positive activities.

The TNFD framework was inspired by the Taskforce on Climate-related Financial Disclosures (TCFD), by now a familiar climate reporting framework to financial market participants in the EU. Carrying a similar objective to measure and report on nature-related risks and opportunities, the TNFD focuses on disclosures related to biodiversity risks and opportunities by firms of different sizes and across sectors. The Taskforce has released a fourth and final version of the proposed disclosures, which closed to public consultation on 1 June 2023. 

Like climate-related matters, the scale of biodiversity loss and impacts are incredibly complex, requiring a dedicated disclosure framework to guide our common understanding of the impacts and actions of economic activities. The ambitious targets agreed upon by various countries at COP15, which include ending or reversing deforestation by 2030 and conserving at least 30% of global land and sea areas, require a significant increase in investment into biodiversity. More than $700 billion is needed annually until 2030 to achieve COP15 targets, creating a massive gap from the current annual investment flow of $140 billion [1].

How the TNFD framework can impact asset management

With the EU playing a supporting role in capacity-building for the GBF through the Accelerator Partnership, we can expect financial market participants to play a part in helping achieve ambitious global biodiversity targets. In addition to knowledge sharing, the Accelerator Partnership will match financing with biodiversity solutions. Many of the latter are in developing economies or high-biodiversity areas of the Global South that require financing to protect, conserve, and restore biodiversity while presenting opportunities for economic benefits and investment returns.

The TNFD framework follows closely the TCFD recommendations, encompassing governance, strategy, risk management, and metrics and targets. Improvement in disclosures will help investors understand the long-tailed risks of biodiversity loss and damage to ecosystem services, information that is crucial to quantifying the financial value of nature and to qualify private sector investments in nature. Coupled with increased legislature and global commitments, fund managers have more tools and guidance at their disposal to monitor biodiversity risks and design products that can narrow the biodiversity financing gap.

Investing in biodiversity

Early market response has seen the launch of a few biodiversity-focused funds that employ various screening methodologies for biodiversity impacts. The HSBC World ESG Biodiversity Screened Equity UCITS ETF (HBDS) tracks the first benchmark index on the market to be screened for biodiversity, the Euronext ESG Biodiversity Screened Index. HSBC Asset Management uses three filters to screen portfolio companies, including Iceberg Data Lab’s Corporate Biodiversity Footprint methodology.

BNP Paribas Easy ESG Eurozone Biodiversity Leaders PAB UCITS ETF (ASRV) is a PAB-aligned, SFDR Article 9 biodiversity-themed ETF, offering exposure to global equities with lower biodiversity impact. Screening also uses Iceberg Data Lab’s Corporate Biodiversity Footprint and automatically excludes companies violating UNGC controversies.

The Ossiam Food for Biodiversity UCITS ETF (F4DU) features a portfolio of food and agricultural heavyweights such as Nestle and Mondelez, companies whose value chains engage in large scale land use – a prime factor in biodiversity impacts. The fund has the objective to reduce the biodiversity impact in the agricultural and food sectors.

Across the current investable offerings for biodiversity, fund managers adopt a mixed screening approach comprised of exclusionary criteria for controversial sectors, general ESG risks, and finally a biodiversity-specific filter that provides deeper analysis of biodiversity risks. 

At present, portfolio holdings of biodiversity ETFs are still indirectly linked to activities such as deforestation. When the TNFD is finalized, it could encourage the development of other methodologies for evaluating biodiversity risks. Upon its final release, we can expect greater momentum in biodiversity investments and perhaps even an increased application of screening criteria to the upstream and downstream risks in value chains. 

References:

[1] https://www.paulsoninstitute.org/conservation/financing-nature-report/

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.