Nature-Related Disclosures Will Widen Data Gaps In The Financial Sector That Technology Will Be Critical In Filling

The world of business and finance is preparing for the finalization of disclosure standards from the International Sustainability Standards Board (ISSB) for sustainability (S1 standard) and climate-related risks (S2), but there is another risk rising in relevance. The risks and opportunities related to nature dependency and the impacts of economic activities are leading to growth in the disclosure frameworks around these issues that are likely to follow on the ISSB’s agenda. The ISSB has a consultation open now on its agenda priorities that includes biodiversity as one of the projects under consideration.

Meanwhile, the Task Force on Nature-related Financial Disclosures (TNFD) will close its final feedback opportunities for its framework before launching in September. This all comes amidst two significant developments during the past 12 months: agreement on global targets to protect 30% of nature by 2030 (both terrestrial and marine); and agreement on a high seas treaty (marine biodiversity beyond national jurisdiction, or BBNJ).

Among the issues on the coming agenda, nothing has been so overlooked, especially within the financial sector, as issues of nature-related risks and opportunities for oceans and access to water. The OECD estimates that this ‘blue economy’ produced a global economic value of $1.5 trillion in 2015, and this is expected to double by 2030. Within the Middle East, North Africa and Turkey (MENAT) region, the value of economic activity is likely to account for at least $100 billion per year.

The importance of the TNFD is that it will lay out a framework for nature risk analogous to the Task Force on Climate-related Financial Disclosures (TCFD), and this has been incorporated into the ISSB’s climate standards. Even as climate risk poses significant challenges for companies, investors and financial institutions, they will have to prepare for TNFD at the same time.

This backdrop provides the framework for RFI Foundation’s development of the Blue Finance Challenge with HSBC. The theme of our open innovation challenge last year was focused on Net Zero in light of the adoption of national targets in many parts of the MENAT region. As climate action continues, the focus will proceed from high-level ambition to concrete action, which will impact businesses across the region, especially financial institutions.

The most recent draft framework of the TNFD includes specific guidance for marine biomes, but financial institutions are likely to struggle to adopt the recommendations without additional capacity. As important as nature risk is to financial institutions, especially those in emerging markets such as many countries in the MENAT region, it’s not a natural part of their risk management skills.

The TNFD framework asks companies and financial institutions to identify four types of information – dependencies from and impacts on nature and the risks and opportunities that result – that are relevant but rarely analyzed systematically. The disclosures result from a process of locating interactions with nature, evaluating the dependencies and impacts, assessing risks and opportunities, and preparing to respond. This is termed the ‘LEAP’ framework.

Although this framework is conceptually simple, and is mostly aligned with TCFD considerations (governance, strategy, risk management, metrics, and targets), it quickly becomes complex. Issues relating to the blue economy and impacts from climate change are common across many regions, but they are often difficult to measure and are unfamiliar territory both spatially and in terms of the relevance of the science incorporated into evidence-based decision-making.

This is fertile ground for technology to play a role, as it can embed much of the capabilities lacking in financial institutions, especially where based on widespread and commonly shared issues around water, marine and coastal areas. As financial institutions and regulators start to get into the details of the blue economy, and how to proactively address the risks and opportunities in blue finance, they will need to quickly identify how to avoid information overload when trying to evaluate everything internally.

The Blue Finance Challenge is designed to help speed up the process of connecting the technology relevant to financing the blue economy with financial sector stakeholders. We believe that by helping to speed the identification process of the technology that can help the financial sector in the MENAT region to increase blue finance, this will help the financial institutions to discover new opportunities, manage risks, and improve their contribution to national and global climate and nature goals.