• Alongside climate transition planning, companies are increasingly focused on the “nature transition”, seeking to foster a sustainable economy and reduce biodiversity loss. This follows the December 2022 COP15 Biodiversity Conference and resulting Kunming-Montreal Global Biodiversity Framework agreement, which set targets to halt and reverse biodiversity loss by 2030.
• Similar to a climate transition plan, a nature-related transition plan focuses on the impact of changes in biodiversity on a company’s operations as well as the company’s dependence on natural resources. It also includes targets to reduce a company’s harm to ecosystems and ensure its sustainable use of natural resources.
• This note discusses recent developments in nature-related transition planning for asset managers, in particular the draft guidance on transition plans published by the Taskforce on Nature-related Financial Disclosures and the Glasgow Financial Alliance for Net Zero, both released at COP 16 in October 2024.

Introduction

Many companies have adopted climate-related transition plans under the recommendations by the Taskforce on Climate-related Financial Disclosures (“TCFD”) and in line with the 2015 Paris Agreement to limit global warming to 1.5 °C. Companies are also increasingly focused on the “nature transition”, seeking to foster a sustainable economy and reduce biodiversity loss. This development is partly in response to the December 2022 COP15 Biodiversity Conference and resulting Kunming-Montreal Global Biodiversity Framework agreement (“GBF”), which set targets to halt and reverse biodiversity loss by 2030. Similar to a climate transition plan, a nature-related transition plan focuses on the impact of changes in biodiversity to a company’s operations as well as on the company’s dependence on natural resources. It also includes targets to reduce a company’s harm to ecosystems and ensure its sustainable use of natural resources. Guided by the principle that “There is no net-zero without nature”, companies are increasingly incorporating nature-focused considerations into their climate transition plans.

This note discusses recent developments in nature-related transition planning for asset managers. Of particular importance are the draft guidance documents on transition plans published by the Taskforce on Nature-related Financial Disclosures (“TNFD”) and the Glasgow Financial Alliance for Net Zero (“GFANZ”), both released at COP 16 in October 2024. This note supplements our separate publication on Biodiversity 101: A Guide to the Next Frontier in the "E" of ESG.

Unlike the various recommended disclosure frameworks for climate-related transition plans, which are generally based on TCFD recommendations but tend not to be inter-operable, the TNFD and GFANZ guidance are designed to be read together. Whereas the TNFD guidance focuses on the impacts on nature, biodiversity or ecosystem services from climate change in general, the GFANZ guidance covers climate change and greenhouse gas (“GHG”) emissions as drivers of nature loss, as well as natural carbon stocks (carbon stored in the natural environment which has been sequestered from the atmosphere, for example in peat bogs).

TNFD

The TNFD published its original recommendations for companies to disclose their financial risks and opportunities related to nature in September 2023. The recommended disclosures broadly follow the TCFD disclosure recommendations, covering the four key themes of governance, strategy, risk and impact management, and metrics and targets.

A company adhering to the TNFD disclosure recommendations will include information on its nature-related transition plan under the “strategy” theme as part of its wider disclosure on plans to address nature-related targets or commitments.

The TNFD guidance sets out more detailed requirements for a transition plan which financial institutions, such as asset managers, may adopt. In line with the GFANZ guidance, it divides the requirements for a transition plan into five parts:

i. Foundations

A company should disclose its overall approach to the nature transition. This includes a description of the scope of and any necessary changes to its business model and value chains to align with the nature transition, as well as which nature-related dependencies, risks and opportunities are most significant for the company. For example, a nature-related dependency is where a company relies on local water sources to power a factory or transport materials in an area that suffers frequent droughts. Nature-related opportunities may involve introducing sustainability-led products and services to new markets, developing products, services or production processes with lower environmental impact and initiating supply chain projects and sourcing activities with conservation and restoration activities.

For financial institutions, the plan should cover arrangements such as offering new financial incentives to portfolio companies for adopting green technologies, such as sustainable farming.

ii. Implementation Strategy

A company should disclose its actions to align business activities, products, services and policies with its transition plan priorities. Where this involves withdrawal, for example by committing to no longer source products from areas with deforestation, this may include putting in place additional measures to support continued nature preservation to ensure that the deforestation does not continue unabated following withdrawal.

iii. Engagement Strategy

A company should disclose how it will work with other entities to support its transition plan, including entities in the company’s value chain, industry peers and other stakeholders. The guidance envisages a significant role for financial institutions in convening portfolio companies and other stakeholders to broker solutions, monitor progress and co-ordinate actions. For example, an asset manager may encourage an investee company in the food industry to work with farmers in its value chain to provide training in precision fertilisation or other sustainable agriculture practices. The guidance also states that financial institutions should include appropriate escalation mechanisms, including voting against the board or management of portfolio companies, where progress towards nature-related transition targets is inadequate under the plan. Asset managers should also conduct additional engagement or due diligence for investee companies with the most significant nature-related dependencies and risks.

iv. Metrics and Targets

The wider TNFD framework provides several lists of indicators and metrics which a company may use to measure nature-related impacts, risks and opportunities in its transition plan, relating, for example, to land-use change and species extinction risk.

Financial institutions are encouraged to use these TNFD-approved metrics in their transition plans, such as by requiring portfolio companies to meet targets to qualify for finance under their transition financing strategy. For example, an agricultural commodity producer may focus on reducing water use in its transition plan priorities, with metrics such as science-based environmental flow models endorsed by local water authorities. An asset manager may also use metrics provided by TNFD to inform any escalation mechanisms it chooses to include in its financing arrangements with a portfolio company.

v. Governance

A company should disclose information on its internal processes to oversee implementation of its transition plan. This includes information on who has responsibility for ownership, oversight and responsibility for delivery of a transition plan, together with information on accountability, performance criteria, role descriptions and incentives.

GFANZ

As noted above, the GFANZ guidance is complementary to the TNFD’s recommendations on nature-related transition plans. Designed to supplement GFANZ’s framework for net-zero climate-related transition planning (released in 2022), the GFANZ guidance uses the same five overarching disclosure themes used by the TNFD. Building on the TNFD guidance, its recommendations on nature-related transition plans have, among other things, two specific emphases:

i. Natural Climate Mitigation

This incorporates guidance on how to reduce or avoid nature-related emissions (for example, from agriculture and forestry) and increase carbon storage via nature-related carbon sinks.

ii. Natural Climate Enablers

This refers to activities that “enable” other activities which themselves support reductions in GHG emissions or increases to carbon sinks. This includes for example producing biochar to improve soil health or shifting to plant-based diets. In doing so, these activities indirectly affect the management of ecosystems, biomes, natural commodities and ecosystem services.

The GFANZ consultation paper recommends broadly similar measures to the TNFD to achieve these aims, recommending that asset managers include nature-specific due diligence in their reviews of prospective portfolio companies and investment committee decisions, including by assessing climate-nature “synergies” - activities that benefit both climate change mitigation and biodiversity, such as reforestation - and “trade-offs” -which assess the relative benefits of an activity for climate change mitigation against potential harm to biodiversity, such as growing sugarcane for ethanol on deforested land. The paper also recommends that financial institutions consider the opportunities for influencing underlying portfolio companies and their other “real-economy counterparts”, including the same four financing strategies under the TNFD discussed above.

Conclusion

TNFD recommends that a company addresses both climate and nature within the same transition plan, and considers the trade-offs and synergies between the two areas. Although the current regulatory frameworks under CSRD, CSDDD and ISSB standards envisage a company publishing a transition plan for climate change mitigation only, asset managers may begin considering how they will incorporate nature-related disclosures into these plans in line with the draft TNFD and GFANZ guidance, which are expected to be finalised in 2025.

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.