How relevant will the Taskforce for Nature-related Financial Disclosures be to the Real Estate sector?

There is a growing understanding that biodiversity loss and climate change are interlinked crises. Climate change degrades many ecosystems and makes the species within them more vulnerable; a decline in biodiversity reduces the ability of ecosystems to act as a carbon sink and to provide resilience for human populations through ecosystem services. The second part of COP15 Biodiversity Conference, being held in China this year from the 25th of April to the 8th of May, is expected to yield a Paris-style agreement to halt and reverse biodiversity loss and make commitments a part of binding national policies for the first time.

In the UK, the soon-to-be-introduced Biodiversity Net Gain policy (part of the Environment Act 2021) will require property developers to deliver a 10% net gain in biodiversity levels either on-site or off-site through biodiversity credits. Globally, and particularly in the UK, it appears that biodiversity loss is receiving a similar level of interest that climate change was seeing 5-10 years ago and is rapidly climbing the corporate agenda.

The key risk management and disclosure framework emerging to deal with nature and biodiversity is the Taskforce for Nature-related Financial Disclosures. It is being developed by a broad spectrum of stakeholders, including many of the world’s largest financial institutions. The TNFD will provide a framework to allow organizations to report on the risks and opportunities they face from biodiversity with the aim of shifting financial flows to create a nature-positive economy. The first beta version has just been released with the final version expected in 2023.

Like the TCFD, it will use the same pillars of Governance, Strategy, Risk Management and Metrics & Targets to structure disclosures. Unlike the TCFD, the TNFD is likely to directly incorporate the concept of double materiality within the framework and require users to report their impact on nature as well as nature’s impact on them. In light of recent criticism of ESG assessments which only focus on a company’s bottom line rather than their wider impact, this is a positive step.

So how significant is this likely to be for the Real Estate sector? A report published in 2020 from the World Economic Forum found that the construction sector was highly dependent on nature, with the real estate sector being moderately dependent. This is unsurprising given the huge material inputs that the construction and maintenance of buildings require, particularly if the sector intends on moving towards the use of structural timber at a large scale.

If nature is neglected, supply chains for natural fibres and timber could become more vulnerable due to issues around soil quality, pests and the decreased climate resilience brought about by a fall in biodiversity. Once buildings are in operation, nature plays a key role in maintaining their value by protecting against flooding, providing clean water, reducing temperatures during heatwaves and, for many buildings, creating a pleasant environment. As mentioned above, the real estate development sector in the UK must now meet rules around biodiversity such as Biodiversity Net Gain and the London Plan’s Urban Greening Factor. Nature is clearly a key factor in the construction of real estate and in the preservation of its value, as well as being the focus of increasing legal requirements.

Adopting the TNFD will be a difficult task for the industry given the complexity of nature and the challenge this causes for creating useful data. Helpfully, many of the steps that the real estate sector is already taking to reduce emissions and vulnerability to climate change will also limit the harm done to nature, such as reducing material use and incorporating nature-based solutions into developments. With the experience gained from the TCFD, the financial system is in a better position to rise to the challenge.