The LEAP framework for nature-related financial disclosures
What is the LEAP framework that accompanies the TNFD disclosure recommendations? It stands for “Locate, Evaluate, Assess, Prepare”, and it is a four-step integrated assessment framework for nature-related issues released by the Taskforce on Nature-related Financial Disclosures. The market participants of TNFD strongly expressed a need for an integrative framework on nature-related disclosures that aligns with other frameworks and protocols from leading institutions, and thus this framework was released at the same time as the disclosure recommendation. During the formulation period of this framework, over 240 institutions helped to shape and inform the final LEAP framework. The final methodology helps to support an organization’s internal assessments of nature-related issues.
In the previous article, we discussed the key concepts related to nature-based intersections with business, including definitions of nature and its four realms, society and how it interacts with nature, ecosystems and biomes, and the pathways that flow between businesses and nature. These concepts are central to the discussion about nature-related issues that impact financial and non-financial disclosures. The LEAP framework builds on these concepts and presents an approach to implement the identification and assessment of nature-related risks and opportunities. In this article, we provide further insights into each of the four steps of the LEAP framework, which are
Locate the interface with nature
Evaluate dependencies and impacts on nature
Assess nature-related risks and opportunities
Prepare to respond to, and report on, nature-related issues
Step 1: Locate the interface with nature
The first step of the LEAP framework helps filter and prioritize potential nature-related issues across three dimensions: sector, value chain, and geography. The objective is to identify, with some precision, geographies that are of the highest importance in the assessment of nature-related risks and opportunities for the business. This step is particularly unique to nature-related assessments since nature is physical, and therefore, a step that identifies localities helps to limit the scope of the assessment to particularly impacted or sensitive geographies. Depending on the business, one, two, or possibly all three filters may be applied to identify the sources of potentially material nature-related dependencies, impacts, risks, and opportunities. Throughout the process, particularly attention to sensitive locations is important to efficiently identify geographies where the dependencies and impacts may be most impacted. These ecologically sensitive locations are geographies where there are known risks of natural offense, such as areas with a rapid decline of ecological integrity. Some useful tools for identifying sensitive locations are the Biodiversity Intactness Index, Aqueduct Water Risk Atlas, and Integrated Biodiversity Assessment Tool (IBAT), which provide various national-level and location-disaggregated data on ecologically sensitive land and aqueduct locations.
A two-dimensional representation, such as a heatmap, is usually an insightful visual tool to highlight areas of particular exposure to nature-related dependencies and impacts. To construct such two-dimensional visuals, the vertical dimension could be one of the three filters. For financial institutions that have a portfolio of products across sectors, the sectors may be listed across the vertical dimension. For businesses that operate in only one sector, the key geographies of operation (possibly already cross-checked to highlight sensitive locations) could be listed on the vertical dimension. Value chain activities (e.g., key upstream or downstream operations and their locations) could also be on the vertical axis of the same visual, or possibly a separate visual dedicated to assessing value chain activities. The horizontal dimension usually lists the dependencies and impacts related to impact drivers (e.g., land/freshwater/ocean use change or resource use/replenishment).
Once high-risk sectors or geographies are located, a description of the interaction between nature and these sectors or geographies is needed to specify the types of risks and opportunities that arise in these interactions. This includes a description of the ecosystems and biomes in the identified sectors/geographies and their vulnerabilities. The IUCN Global Ecosystem Typology is the standard reference set of biomes, and the TNFD guidance provides a mapping of the typology across the four realms of nature and other concepts. Particular attention should be paid, again, to sensitive locations, which could represent locations of heightened risks that require additional attention. The priority locations identified through this step should include both material locations (locations with particularly heavy business activities) and sensitive locations (locations with particular nature vulnerabilities), allowing for some overlap across the two categories.
Step 2: Evaluate dependencies and impacts on nature
In the second step of the LEAP framework, the organization develops a granular understanding and measurement of nature-related dependencies and impacts on the priority locations identified in Step 1. A useful reference for this step of the framework is the Natural Capital Protocol developed by the Capitals Coalition.
This assessment usually starts with the impact drivers and external factors that could influence natural capital and ecosystem service provision. Impact drivers of business are the effect of business activities on drivers of nature change, and they include categories and specifics like climate change, land/freshwater/ocean use change, resource use/replenishment, pollution/pollution removal, and invasive species. External factors, such as other natural forces like geological activities or other human activities unrelated to the business, should also be considered since these external factors may interact with business-related impact drivers that accentuate or attenuate the overall nature-related effect.
The effect of impact drivers and external factors on changes in the state of nature and consequently on the provision of ecosystem services is analyzed in this step of the LEAP framework. The analysis is highly customizable, depending on the business activities and the local characteristics of nature involved. Some key considerations, like that of the time horizon of change (e.g., multiple decades in relation to discernible climate change), nature thresholds, and potential tipping points, should be incorporated.
To prioritize the identified dependencies and impacts and the resulting changes in the state of nature/ecosystem services, the organization should measure, to the best of its abilities, the scale and scope of these entities. The measurements, through the selection of indicators and metrics, could be qualitative (e.g., high vs. low) or quantitative (e.g., million tonnes of pollutants). As an example, the measurement of an impact driver such as soil pollution could include indicators of pollutants released to the soil by type. The effect of this on the ecosystem service of soil quality regulation could be measured by the amount of good-quality soil retained. When evaluating the effect of change on the state of nature, such as species biodiversity, the extinction risk could be an indicator with a qualitative metric that is justified with sufficient evidence. Annex 1 of the LEAP guidance provides a list of suggested metrics for a number of dependencies and impact drivers, changes in the state of nature, and ecosystem services provision.
Step 3: Assess nature-related risks and opportunities
The third step of the LEAP framework connects dependencies and impacts to risks and opportunities that should be disclosed through reporting. Similar to the climate framework, nature-related risks are categorized as physical risks, transition risks, and systemic risks. Physical risks can be chronic, such as the gradual decline of species diversity for pollination, or acute events resulting from a natural disaster. Transition risks are risks that arise from a misalignment between an organization’s activities and policies aimed at protecting or restoring nature. They occur often when an organization’s policies are not fully adjusted to new or changing regulations for the protection of nature, and this could include liability risks that arise from legal claims. Systemic risks are risks that arise from the breakdown of the entire system, and this could be triggered by one major event or several moderate tipping points that combine to trigger a large, irreversible failure. Systemic risks could occur as ecosystem stability risks or financial stability risks depending on the nature of the triggers that lead to such major failures.
Nature-related opportunities are activities that create positive outcomes for organizations and nature. Since nature-positive outcomes require actions to address the pressures that lead to nature degradation in connected geographies, comprehensive strategic transformation is likely to be more impactful than the management of nature-related risks in isolation. Thus, nature-related opportunities for businesses should consider comprehensive, conservation-based programs. Such programs will vary according to the region, market, and sector, and opportunities could encompass a range of actions, such as the protection and management of ecosystems, the incorporation of green and blue infrastructure in urban areas, and the application of ecosystem-based principles to agricultural systems. However, it is recommended that organizations first prioritize business actions that avoid or minimize negative impacts on nature before pursuing opportunities to restore nature or mitigate existing damage.
Risks and opportunities from nature-related dependencies and impacts can implicate financial risks, such as credit risks, market risks, or liquidity risks, by affecting the resilience of the business. When material financial implications are linked to nature-related risks and opportunities, organizations have an obligation to report these material risks and opportunities to their investors. The management and governance of an organization must incorporate the identification of nature-related risks in its risk management apparatus and develop corresponding processes for monitoring, mitigating, and reporting these risks. The TNFD highlights five principles for integrating nature-related risks and opportunities into existing frameworks. Building on the four principles from TCFD, which are inter-connections, temporal orientation, proportionality, and consistency), TNFD adds a nature-specific principle of being location-based, highlighting the unique feature of nature as being location-specific.
Step 4: Prepare to respond to, and report on, nature-related issues
In this last step of the process, the organizations should make decisions on their response to the identified nature-based risks and opportunities, including what to disclose and how to disclose the issues identified. These issues may have implications for an organization’s strategic planning, resource allocation, risk management, and governance. The Action Framework for the Mitigation Hierarchy (AR3T) by the Science-Based Targeting Network (SBTN) is a recommended reference for risk mitigation, and the hierarchy follows the order of
Avoid or eliminate negative impacts
Reduce or minimize negative impacts that cannot be eliminated
Regenerate by enhancing the biophysical functions and/or ecological productivity where possible
Restore the health, integrity, and sustainability of an ecosystem with a view toward permanence
Target-setting is an important element of this final step, and such nature-related targets should be aligned with the goals and targets of the Kunming-Montreal Biodiversity Framework among other international consensus, as outlined in this joint TNFD and SBTN guidance.
Finally, the TNFD recommends 14 disclosures to provide decision-useful information to the primary users of general-purpose financial reports. These disclosures cover the areas of Governance, Strategy, Risks and impact management, and Metrics and targets. In addition to the 11 disclosures recommended by the TCFD (and adjusted for nature), the TNFD makes these modifications which were outlined in the last article.
The LEAP framework is a comprehensive framework that helps organizations assess nature-related issues, from dependencies and impacts to risks and opportunities. It draws the linkage between business activities across value chains to their positive and negative effects on nature and their financial and governance implications. The framework should be implemented iteratively, driving further understanding of the interaction between nature and business activities with each iteration. Embedding processes and practices deriving from such analyses will improve the existing processes and practices and enhance the resilience of the organization facing potential nature-based risks and opportunities. It will also help support nature in its regenerative and service-provisioning activities and set the path for a long and sustainable relationship between businesses, their stakeholders, and nature.
Note: This is the second of a three-part series on nature-related disclosures. In the first article, we discussed the foundation and key concepts of nature’s interaction with businesses. In the next article, we discuss disclosure guidances for biomes or spheres of ecosystems with particularities in their biodiversity and climate conditions.