Data limitations and direction of travel
While disclosures and therefore availability of nature assessments at an entity level is currently low, finalization of TNFD recommendations and guidance on disclosure metrics (September 2023) is expected to drive further disclosure and greater availability of data. There will likely be a time lag before company specific data is available for portfolio-level assessments. Once the TNFD is finalized, financial institutions should begin to engage with corporates to help drive the assessment and disclosure of their nature impacts in line with the guidance.
In the interim, financial services institutions can use the data that is available to build a directional understanding of their exposures in preparation for more granular assessments in the future.
The challenge is not only about data availability, but also how it is interpreted for useful decision-making. By using existing data, financial institutions can assess their initial exposure to nature. The output from these assessments can provide useful information that highlights nature exposure across portfolios and enables better understanding for more accurate decision-making to reduce risks.
As data availability improves, financial institutions can start to test their portfolios under different scenarios, which will provide more granular information on their nature exposure. However, physical nature risks are more complex than climate to model because of the multiple, correlated dimensions (i.e., soil erosion, deforestation, urbanization, water quality and species), as well as their interdependency with climate, for which modeling is already difficult, since it is an area where the science is constantly evolving. Therefore, requisite tools and data are likely to take longer to develop than for climate. Understanding the full picture would also likely require integrating nature and climate models. The market is not yet mature enough to do this.
Furthermore, nature transition risk modeling is driven by economic, policy and technology factors. Regulatory policy for nature is not yet clearly defined, and nature-based solutions are not well established.
Data Management for ESG and nature
Our observation of the market shows that ESG data is not often being integrated or managed in a strategic way, with data sourced and governed in a distributed manner. The addition of nature data adds more complexity and potential further risk of error and inconsistency. By taking this fragmented approach, financial institutions risk building silos of data which may limit their ability to reconcile their progress against ESG commitments.
ESG is expected to continue to become more tightly regulated, with mandatory assurance on ESG disclosures. Therefore, financial institutions should start to build a strategic approach to ESG data management while data needs and sources are still relatively small. This will provide the requisite governance, traceability and auditability that enhanced regulation will require. Conversely, there is a risk of significant cost and time commitment to retrospectively apply such a data strategy to a growing set of ESG data use cases. Additionally, there is significant risk of misrepresentation of sustainable products, lending or in regulatory disclosures e.g., EU Taxonomy.