TNFD calls for stronger due diligence on environmental crime

Asset owners and managers are being urged to scrutinise portfolio exposure to environmental crime more closely, including through enhanced due diligence and stewardship escalation, under draft guidance from the Taskforce on Nature-related Financial Disclosures (TNFD).

A discussion paper, published earlier this summer, aims to help companies and financial institutions identify and manage nature-related risks arising from environmental crime and incorporate them into decision-making. The consultation closed on 7 August.

The paper supplements the TNFD’s Guidance on assessment of nature-related issues.

Tom Hegarty, associate director in TNFD’s technical department, told IPE that asset owners and managers responding to the consultation were particularly focused on risk and on understanding how assessing exposure to environmental crime can help identify and manage otherwise unidentified risks.

Such risks can arise through hidden or distorted impacts on nature and disruption to the ecosystem services that investee companies depend on, he said.

Furthermore, Hegarty said investors could undertake enhanced due diligence on investments exposed to high-risk sectors, commodities and jurisdictions, looking particularly at traceability, legality, permits and supply-chain controls.

“Where concerns remain unresolved, investors might escalate through voting, collaborative engagement, restrictions on new investment or, in some circumstances, divestment”

Tom Hegarty at TNFD

“Where concerns remain unresolved, investors might escalate through voting, collaborative engagement, restrictions on new investment or, in some circumstances, divestment,” he said.

Nature risk

The guidance comes as asset owners are increasingly focusing on stewardship and nature-related risk. Last year, Pensions UK said it had strengthened its voting guidance on nature and biodiversity, while the Investment Association has urged asset owners to rethink stewardship and place greater emphasis on mandates and manager oversight.

The paper also comes as nature-related reporting is moving closer to the mainstream, with the International Sustainability Standards Board (ISSB) drawing on TNFD as it develops its approach to nature-related disclosures.

Allianz also revealed plans last year to develop a new approach to managing biodiversity dependencies, impacts, risks and opportunities in its portfolio using TNFD guidance.

Similarly, Storebrand Asset Management, Candriam, Norges Bank Investment Management (NBIM) and the Church of England Pensions Board (CEPB) have all ramped up their focus on nature and identifying potential financial and operational risks.

More broadly, incorporating environmental crime into nature-risk assessments could mean that exposure to such activity increasingly influences capital allocation, portfolio monitoring and investment decisions, Hegarty said.

“Rather than treating environmental crime as a narrow compliance issue, investors may consider it a potential source of financial, operational, legal and reputational risk that can affect portfolio performance and long-term value creation,” he added.

Investor guidance

Investors are unlikely to rely on a single piece of evidence when assessing potential exposure to environmental crime. As such, activities are often concealed within complex supply chains and financial networks. Investors would typically look for patterns of indicators rather than definitive proof of an underlying offence, Hegarty stressed.

These indicators may include weak traceability, compromised or inconsistent documentation, opaque ownership structures, unusual trading routes, regulatory irregularities or operations in sectors and jurisdictions associated with elevated environmental-crime risks.

“In practice, investors may combine information from multiple sources, including company disclosures, supplier and certification data, satellite monitoring, government enforcement actions, court proceedings, civil society reports and specialised risk datasets,” Hegarty said.

The objective, therefore, is not to determine whether a crime has occurred, but to understand whether there is a credible risk that environmental crime could affect a company’s operations, value chain, counterparties or financed activities, he added.

TNFD is reviewing consultation responses and plans to publish updated guidance in the autumn.