Schroders’ first TNFD report links nature data to investment insight

2020 was a noteworthy year for those monitoring biodiversity, nature and financial disclosures. Not only was the Taskforce on Nature-related Financial Disclosures (TNFD) announced but 26 financial institutions also came together to sign the Finance for Biodiversity pledge.

Then, at NYC Climate Week 2023, the much awaited TNFD recommendations were released. Armed with these disclosure guidelines, signatories of the pledge who signed on to its principles before 2024 are due to report publicly on their progress in 2025.

One such signatory, Schroders – a listed asset manager with over $975bn under management - has released its inaugural group nature report.

Here are some of the highlights:

Nature dependence

At their core, the TNFD recommendations seek to amplify the message that nature loss is financially material. They provide a broad framework, much like their TCFD counterpart, of how nature risks could be mapped and therefore, managed.

As the adage goes, a challenge that cannot be measured is harder to manage. Financially material nature loss is no different. The process of publishing TNFD-aligned disclosures is, therefore, partly an exercise in mapping nature-related impacts and dependencies.

“With the world’s natural environments under growing pressure, measuring and managing the nature-exposed risks of our investments is becoming increasingly important”, says Andrew Howard, global head of sustainable investment at Schroders.

Using the ENCORE dataset, Schroders was able to identify the proportion of AUM with higher nature dependence. The findings show that for listed assets, the highest dependencies are all water-related.

There is some precedent to the finding of water dependence. When Swedish pension fund AP3 mapped its biodiversity exposure last year, results were similar. Some 20% of the fund’s equity portfolio was linked to high water dependence courtesy of investments in health care, real estate and consumer staples.

New tools

To further refine the analysis of impact and dependence, Schroders developed a new proprietary tool - NatCapEx.

“As a proudly active asset manager, we are leading by example through proactively disclosing our nature-related risks and opportunities, as well as developing our new proprietary tool, NatCapEx, to help fill the nature data gap”, added Howard.

The NatCapEx analysis refines the nature materiality assessment to make it investment relevant. The findings show that Schroders’ greatest nature-related impacts for its listed portfolio are land use, sea use, freshwater and pollution.

Private markets

Additionally, the report includes an initial assessment of nature risk in private markets -infrastructure in particular.

Citing the introduction of the UK’s Biodiversity Net Gain regulation, the report makes the case that regulations are encouraging nature-related disclosures for private market assets.

Using examples of Schroders Greencoat’s directly managed solar portfolio and Schroders’ infrastructure debt business, the report pledges to further refine private market disclosures in the near future.

“Having developed the NatCapEx model for publicly listed companies, we are now seeking to extend the framework’s logic to apply to private assets to facilitate consistent assessment”, the report reads.

Action plan

In addition to disclosing dependencies and impacts, nature reports also provide an opportunity to reflect on how these risks are to be managed.

AP3, for instance, incorporates nature-related analysis into pre-investment screening for listed companies in industries such as food, forest products, packaging and luxury goods.

For Schroders, these disclosures are informing engagement priorities for companies linked to natural capital and biodiversity. In 2024, the asset manager updated its expectations from investee companies to include TNFD factors. Engagement with an Indonesian bank over deforestation risk, is an example the report cites.

“Many companies are starting to assess their risks, impacts and dependencies on nature and to report these to investors”, the company says in the report.

In addition, Schroders has extended support to a form of engagement that has recently faced political headwinds on the climate front – collaborative engagement. 2024 was the first opportunity investors had to pursue in Nature Action 100 engagements of which Schroders participated in six.

There is also the prospect of translating TNFD-based analysis into investment decisions. Schroders says it will develop a new carbon impact strategy through its BlueOrchard business – cantered around financing reforestation and agroforestry.

As far as nature-related financial disclosures by institutional investors go, it is still early days. Data gaps remain in some areas and underlying disclosures by companies themselves are a work in progress. Schroders’ hope is that this voluntary attempt to lead by example will pave the way for others to follow.

“We also hope this voluntary disclosure in line with TNFD will help galvanise broader progress in corporate and investment disclosures. We will continue to engage with companies to encourage them to publish their own nature-related disclosures and shed light on this increasingly important risk and opportunity”, says Howard.