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Joshua Geer reports on how firms in Japan and beyond are approaching the task of disclosing nature-related risks and opportunities
Japanese insurers are at the forefront of embracing the Taskforce on Nature-related Financial Disclosures (TNFD) framework.
The country's underwriters represent the bulk of the 14 insurers who signed up as early adopters of the TNFD, which recommends a set of disclosures to help organisations act on nature-related risks and opportunities.
Japanese culture reveres nature unlike any other country, with practices like shinrin-yoku (forest bathing) endorsed even by doctors as a means to find solace from the bustle of urban life.
"There's a clear cultural alignment: Japanese people naturally gravitate towards lifestyles harmonious with nature," remarks Masaaki Nagamura, manager of international initiatives at Tokio Marine Holdings.
Beyond the cultural affinity, insurers are seeking a strategic alignment with global sustainability efforts, and preparing for mandatory nature-related disclosures in the future.
TNFD
TNFD represents the main framework for insurers to start measuring and managing their nature exposures. Following in the footsteps of the Taskforce on Climate-related Financial Disclosures (TCFD) it is hoped over time the initiative will have similar success with large global take up.
However, as it stands just 14 insurers are early adopters of the TNFD, with more to be announced later this year.
By the financial year 2024 or 2025, these early movers have promised to begin including TNFD disclosures in their corporate reporting.
The framework has 14 recommendations designed to provide insurers and corporates with means to act on evolving nature-related dependencies, impacts, risks and opportunities. These are split across four pillars: governance, strategy, risk management and metrics/targets.
The Association of British Insurers (ABI) has been a strong supporter of the TNFD, praising its approach in its very own guide to action on nature, published last year.
"Several of our members have been closely following the work of the Taskforce on Nature-related Financial Disclosures and have responded to its consultations," explains Rebecca Lea, the ABI's manager for investment and climate.
Talking to InsuranceERM, Lea highlights that insurers need to start working on addressing nature loss, labelling it "one of the most crucial issues facing our planet".
She says nature's "shocking decline" not only threatens life, but is already harming business and preventing economic growth.
Chris Hart, nature investment strategy lead at UK life insurer Phoenix adds that nature "underpins economies in tangible, measurable ways, with over half of the world's GDP significantly dependent on nature and the ecosystem services it provides".
He tells InsuranceERM the establishment of TNFD underscores the growing recognition in the financial sector of the economic impacts of biodiversity loss and ecosystem degradation.
"Ultimately, it aims to ensure that the financial sector can make decisions that are informed by a comprehensive understanding of environmental risks and opportunities," says Hart.
Big in Japan
While many have voiced support for TNFD, Japanese insurers have put their money where their mouth is.
Tokio Marine was one of the TNFD's early adopters and Nagamura tells InsuranceERM the firm has long valued biodiversity, citing its first mangrove planting initiative in 1999 as an early example of its approach and efforts.
"The TNFD recommendations provide a clear standard to examine, measure and disclose our nature-related risks and opportunities, giving us a clear basis for determining effective actions," says Nagamura.
Reflecting on why Japanese insurers have taken the lead on TNFD, Nagamura highlights a cultural affinity with nature.
As a result "there is often clear support for Japanese companies, in their domestic market, to position nature conservation as one of their key management issues," he says.
"From the technical perspective, Japan has the highest number of companies supporting the TCFD recommendations in the world, so there is already strong momentum," says Nagamura.
He also highlights how the region's insurers want to be prepared for anticipated biodiversity disclosure rules from the International Sustainability Standards Board (ISSB).
A further reason for the notable TNFD uptake was efforts by Japanese government agencies, such as the Ministry of the Environment and the Financial Services Agency, to participate in the TNFD Forum.
Getting started on nature reporting
It's worth noting the signatory insurers have joined a voluntary initiative and in the early stages they may only report one or two of the recommended disclosures. With that in mind, insurers wishing to go further in integrating nature risk and opportunities into their business are taking other steps.
Hart at Phoenix explains the insurer has started to build on its work to understand the nature-related risks in listed asset portfolios, further incorporate nature-related risks into its risk management framework and explore nature-related investment opportunities.
"We have also finalised our nature risk prioritisation work, and to date have drafted bottom-up company-level impact and dependency exposure and risk assessment methodologies that we aim to apply to listed equity and listed credit portfolios," says Hart.
Offering advice to other insurers, Hart suggests starting to plan a phased adoption of the TNFD core recommended disclosures, and engaging internal stakeholders to determine agreement on how the organisation will respond to the nature-related issues.
Nagamura explains Tokio Marine has for this fiscal year identified biodiversity loss as one of the key emerging risks to its business and has committed to taking the appropriate measures to monitor its impact. The group also plans to combine its TCFD and TNFD reporting for 2024.
"We have now begun integrating the TNFD framework into risk management and disclosure practices under the expectation that the speed of integration will accelerate once the ISSB decides to include biodiversity into its reporting standards," he adds.
LEAP assessment
The Locate, Evaluate, Assess, Prepare (LEAP) approach has been central for insurers using the TNFD framework, in guiding them through the process of understanding and managing their nature-related risks and opportunities.
Phoenix's Hart says piloting the LEAP guidance in 2023 was an essential step in integrating nature-related considerations into investment management activities.
Similarly, Tokio Marine adopted the LEAP approach early on. Nagamura explained it helped the firm build on previous analysis on a subset of its investment portfolio to improve its understanding of the potential materiality of portfolio exposures to nature-related impacts and dependencies.
Challenges
However, as with starting anything new, challenges are inevitable.
"It's not easy to assess how reliant your business is on nature, or how important it is to your business strategy – not least due to challenges surrounding data requirements for the localised impacts on nature. Nature decline and nature-based solutions are location specific, difficult to measure, and involve a range of sometimes competing interests," says the ABI's Lea.
The UN-backed ENCORE tool (Exploring Natural Capital Opportunities, Risks and Exposure) is often a first step to understand nature risks and dependencies.
Nagamura, identifying challenges specific to Tokio Marine, says the firm is working out how to best utilise its ENCORE analysis in customer and investee engagements.
He says there is a need to improve understanding of nature-related issues among customers, investees, value chain partners, and Tokio Marine's own employees.
"It will take time, but we are addressing this by promoting awareness-raising activities, biodiversity conservation initiatives, and the disclosure of our TNFD report," he explains.
Opportunities
But within these challenges, there are opportunities to be found, the insurers note.
Lea says in the long run there are financial opportunities to tackling nature loss and reporting on progress. These can come from mitigating or offsetting those risks, but also from addressing the current funding gap for restoring nature.
"Tackling nature loss also creates opportunities to innovate in asset protection, extend net-zero strategies and collaborate with governments, industry and other stakeholders to advocate for policy and regulatory change," she adds.
Meanwhile, Hart says reporting against a robust framework on nature will help insurers better understand both their own and their investee companies' exposure.
In particular, Hart explains voluntary reporting on nature by insurers can help to promote alignment among policymakers and regulators that supports a transition to nature restoration.
"Reporting can signal to stakeholders that they are proactively integrating new sustainability factors such as nature and biodiversity considerations into their decision making," he says.