Emerging Nature-Related Implications for Sustainability and ESG
William J. Brady P.E.
CCS Strategies LLC
Background
Over the past decade, the focus of the US electric power sector on sustainability and ESG has matured to a level where these considerations have been integrated into governance, strategy, management, and reporting. Investor and consumer expectations for addressing climate change, social equity, and the myriad of other relevant ESG and sustainability issues have been significant contributing factors to the sector’s progress. Sustainability is often characterized as a journey, and as the focus on nature-based solutions and disclosure grows, the power sector is poised to experience further integration of these issues into sustainability and ESG management. In response to expectations and the development of standards and best practices for addressing nature-related issues, power sector infrastructure investments and the adoption of nature-based solutions for addressing climate change are several aspects that could be catalysts for expanding an organization’s strategic and management focus on nature and creating or protecting value.
Discussion
The Taskforce on Nature-related Financial Disclosures (TNFD) plans to publish its recommendations (v1.0) in September 2023.[1] Following the model of the Task Force on Climate-related Financial Disclosures (TCFD), the TNFD has been developing a risk management and disclosure framework for organizations; designed to report and act on evolving nature-related risks and opportunities, intending to shift global investments away from nature-negative outcomes to nature-positive outcomes. The most recent beta version released in November 2022 (v0.3) includes recommendations, for identifying, assessing, managing, and disclosing nature-related dependencies, impacts, risks, and opportunities, for large and small businesses across all sectors. This latest beta version incorporates additional guidance for addressing traceability, stakeholder engagement, and aligning climate and nature targets. Through the stakeholder review process, the TNFD seeks to align with the many existing standards for addressing these dimensions. What is unique about the TNFD recommendations is that they represent a holistic approach to addressing the strategic and risk management implications of an organization’s relationship with nature and nature’s relationship with society.
Adoption of the TCFD recommendations has gained considerable momentum in recent years; notably, the US Securities and Exchange Commission (SEC) use of them as the basis for its proposed amendments addressing climate disclosure, which could be affected as soon as 2023. Following the TCFD’s lead, the TNFD recommendations are receiving more attention from both corporate and non-corporate stakeholders, particularly those engaged in the collaborative review process. Approximately 130 have already begun to pursue implementing the recommendations to understand how they could add value. In addition, companies are beginning to reference the recommendations in their sustainability and ESG reporting. Should the development and adoption of the TNFD recommendations continue to follow a trajectory similar to the TNFD, it could become the definitive standard for addressing and reporting on nature-related issues.
Organizations that have developed the capacity for addressing the TCFD recommendations on governance, strategy, risk management, and metrics and targets could potentially leverage their capability, including scenario analysis, to address the TNFD recommendations. However, companies should also expect to develop additional capabilities to fully adopt these recommendations. The potential implications of the TNFD recommendations for the power sector are highlighted by considering two aspects of activity, the projected level of infrastructure investment to address resiliency and electrification and the use of nature-based solutions.
EEI reports that its members plan to invest about $155 billion annually through 2024 on infrastructure investments, about 50% of that on T&D projects, and nearly 20% of total projected investment targeted for addressing adaptation, hardening and resilience.[2] Over the longer term, electrification is anticipated to make a significant contribution towards decarbonizing the economy, and facilitating that transition will require even greater capital deployment in T&D and zero-emitting generation.
Utility rights-of-way, utility-scale wind and solar generation, and distribution infrastructure occupy large footprints and impact and depend on the natural environment. Fossil and hydro-based power generation have even more complex relationships with the environment and nature, evidenced by their effect and dependency on air and water resources that are integral to species, habitats, and societal services. Identifying, assessing, managing, and disclosing these relationships using the TNFD framework potentially enhances a corporation’s long-term strategy and brand, and ensures the retention of its social license to operate. Adopting a common framework for disclosure enables companies to communicate using an approach informed by investors and other interested parties and that supports comparability across the sector as well as the broader economy.
The electric power sector’s adoption of nature-based solutions for mitigating GHG emissions and enhancing resiliency is another aspect where the focus on managing and disclosing dependencies, impacts, risks, and opportunities will likely increase as the TNFD recommendations gain momentum. The implications of utilizing nature-based solutions are particularly nuanced and companies pursuing them could benefit from developing the capacity to identify and manage them.
Market Capitalization of Largest US Electric Utilities[3]
The ten largest investor-owned electric utilities represent two-thirds of the market capitalization for the sector; each having adopted its own form of net-zero carbon commitment to be achieved by or before 2050. While not entirely representative of the sector’s commitment to net zero, it indicates the impact that could be had on achieving economywide outcomes. More than half of these companies have identified either relying on or utilizing carbon offsets as part of the decarbonization strategy, with several citing the use of natural carbon solutions. Sempra, for example, reports that its IEnova subsidiary plans to identify and develop carbon offset projects, including forestry projects in Mexico that could generate carbon offsets for Mexico’s emissions trading system.[4] Several natural gas LDCs, such as DTE, are pursuing the mitigation of their associated Scope 3 GHG emissions by offering their customers access to nature-based carbon offsets.[5]
Nature-based solutions can be attractive options for affecting mitigation measures due to their contribution towards reducing carbon in the atmosphere and their positive impact on biodiversity if done effectively. For companies, this added benefit can potentially provide a greater return on investment financially and enhance their brand. The demand for nature-based carbon solutions will likely increase in response to net-zero commitments across the global economy and the shrinking time horizon for acting. The global voluntary carbon market was valued at $2 billion in 2022, nearly double from 2021, and is projected to have a CAGR of nearly 43% through 2027, including 399 Mt CO2e credits issued in 2021.[6]
Recognizing the growing interest in utilizing nature-based carbon solutions, Ceres advises investors to carefully assess companies’ use of carbon offsets; in particular, how they account for and manage offsets from natural climate solutions.[7] Their perspective aligns in many ways with the TNFD recommendations, particularly the need to address impacts on communities.
Companies opting to use carbon markets to purchase offsets for mitigating their emissions should expect greater scrutiny, particularly those that are sourced from nature-based activities. Traditionally, key considerations for the use of offsets have included traceability, measurability, verification, avoidance of leakage, fungibility, and durability. Considering the TNFD recommendations and Ceres advice, companies considering nature-based carbon offsets will need to identify, assess, and manage the broader dependencies, impacts, risks, and opportunities associated with obtaining or producing a title for offsets, including addressing the societal dimension. Holders utilizing offsets to reduce their net carbon footprint should expect to conduct more rigorous due diligence on environmental and societal impacts; assessing how future conditions could affect the viability of the underlying activities that contribute to carbon sequestration and avoided emissions. Addressing how physical climate change would affect the carbon value of the offsetting activities should be a fundamental consideration for scenario analysis, along with identifying transition risks that could affect outcomes. To address the relationship between climate change and nature, TNFD is working to align the integration of climate and nature considerations.
Although the standards for addressing nature-related issues and their application to capital deployment and nature-based solutions are becoming more stringent, the body of experience and knowledge is growing commensurately. There are numerous supporting standards and methodologies for addressing the expanded range of considerations; for example, the TNFD LEAP methodology[8], is used for scoping the organization’s relationship to nature and identifying dependencies, impacts, risks, and opportunities. Addressing nature-related societal issues, such as stakeholder engagement and human rights, presents a broad pallet of options to consider, and the TNFD is working to align with the UNGP and OECD Guidelines for Multinational Enterprises as relevant and useful references.
Determining what is material for nature-related issues will likely continue to be left to the judgement of each company to decide, similar to identifying other material sustainability issues, that may or may not be financially material, but are of significant interest for key stakeholders. As has been the case with other sustainability issues, nature-related disclosure recommendations will continue to be further refined, experience and best practices will build, and ultimately, an organization’s strategy and performance should benefit from adopting a broader perspective on them to creating and protect value.
Summary
The power sector has a unique and significant role in enabling the decarbonization of the economy and the utilization of nature-based solutions has the potential to deliver greater overall economic, environmental, and societal value. The TNFD recommendations provide a framework that supports managing the range of nature-related considerations associated with making the transition to net-zero. Developing an understanding of the recommendations, engaging in the stakeholder process, and identifying how to begin adopting them are ways that companies can start to pursue the added value of more holistically addressing nature as part of their sustainability and ESG management.
[1] Taskforce on Nature-related Financial Disclosures Executive Summary
[2] EEI Industry Capital Expenditures with Functional Detail (September 2022)
[3] www.companiesmarketcap.com Largest Electricity Companies by Market Cap
[4] Sempra 2021 Corporate Sustainability Report, page 119
[5] DTE Energy CleanVision Natural Gas Balance
[6] Research and Markets press release, December 30,2022, Global Voluntary Carbon Market Report 2022: Industry to Reach $17.11 Billion by 2027 Amidst Unprecedented Momentum for Climate Action
[7] Ceres, EVALUATING THE USE OF CARBON CREDITS, Critical questions for financial institutions when engaging with companies, March 2022