When Climate Risk Escalates — “Natural Capital” Is Now Part of Financial Disclosure
Following the issuance of IFRS S1 and S2 by the International Sustainability Standards Board (ISSB), which established the global framework for disclosing climate-related financial risks, the recommendations released by the Taskforce on Nature-related Financial Disclosures (TNFD) signal a major shift: companies must now expand their focus beyond carbon emissions (climate risk) to encompass the broader spectrum of nature-related risks.
The convergence of these two standards positions TNFD as the second major disclosure framework that directly affects financial reporting. For industries highly dependent on natural capital—such as water resources, land, and biodiversity—including agriculture, construction, manufacturing, and tourism, TNFD adoption is not merely a sustainability exercise. It is a critical accounting issue that directly influences asset valuation and impairment testing.
The convergence of these two standards positions TNFD as the second major disclosure framework that directly affects financial reporting. For industries highly dependent on natural capital—such as water resources, land, and biodiversity—including agriculture, construction, manufacturing, and tourism, TNFD adoption is not merely a sustainability exercise. It is a critical accounting issue that directly influences asset valuation and impairment testing.
1. Dual Disclosure Standards: The Intersection of TNFD and ISSB
TNFD is not an isolated framework separate from ISSB; rather, it is designed to be highly complementary to climate-related disclosure standards (IFRS S2 / TCFD). Its core objective is to help companies identify, assess, and manage their dependencies and impacts on nature, and translate these risks into decision-useful financial information.
1.1 Expanding the Risk Boundary: Defining “Natural Capital”
TNFD requires companies to consider natural capital such as land, water, oceans, and biodiversity.
Changes in these natural systems—such as water scarcity or soil degradation caused by extreme weather—create both transition risks and physical risks, which ultimately flow through to the company’s income statement and balance sheet.
Changes in these natural systems—such as water scarcity or soil degradation caused by extreme weather—create both transition risks and physical risks, which ultimately flow through to the company’s income statement and balance sheet.
1.2 The Accountant’s Perspective: Financializing Nature-Related Risks
For professional finance and accounting teams, the challenge of TNFD lies in the requirement to translate non-financial information into financial terms. Companies must answer questions such as:
- Dependence: To what extent does the business rely on water resources, and how does this dependence affect operating costs and production capacity?
- Impact: How do the company’s waste discharge or land-development activities contribute to ecosystem degradation and thereby create legal or reputational risks?
Image source: FREEPIK
2. How Do “Nature-Related Risks” Transform Asset Valuation in Accounting?
The mandatory adoption of TNFD will directly challenge traditional accounting practices for valuing land assets, water rights, and other nature-dependent resources. Asset valuation can no longer rely solely on market prices or replacement costs; it must also incorporate the “health” of the underlying natural capital.
2.1 Land Assets and Asset Impairment
- Traditional valuation: Only evaluates the market price of the land and its future cash flows.
- TNFD consideration: If the land owned by the enterprise is determined to cause significant damage to biodiversity, it may face risks such as the government withdrawing concessions, being required to carry out ecological restoration, or operational activities being terminated due to community lawsuits.
- Accounting impact: The occurrence of these risks will lead to a decrease in the future recoverable amount of the land asset, thereby triggering an impairment test and requiring the recognition of large impairment losses. For industries such as agriculture, construction, and mining that possess large amounts of land or concession rights, the impact is especially severe.
2.2 Water Resources and Provision Recognition
- Traditional accounting: Water charges are typically regarded as operating expenses.
- TNFD perspective: If a company’s water use in water-stressed areas is considered unsustainable, it may face risks such as tighter environmental regulations, sharp increases in water-use charges, or being required to bear pollution-treatment or water-restoration costs.
- Accounting impact: Finance departments must recognize provisions—based on accounting standards—for future environmental obligations, such as potential water-resource restoration costs. These provisions will be reflected directly on the balance sheet as liabilities and will affect the company’s net assets.
3. Practical Challenges and Responses in Accounting Valuation: The Upgrade of Data Governance
Integrating TNFD into accounting valuation is not easy; it requires significant upgrades to the enterprise’s governance system.(1) Data acquisition and integration challenges
The data relied upon by TNFD (such as biodiversity indices, water footprints, and ecosystem health conditions) mostly belong to non-financial data and are difficult to obtain. Enterprises must establish a cross-departmental data governance system to integrate and calibrate data from environmental, operational, and financial departments, ensuring the auditability of the data.(2) Internalization of externality costs
Enterprises must internalize environmental costs that were originally regarded as externalities (such as the social cost of pollution or potential fines arising from biodiversity destruction) and incorporate them into accounting valuation models. This requires cross-disciplinary cooperation between accounting professionals and environmental engineers/ecologists in order to establish a scientifically reasonable risk discount rate.
(3) Practical response: incorporating nature-related risks into the impairment-testing process
Enterprises should incorporate the nature-related risk identification results required by TNFD into the initiation process of their annual or interim asset impairment tests. When assessing the “value in use” and “net fair value” of assets, they must consider the impact of nature-related risks on future cash flows to ensure that accounting valuation meets the rigor required by international standards.
Image source: FREEPIK
4. Conclusion: From “Environmental Protection” to “Asset Protection”
The trend reflected by TNFD clearly indicates that enterprises that ignore the natural environment will pay a financial price.
For Taiwanese companies, this is an opportunity to elevate environmental-protection thinking to the level of asset protection and corporate governance.
Precise financialization of nature-related risks, rigorous accounting valuation, and impairment testing are key for enterprises to gain investor trust and optimize capital costs in the international market.
For Taiwanese companies, this is an opportunity to elevate environmental-protection thinking to the level of asset protection and corporate governance.
Precise financialization of nature-related risks, rigorous accounting valuation, and impairment testing are key for enterprises to gain investor trust and optimize capital costs in the international market.
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