In the first half of July 2025, the TNFD Chair sent a letter to Patrick de Cambourg, Chair of the EFRAG Sustainability Reporting Board, in which they proposed further alignment of ESRSs with TNFD recommendations. It contains several interesting proposals that are worthy of support, but there are also some that I do not particularly like (e.g., combining all thematic standards E2-E5 relating to the natural environment—except for climate—into one).
One proposal in particular is worth considering. The TNFD chairmen propose increasing the importance of dependencies in materiality assessments, explicitly expecting companies to identify and assess dependencies in addition to identifying material impacts, risks, and opportunities.
And what exactly are these dependencies? Well, it's exactly what the name suggests: identifying the elements of the natural environment on which our company significantly depends. A beer producer will certainly identify its significant dependencies on the availability of sufficient quantities of good quality water today and in the future, as well as on the availability of hops, barley, and other necessary crops of sufficient quality (and at an acceptable price). A tire manufacturer will discover its dependence on rubber crops. A grocery store chain will identify its dependence on many crops and livestock, which are later used to produce food products. A media company with a publishing house in its structure will probably be dependent on the forests from which the wood used to produce paper comes.
Dependencies are a source of risks and opportunities, which means they are fundamental to financial materiality. If a large part of my business depends on the sale of chocolates and pralines, I will identify my dependency on cocoa cultivation. If I also assess that the availability of cocoa beans will decline in the coming years and their prices will rise, I am able to calculate the financial impact of the significant risk associated with this dependency.
As most of you probably know (from last season's reporting experience), discussions with company management boards about environmental impacts, especially negative ones, are difficult. „Okay, maybe we have some impact on biodiversity and ecosystems, but the impact of Nestle and other large corporations is greater. So why do we here in Poland have to report on this? What will we gain from this reporting? How is it relevant to our business?”
Now let's reverse our perspective and talk to the CEO not about influence, but about dependence. „Yes, cocoa beans account for 30% of our raw material costs. Yes, prices have been rising recently, we're managing somehow, but it's not easy. What? You have a report that in the next 5 years the amount of beans available on the market will fall by 60%? That would be Armageddon for our industry! Of course, this is a significant risk for us. Please immediately set up a team to analyze this in more detail and present us with mitigation concepts: maybe long-term contracts with selected suppliers, maybe futures contracts, maybe there are some substitutes for cocoa beans, maybe we should buy a plantation ourselves to improve our margin and secure supplies?”
It is much easier to talk to CEOs and CFOs about dependencies than about impact. Or, to put it another way, once we have discussed a specific dependency, this lays the groundwork for a conversation about impact. And yet, in the medium term, the scope of impact and financial significance will almost entirely overlap if we analyze the entire value chain.
When, in the fall of 2021, I was working with Patrick de Cambourg, Chiara del Prete, and Filip Gregor on an approach to the principle of dual materiality for future ESRSs (does anyone remember such a document?), ESRG 1 Double materiality conceptual guidelines for standard-setting?), we based financial materiality on dependencies. What is more, we treated them more broadly than TNFD proposes today, because we wrote about dependencies on all types of capital (i.e., not only natural, but also human, intellectual, social, etc.). Only the second stage of this chain, i.e., risks and opportunities, was directly included in the materiality assessment itself. At the time, we decided that it would be easier to talk to management boards about risks and opportunities, as these are concepts familiar from financial reporting and business management practice. In 2021, there were no TNFD recommendations yet; their first draft was not published until March 2022.
Should we today remodel the study of significance so that it also explicitly seeks significant correlations? This is an interesting idea, worth considering. But if so, we should not limit ourselves to dependencies on the natural environment, but rather include all types of capital. After all, most of these dependencies are in the social sphere (yes, yes – a relationship built with a bank is an element of social capital, as are long-term relationships with customers). And finally, should we identify, as TNDF proposes, significant DIROs, or would D&I, i.e., dependencies and influences, suffice? After all, risks and opportunities are a derivative of dependencies.
When considering in August—in your offices or on vacation—what could be improved in sustainability reporting, think about whether basing materiality research on dependencies and impacts would be a simpler approach.
P.S. Due to the aforementioned holiday period, the next newsletter will be sent in two weeks, on August 25, 2025.
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