Understand material risk in the context of climate-related financial disclosure
What is material risk?
Material risk is a widely-used concept in many sectors, including business, financial, legal and medical sectors and describes risk that has significant consequences. Designating risk as “material” indicates that it is risk that needs to be managed, or it has the potential to create negative performance outcomes. This broad definition is what makes the concept of material risk applicable across so many sectors. It also makes applying material risk subjective, as perceptions of what counts as “significant” change over time with changing cultural and socioeconomic contexts.
How is material risk applied in climate-related financial disclosures?
The Task Force on Climate-related Financial Disclosures (TCFD) recommends organizations to complete a materiality assessment as part of their disclosures for Strategy and Metrics and Targets, but not for Governance and Risk Management. Find out more about the TCFD here.
The TCFD does not have a specific definition for materiality. Instead, they advise organizations to ‘determine materiality for climate-related issues consistent with how they determine the materiality of other information included in their annual financial filings.’ This means that it’s up to individual organizations to define when climate-related risk becomes material risk, in line with how they define material risk in other financial reporting.
How should organizations approach defining climate-related material risk?
Materiality is a widely debated concept, varying across sectors and even organization to organization. This is because determining what counts as significant or material consequences is dependent on an organization's individual context. A materiality threshold helps organizations to set a benchmark for determining when information is expected to be relevant for organization and stakeholder decisions.
While there is no one size fits all definition on material risk, there are a number of different useful definitions and measures that are used in different sectors. These definitions of material risk have been designed to provide guidance to organizations on determining thresholds for material risk.
What is the materiality threshold in EarthScan?
In EarthScan, we have set a materiality threshold as an indication for determining where risk to assets within your portfolio become material. This threshold is designed as a suggested guideline for material risk, as different industries and organizations have different levels of risk tolerance and the threshold for when an asset is at material risk will depend on organizational context.
Within the EarthScan Summary Report, the materiality threshold for climate hazard risk exposure is medium risk. An asset is defined as being at material risk if it has an EarthScan Rating of C-F.