A4: Risk and opportunity materiality assessment

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A4: Risk and opportunity materiality assessment

Guiding Question: Which risks and opportunities are material and should be disclosed in line with the TNFD disclosure recommendations?

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Introduction

Organisations should adapt existing risk and opportunity management processes and key elements based on information gained in the previous components of LEAP, including the prioritisation and measurement of risks and opportunities.

Measurement and prioritisation are fundamental to the management of risks and opportunities.

Measurement of nature-related risks and opportunities

Organisations should identify a set of metrics for the risks and opportunities identified, including, as far as possible, Assessment Metrics for the financial impacts on the organisation. Metrics for individual risks and opportunities during the assessment may be at the site, project, product/service or location level.

The TNFD recommends nature-related risks and opportunities are assessed through the use of:

Exposure metrics, based on nature-related dependencies and impacts (refer to the Evaluate phase of LEAP); and
Magnitude metrics, which can be used to assess the financial implications to the organisation of nature-related risks and opportunities.

Determining the financial implications of nature-related risks and opportunities generally involves an organisation assessing its:

potential for damages or benefits against identified risks and opportunities;
planned responses; and,
response effectiveness.

Forward-looking analyses are especially important (see the TNFD scenarios discussion paper for the TNFD’s proposed approach to scenarios).

The table below contains illustrative metrics for the exposure to risk and opportunity, based on impacts and dependencies, and the financial implication of risk and opportunities to the organisation.

Additional Content

Table: Illustrative indicators

Type	Risk	Example	Exposure indicators	Magnitude metrics
Physical risk
Acute risk	Changes in the state (condition and/or extent) of ecosystems on which the organisation is dependent or has an impact, resulting in changes to the flow of ecosystem services	Degradation of freshwater habitat due to pollutants released by the organisation and other stakeholders	Quantity and concentration of pollutants emitted (impact driver) Change in mean species abundance in freshwater ecosystems (ecosystem condition) Concentration of pollutants in water (ecosystem condition)	Costs associated with the relocation of operations and suppliers Reduction in revenue due to interruption ofoperations/supply chain Increased costs due to interruption of operations/supply chain Restoration costsValue of assets/revenue dependent on area Number of locations/business lines/facilities exposed
Acute risk	Changes to species on which the organisation is dependent or has an impact (e.g. composition, population size, level of connectivity associated with species ranges) resulting in changes to the flow of ecosystem services provided	Reduction in keystone species an ecotourism company is dependent on	Change in population numbers of keystone species (species) Changes to annual visitor rates (ecosystem service)	Reduction in revenue due to interruption of operations (e.g. reduced ticket sales) Write-offs and early retirement of existing assets Costs associated with the relocation of operations and suppliers Restoration costs Costs related to substituting existing products/services Value of assets/revenue dependent on area Number of locations/business lines/facilities exposed
Chronic risk	Changes to species on which the organisation is dependent (e.g. composition, population size, level of connectivity associated with species ranges) resulting in changes to the flow of ecosystem services provided	Reduction in crop yield due to change in abundance of pollinators	Change in abundance of pollinators (species) Changes to crop yield (ecosystem service)	Increased costs of natural inputs/reduced supply Increased capital expenditure on adaptation, e.g. mechanical pollinators Reduction in revenue due to interruption of operations/supply chain Increased costs due to interruption of operations/supply chain Costs associated with the relocation of operations and suppliers Costs related to substituting existing products/services Value of assets/revenue dependent on area Restoration costs Number of locations/business lines/facilities exposed
Chronic risk	Changes in the state (condition and/or extent) of ecosystems on which the organisation is dependent or has an impact, resulting in changes to the flow of ecosystem services	Inability of ecosystem to provide protection against storms/flooding due to increased natural disasters (associated with climate change)	Occurrence/increase of storms/floods in area (external impact driver)	Increased capital expenditure on infrastructure repair Increased capital expenditure on adaptation Reduction in revenue due to interruption of operations Increased costs due to interruption of operations/supply chain Write-offs and early retirement of existing assets Restoration costs Costs associated with the relocation of operations and suppliers Value of assets/revenue dependent on area Number of locations/business lines/facilities exposed Insurance costs
Transition risk
Policy and legal	Changes to legislation/regulations aimed at achieving nature-positive outcomes/reducing negative-nature outcomes	Degradation of freshwater habitat due to pollutants released by the organisation that exceeds legal limits	Quantity and concentration of pollutants emitted into water (impact driver)	Increased costs of personnel and monitoring of activities required Increased compliance costs Increased fines and penalties Losses due to delays in operations/permit denials Reduced revenue due to reduction in production capacity/loss of license of operate Costs related to substituting existing products/services/processes Costs related to the loss of operating areas Clean-up costs
Technology	Requirements to transition to more efficient, resilient and less environmentally damaging technologies	Failure of nature-friendly technological innovation	Reduction in negative impact drivers expected as a result of innovation (impact driver)	Increased expenditure for research and development of new and alternative technologies Increased costs of operations required to achieve nature-related goals Write-offs and early retirement of existing assets
Market	Shifting customer/investor values or preferences to products and/or services that are nature-positive/have lower impacts on nature	Increased cost of plant-based inputs the organisation uses in the production process due to increased demand	Amount of input used in the production process (ecosystem service)	Increased production/raw material costs Costs related to substituting existing products/services
Reputation	Changes in sentiment towards the organisation/brand due to impacts on nature	Company is responsible for an oil spill	Total number of recorded oil spills (impact driver) Volume of spill (impact driver) Change in biodiversity intactness (ecosystem condition) Change in catch numbers of fish in local fisheries (ecosystem service) Decline in recreational value of area (ecosystem service)	Reduction in revenue due to lower demand for products and services Increased costs due to increased employee turnover/strikes Increased operational costs due to reduction in loyalty of suppliers or stakeholders Costs related to substituting existing products/services

Organisations should refer to the TNFD Guidance on Metrics for the Evaluate Phase of LEAP, which provides guidance on metrics for dependencies and impacts on nature (exposure metrics), along with an illustrative set of indicators and metrics. Where the location is not known, potential exposure can be surmised through the use of estimates, models or generic sector impacts.

For financial institutions, refer to ‘Illustrative Assessment and Disclosure Metrics for Financial Institutions’ (Annex 3.4) for illustrative metrics currently in use among pioneering financial institutions relating to impacts, dependencies, risk and opportunities.

Summary metrics

Summary metrics provide an understanding of the overall exposure and/or potential financial implications for the organisation of nature-related risks and opportunities. They may be useful to define at a:

Corporate level; and/or
Portfolio level.

Summary metrics can help inform corporate and financial institution decision-making and feed into external disclosures.

Illustrative risk and opportunity summary metrics

The following summary metrics can be used to assess nature-related risks and opportunities:

Financial value of nature-related risks/opportunities that could have a substantive financial or strategic impact on the business[1] (maximum, minimum);
% share of revenue exposed to elevated: 1) physical risks; 2) transition risks;
Proportion of assets exposed to risk by categories (physical, transition) and by risk ratings;
Total revenue/value of assets with substantial dependence on ecosystem services or with a high impact on nature; and
Value/proportion of business activities that have positive impacts on nature (e.g. through nature-based solutions, conservation, restoration).

It may be useful to split values into:

1) Values currently already being realised; and 2) those that could be realised;
Different risk/opportunity categories; and,
Prioritisation rating categories (e.g. very high, high, medium, low).

Prioritising nature-related risks and opportunities

Many organisations use a traditional ‘likelihood and impact’ approach to gauge the severity or materiality of their risks and then evaluate the severity of risks relative to their risk appetite (refer to TCFD for further details on risk appetite).[2] TCFD expands these prioritisation criteria to also include ‘vulnerability’ and ‘speed of onset’. [3]

Aligned with this, the TNFD recommends using the same prioritisation criteria (the TNFD refers to ‘impact’ as ‘magnitude’), with two additional criteria that relate to:

1) the scale and severity of impacts on nature; and

2) the scale and severity of implications for society from those nature impacts.

Additional Content

Figure: Criteria for prioritising nature-related risks and opportunities

The table below provides an overview of the TNFD’s criteria for prioritising nature-related risks and opportunities.

Additional Content

Table: TNFD priorisation criteria for nature-related risks and opportunities

Prioritisation criteria	Description
Magnitude	The impact of the risk/opportunity to the organisation, based on the financial implications.
Likelihood	The likelihood of the risk or opportunity emerging, informed by current and potential future trends and threats.[1] The assessment of likelihood is interconnected with scenario analysis. [2]
Additional TCFD prioritisation criteria
Vulnerability	Vulnerability refers to the susceptibility of an organisation to a risk/opportunity event in terms of its preparedness, agility and adaptability. The organisation’s ability or inability to adapt/mitigate/control the risk, or ability to harness the opportunity, is dependent on risk and opportunity awareness, management along the value chain, operational and managerial resilience, value chain and/or product diversification, or market or sector influence.
Speed of onset	The speed of onset that the risk/opportunity is expected to arise, i.e. long-term, medium-term or short-term. [3] Speed of onset refers to the time that elapses between the occurrence of an event and the point at which the organisation first feels its effects.
Additional TNFD prioritisation criteria
Scale and severity of impact on nature	The scale (temporal and spatial) and severity of the negative/positive impact on nature
Impact to society	The value of the impact on nature to society. TNFD may develop further guidance on valuation in future beta releases.

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