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?

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

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

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

Additional Content

Useful Tools and Platforms

The following tools and platforms have been carefully selected by the TNFD to help support you in completing this phase of the LEAP process.

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