A4: Assessing materiality

Guiding Question: Which risks are material and should be disclosed in line with the TNFD disclosure recommendations (Strategy A)?


Developing an integrated assessment of enterprise-wide risks – based on an evaluation of dependencies and impacts at each priority location – is the necessary analytical foundation for an organisation to form a view about current and future financial risk.

The TNFD Draft Disclosure Recommendations, specifically the ‘Strategy A’ disclosure, requires that organisations: Describe the nature-related risks and opportunities the organisation has identified over the short, medium, and long term.

Nature-related risks and organisation's financials

Nature-related risks can be transmitted through an organisation’s financials in a number of ways:

  • A reduction in the flow of ecosystem services to the organisation, resulting in a lower yield of the products and services that create financial value. For example, the collapse of bee populations, resulting in a significant decline in pollination services from nature to the business, resulting in a significantly lower yield of almonds or coffee.
  • A tipping point event that results in the dramatic depletion of an ecosystem service critical to a business process that drives cashflows and enterprise value. For example, a coral bleaching event that ends the cultural services (tourism value) from nature to business in a section of the reef relied on by a snorkeling and diving tourism operator.
  • A natural disaster that destroys key assets. For example, a bushfire that destroys above-ground electricity powerlines through forested areas, resulting in a loss of maintenance services from nature to business resulting in a disruption of service to consumers, a loss of income for the utility, the writing down of capital assets, and the requirement for fundraising for replacement capital expenditure.

These financial risks to companies then create risks to financial institutions – asset owners, asset managers and credit providers. Key risks to financial institutions include credit, market, liquidity, operational and reputational risk.

The determination of materiality for companies and for financial institutions depends on a range of organisational and jurisdictional considerations. Historically, some organisations have focused only on financial risk to shareholders (the so-called ‘single materiality’ approach). Other organisations have embraced a broader lens on materiality that incorporates consideration of the potential financial and non-financial impacts on nature and society, as well as the financial risks to shareholders (the so called ‘double materiality’ approach).

With the recent announcement of the International Sustainability Standards Board (ISSB) under the auspices of the International Financial Reporting Standards (IFRS) Foundation, international political leaders as well as market regulators have endorsed the creation of a ‘global baseline’ for sustainability reporting. This is in recognition of the disparate, and often confusing, approaches that have emerged over the past decade.

Aligned with the mission of the TNFD to build and promote an integrated and global framework for risk management and disclosure of nature-related risks and opportunities, it is our intention to inform the creation of this global baseline with respect to nature-related risk management and disclosure. The TNFD recognises that organisations in specific jurisdictions may wish to apply a threshold different from the global baseline or may be required to disclose to a different set of materiality thresholds by regulatory authorities.

As such, the TNFD will continue to align its disclosure recommendations and supplementary guidance, including this LEAP approach, to the global baseline as it becomes clearer. Each organisation applying the LEAP approach will need to form their own view of the materiality thresholds that are most appropriate and relevant to their organisation.

There are a number of frameworks that provide guidance for companies and financial institutions assessing financial materiality resulting from nature-related risks.

Additional guidance on assessing financial implications of nature-related risks

The Natural Capital Protocol

Based on an understanding of dependencies and impacts, as outlined in the LEAP approach, the NCP recommends determining the relative significance of associated costs and the benefits of taking action before selecting an appropriate valuation technique and undertaking or commissioning an assessment. This valuation can encompass qualitative, quantitative and financial valuation techniques.

  • Qualitative valuation techniques are used to inform the potential scale of costs and/or benefits expressed through qualitative, non-numerical terms, such as high, medium or low (e.g., a high increase of population affected by air pollutants or a significant increase in the social benefits of recreation). Techniques include opinion surveys, deliberative approaches and relative valuation.
  • Quantitative valuation techniques based on established indicators for costs and/or benefits (e.g., changes in tons of pollutants or the decrease in the number of people benefiting from recreation). Techniques include indicators, multi-criteria analysis using scoring and scaling and structured surveys.
  • Monetary valuation techniques translate quantitative estimates of costs and/or benefits into a single common currency. Techniques include using market and financial prices, cost-based approaches, revealed preference approaches, and stated preference approaches (e.g., the financial cost of medical treatment needed in response to increased air pollution).

The choice of valuation technique is, in part, determined by the type of environmental asset that is being assessed. Generally speaking, it is recommended to take a sequential and pragmatic approach to identifying and estimating costs qualitatively, followed by a quantification and monetisation when possible.

The CDSB Biodiversity Framework

CDSB suggests that the quantification of risks and opportunities should include descriptive indicators and financial information. Metrics considered should be time appropriate and may be financial or non-financial. Disclosing material nature-related financial information provides a useful illustration of the role of biodiversity in relation to the business model and strategy, and for financial planning purposes. For example, useful indicators related to risks and opportunities include operational expenses and transactions contingent to nature-related rights of access and use.

CDSB suggests that non-financial metrics are useful to report where they provide context about the risk magnitude of business operations, for example, the percentage of operational sites that are near a protected area or the number of species that are national priorities for conservation that live near a business operation area. The quantification of nature-related dependencies, related to final ecosystem services underpinned by biodiversity, is useful to demonstrate the magnitude of nature-related risks and possible implications to an organisation’s financial position and performance. A possible approach that CDSB identifies is to disclose financial information linked to dependencies by connecting the dependent final ecosystem services provided to the related financial accounts, such as assets (e.g. fish stocks), revenues (e.g. sales of wild fish) and expenses.

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