The Materiality of Climate Change Risk

Greg Rogers writes about the “materiality meterGreg Rogers writes about the “materiality meter” that will assess disclosure requirements relating to the risks of climate change.

As corporate boardrooms begin to consider whether and to what extent to include climate-related disclosures in future financial filings, as recommended by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD), the need to quantitatively assess the materiality of climate risk will move center stage. Listed companies will need a “materiality meter” to objectively measure their financial exposure to climate risk as a critical first step in assessing the information investors will need to make informed decisions….From the capital market perspective, investors can use investee disclosures of climate-related scenario analysis to assess the credibility of firms’ transition plans and their ability to execute them, and analyze the potential changes in value of assets and liabilities that could result from a transition to a lower carbon economy or to other climate-related events (e.g., physical or legal risks). This enhances investors’ ability to manage and price these risks and, if they wish, to take lending or investment decisions based on their view of transition scenarios. Going forward, investors must resist the temptation to characterize forward-looking disclosures as predictions, benchmarks, or statements of fact and recognize that good scenario analysis does not isolate on a single one-size-fits-all future state.

 

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