Challenges in determining materiality of climate disclosures

CDSB's new discussion paper looks at the application of materiality to climate-related financial disclosures, highlighting the main challenges and potential strategies for materiality determination

Read the paper

Watch the webinar here

In high-level terms, “materiality is a concept designed to guide the application of professional judgement for the purpose of determining acceptable levels of information disclosure in mainstream reports”. 

The subject of materiality in relation to climate risk reporting, not least the challenges inherent in the determination of it, has remained a contentious theme since the inception of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015. To address this, CDSB is today releasing a new discussion paper which looks specifically at what the Task Force says about the application of materiality to climate-related financial disclosures to help companies understand and address the main challenges involved. The paper was further analysed in a webinar that took place on 29 January.

Although the paper doesn’t answer all of the challenges and issue we highlight, the goal is to generate a discussion among experts to revise it with some clearer answers. Here we summarise some of the suggestions and issues we raise in our paper to ensure the information reported is relevant and useful to your audience.

Materiality judgements must take account of the needs of information users

When making judgements on materiality, it is fundamental to consider the target audience of the type of report that the information will be disclosed in. Information related to climate risks and opportunities that could influence the decisions of current and potential investors should be considered material. What makes it challenging is the diversity of the investor audience, as the needs of all significant shareholder groups should be taken into account, including those who take a long-term view on investment.

Leave out immaterial information and avoid obscuring material information

The purpose of the materiality determination exercise is to set immaterial information aside. Where a particular risk or issue is determined to be immaterial, it should be purposefully excluded from disclosures, so as to avoid obscuring those that are material. This may sound obvious, but a good way to reassure audiences that some risks or issues have not been overlooked is to have a separate statement outlining the organisation’s reasoning behind a determination of immateriality.

Measurement of risk may be difficult, and disclosures may be subjective

One of the key challenges is to identify how much information to include in the mainstream report. The risks related to climate change are often going to be hard to measure, so any disclosure will necessarily be qualitative or quantified based on subjective or restricted bases. Therefore, when assessing materiality, you should not only draw on the knowledge of your company, but also consider the potential impact of broader environmental factors.

Materiality should be assessed over appropriate time horizons

Another challenge for management is to determine the appropriate time frames for the assessment of climate-related risks and disclose the results as part of their response to recommended disclosures on Strategy. Organisations need to provide a description of both what they consider the relevant short, medium and long-term time horizons to be, and the specific climate-related issues for each time horizon.

Assessing materiality involves taking account of the nature and magnitude of issues, not just quantitative thresholds

The materiality of issues does not necessarily have to be determined via purely quantitative means, rather there may be some that can only be assessed via qualitative and indeed subjective means. Further, both the International Accounting Standards Board and the UK's Financial Reporting Council caution management against relying solely on quantitative thresholds when making their materiality judgements, so the challenge for companies is how to assess the materiality of these non-financial items which are difficult to assess other than on a qualitative basis. 

Choosing material key performance indicators (KPIs), metrics and targets

One of the four key TCFD recommendations focuses on metrics and targets, encouraging companies to disclose “the key performance indicators used to assess progress against targets.”.  Companies will need to identify the indicators, metrics and targets that reflect their own materiality judgements rather than the expectations of multiple audiences, stakeholder groups and peers. Organisations such as the Sustainability Accounting Standards Board (SASB) have developed a slate of material indicators at sector level to support this.

The discussion paper on materiality and climate-related financial disclosures is now available here. We invite everyone to send us comments and join the discussion by emailing info@cdsb.net