Climate-related information for materiality assessment

The integration of sustainability and climate-related disclosures into financial statements includes the concept of materiality assessment. Companies need to evaluate the impact of climate risks on their operations.

Regulatory policies

The legal basis for this sustainability reporting is provided by the International Financial Reporting Standards (IFRS) and European Sustainability Reporting Standards (ESRS).

Over the past few years, international regulatory bodies and standard-setting organizations have introduced guidelines to harmonize climate-related disclosures across industries and countries. The definition of the materiality assessment was progressively introduced across accounting standards and taxonomies.

• June 2017, the Task Force on Climate-related Financial Disclosures (TCFD), established by the G20’s Financial Stability Board, published recommendations how companies should communicate financially material climate-related information.
• June 2019, the European Commission published the Guidelines on non-financial reporting: Supplement on reporting climate-related information.
• May 2020, the European Central Bank (ECB) published its Guide on Climate-Related and Environmental Risks, outlining how financial institutions should evaluate the materiality of their exposure to climate risks. This guidance highlights the need for both qualitative and quantitative analyses over long-term horizons.
• August 2022, the European Insurance and Occupational Pensions Authority (EIOPA) issued guidelines specifically for insurers, detailing how they should assess the materiality of climate risks.
• July 2023, the European Commission adopted the European Sustainability Reporting Standards (ESRS), setting the foundation for consistent and detailed sustainability disclosures by companies operating in the EU.
• November 2024, the International Sustainability Standards Board (ISSB) described the characteristics of material information, ensuring alignment with IFRS sustainability disclosure standards. 

These standards, recommendations and guidelines primarily target listed and large unlisted companies, as well as regulated financial institutions such as banks, insurers, pension funds, and asset managers.

What is material?

According to ESRS definition: "A sustainability matter is considered material from a financial perspective if it triggers or may trigger material financial effects on the undertaking. A sustainability matter triggers financial effects on the undertaking when it generates risks or opportunities that have an influence (or are likely to have an influence) on the undertaking’s cash flows, performance, position, development, cost of capital or access to finance in the short, medium- and long-term time horizons."

What do materiality assessments Include?

Materiality assessments serve as more than a compliance exercise; they are a comprehensive evaluation of business factors influencing:

• Cash flows
• Enterprise value
• Cost of capital
• Strategic decision-making
• Short- and long-term growth

Beyond financial metrics, assessments must also address environmental, social, and governance (ESG) factors that affect a company’s resilience to climate shocks. This process involves examining the physical climate risks that could disrupt operations, supply chains, and market competitiveness.

Climate-related questions for materiality assessment

• What hazards threaten the company’s facilities, factories, and production sites?
• How do these risks impact cash flows, performance and enterprise value over different time horizons?
• What dependencies exist within the company’s supply chain that could amplify these risks?
• To what extent should climate risk disclosures influence ratings and lending decisions?

According to the Basel Committee on Banking Supervision (December 2022), banks must incorporate material and relevant information about climate risks when assigning ratings to borrowers and facilities. This includes assessing both physical risks (e.g., floods, wildfires) and transition risks (e.g., regulatory changes, carbon pricing) to determine their impact on financial conditions.

Sector-agnostic vs. sector-specific disclosures

For effective materiality assessments, companies must consider both sector-agnostic and sector-specific factors. While general frameworks provide a baseline, nuanced, sector-specific insights are crucial for understanding risks such as:

• Business interruptions from localized disruptions (e.g., road closures, water shortages, power outages)
• Dependencies on infrastructure and utilities impacted by climate anomalies

Without accounting for broader impacts beyond hyper-local data, companies risk underestimating the true footprint of climate disruptions. For example, flooding a few kilometers away can have cascading effects on supply chain operations and workforce availability.

Expanding the scope of impact modeling

Materiality assessments are not just about compliance; they are an opportunity to:

• Illuminate hidden vulnerabilities in operations and supply chains
• Model the long-term impacts of climate risks on asset and liability portfolios
• Develop actionable resilience measures and mitigation strategies

The European Financial Reporting Advisory Group (EFRAG) recommends using the Global Reporting Initiative (GRI) framework as a solid foundation for assessing impacts under the ESRS. This ensures consistency and relevance across reporting practices.

Climate data for materiality assessment

Weather Trade Net offers instant access to climate risk analytics. This data-driven approach enables companies to:

• Conduct robust and meaningful materiality assessments
• Map severity and frequency of climate anomalies
• Align disclosures with regulatory standards

Contact the Weather Trade Net team for tailored climate risk assessment solutions to empower your decision-making and ensure compliance with evolving global standards.