Section 6 – Due diligence phase

Module 13 – Materiality quantification

This refers to the process of translating complex climate-related risks – such as physical hazards, transition challenges and policy changes – into clear, auditable financial or strategic metrics that support decision-making.

It is one of the most challenging aspects of climate risk management. The unpredictable timing of extreme weather events, shifting transition trajectories, regional policy shifts and development-environment trade-offs make it hard to translate climate shocks into financial metrics. Because these estimates depend heavily on underlying assumptions, materiality quantification should be used to informdecisions, not to automate them.

All materiality quantification approaches should follow a few core principles:

• Core principles

  Decision-usefulness

  The exercise is not aimed at accurate predictions, but to support clear and auditable decision-making at the transaction or portfolio level. If the calculation cannot be easily understood or explained, it should not be used to guide organisational decision.

  Transparency and consistency

  Use structured templates and defined thresholds so results are consistent, repeatable and comparable across business lines. Comparability is essential if the organisation needs to rely on these metrics to prioritise actions.

  Adaptability

  As the climate risk landscape evolves and new data is gathered, FIs should update their methods to reflect the needs of their portfolios and business environments.

  Forward-looking assessments

  Use scenario analysis, climate model projections or other proxies to move beyond historical trends. More granular forward-looking analysis, by transaction or time horizon can improve accuracy and relevance.

  Integration and embedding

  Incorporate climate risk metrics – both qualitative and quantitative – into existing credit, market and operational risk frameworks. This requires upskilling personnel across the organisation so they can apply the methodology and its results in operational contexts.

  Regulatory alignment

  Materiality assessments and disclosures should follow recognised frameworks and standards to ensure consistency with regulatory and market expectations.

Developing-level FIs can conduct qualitative materiality assessments, while Advanced-level FIs can pursue more detailed modelling and quantification. Both approaches recognise key limitations:

• Subjective ratings and model assumptions can create inconsistencies or ambiguous results.
• Methodologies and assumptions may be difficult for non-experts to understand.
• Quantification can require significant skills, data, time, and IT resources.
• Regular recalibration is needed to account for inherent uncertainties and the limitations of models.

Guidance 10a: Rubric for qualitative climate risk materiality assessment

Guidance 10a outlines a structured approach for qualitative climate risk materiality assessment across four key areas: physical risk, transition risk, impact potential and mitigation planning. It can help evaluate the relative significance of climate-related exposures based on best available information and professional judgement, using a simple low-medium-high scoring scale. Applying this rubric consistently can help to improve the traceability and comparability of climate risk assessments, support internal and external reviews, and align risk ratings with organisational risk appetite.

Guidance 10b: Best practices for quantitative climate risk materiality assessment (Advanced FIs)

Advanced materiality quantification usually involves scenario-based modelling, integration with existing risk tools, and the use of diverse data inputs such as physical and transition risk assessments, emissions data and sector-specific considerations. Best practice approaches are transparent about their assumptions, include sensitivity testing and regular recalibration, and stay aligned with regulatory and compliance standards.

The following metrics can be used for climate risk quantification:

• Climate Value at Risk (CVaR)
  A key metric for estimating potential climate-related losses at the transaction, portfolio and enterprise level. It measures the expected loss beyond a specified quantile (for example, 95 per cent), attributable to climate risks over a defined horizon under specific scenarios. Simpler approaches provide broader quantile-based loss estimates, while more advanced approaches also attempt to capture extreme ‘tail risk’ events.
• Expected Shortfall
  The average of the most severe losses beyond a given confidence level.
• Stress Loss
  Projected loss under a defined scenario, such as real estate losses from a major coastal flood.
• Exposure at Risk
  The value of assets or business lines at risk of material impairment or stranded asset status under certain climate scenarios.
• Implied Temperature Rise
  A portfolio-level metric showing how closely the portfolio aligns with global climate targets.
• Financed Emissions over Time
  Tracking the financed emissions footprint across different sectoral decarbonisation scenarios, including those that fall short of expected decarbonisation progress.

The following guidance presents a conceptual approach to quantifying climate risk materiality using the CVaR metric. There is no single, universal formula for CVaR as its calculation depends on the chosen methodology and the characteristics of the asset or client being assessed.

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