The Materiality of Climate Risk

Abstract

This paper presents evidence from a global survey of nearly 700 investors and companies on the materiality of climate risk for financial reporting. We argue that current disclosure regulation likely requires the disclosure of climate risk on the basis of materiality considerations based on three trends: Recent developments in climate change regulation, heightened litigation risk, and increasing investor awareness. Field evidence shows that the majority of investors believe climate risk to be financially material and to represent heightened regulatory and litigation risk. We find a misalignment of the risk perception of investors compared with companies with potential consequences for the usefulness of climate-related disclosures. Far fewer companies believe that they are exposed to climate risks and consequently do not make any disclosures about it. Investors state difficulties with identifying and quantifying risks due to the lack of disclosures as the main challenge in assessing the impact of climate change.

Keywords: Climate Change, Climate Disclosures, ESG, Field Study, Institutional Investors, Materiality

JEL Classification: M14, M41, M48, Q54, Q56, Q58