Introduction
As businesses continue to grapple with climate change and other environmental and social challenges, traditional approaches to risk management are proving insufficient. While enterprise risk management (ERM) has traditionally focused on identifying and mitigating financial risks, a growing number of companies recognise that they need to take a more comprehensive approach that takes into account the social and environmental impacts of their operations. Double materiality impact assessments are the latest evolution of ERM, offering companies a way to assess and manage their sustainability risks and opportunities holistically.
The Evolution of ERM: From Risk Management to Sustainability
ERM has evolved significantly over the years, reflecting changes in the business landscape and the broader societal context in which companies operate. Initially, ERM focused primarily on identifying and managing financial risks, such as credit, market, and operational risks. However, as sustainability emerged as a major concern for companies and stakeholders, ERM began to expand to include environmental and social risks. This led to the development of environmental, social, and governance (ESG) frameworks, which allowed companies to report on their sustainability performance.
While ESG frameworks were an important step forward, they had limitations. For example, many ESG frameworks did not take into account the potential impact of environmental and social risks on a company’s financial performance, or the impact of a company’s operations on society and the environment. This led to the development of double materiality impact assessments, which seek to address this gap.
Double Materiality in Practice: Examples from Industry Leaders
Today, companies are increasingly adopting double materiality impact assessments as a more comprehensive approach to ERM. For example, British American Tobacco (BAT) has conducted materiality assessments since 2007 and in 2022 conducted its first Double Materiality Assessment (DMA) through an external consultancy. The DMA focused on BAT’s impact on society and the environment, as well as potential risks and opportunities that could impact BAT’s financial value. The assessment identified 11 key topics, which include Harm Reduction, Climate Change, and Circular Economy as top priorities. BAT also identified Responsible Marketing and Transparent Communications, People, Diversity and Culture, Biodiversity and Ecosystems, Ethics and Integrity, Human Rights, Sustainability Governance, Farmer Livelihoods, and Water as other important topics. BAT’s DMA reflects the challenges facing society, the global economy, and the industry.
Similarly, Swiss Re, the global insurance company, has also embraced double materiality impact assessments. The company recognises that climate change poses significant risks to its business, and that it also has a role to play in addressing climate change as a global risk. By conducting double materiality impact assessments, Swiss Re is better able to understand the potential financial, social, and environmental impacts of its operations, and to identify opportunities to mitigate risk and create value.
The Benefits of Double Materiality: Why It Matters for Companies and Investors
Double materiality impact assessments offer several benefits for companies and investors alike. For companies, they provide a more comprehensive view of sustainability risks and opportunities, enabling better decision-making and more effective risk management. By understanding the potential financial, social, and environmental impacts of their operations, companies can identify opportunities to create value, reduce costs, and mitigate risks. This can enhance a company’s reputation, attract customers and investors, and ultimately contribute to its long-term success.
For investors, double materiality impact assessments provide a more accurate picture of a company’s sustainability performance, enabling more informed investment decisions. By understanding the potential financial, social, and environmental risks and opportunities facing a company, investors can better assess its long-term prospects and identify opportunities to create value. This can help to align investments with sustainability goals, and ultimately contribute to a more sustainable future.
Overcoming Challenges: How to Implement Effective Double Materiality Assessments
Implementing effective double materiality impact assessments can be challenging, particularly for companies that are just beginning to adopt this approach. One key challenge is data availability and quality. To conduct an effective double materiality impact assessment, companies need access to comprehensive and reliable data on their environmental, social, and financial performance, as well as on the broader economic and regulatory context in which they operate. This can be a significant challenge, particularly for companies operating in emerging markets or in sectors with complex supply chains.
Another challenge is integrating double materiality impact assessments into existing ERM processes. This requires a significant shift in mindset and culture, as well as a willingness to embrace new tools and methodologies. To overcome this challenge, companies should consider developing clear policies and procedures for conducting double materiality impact assessments, as well as providing training and support to employees.
Finally, communicating the results of double materiality impact assessments can be challenging, particularly for companies that are not used to reporting on non-financial performance. To address this challenge, companies should consider developing clear and transparent sustainability reporting frameworks that provide stakeholders with a comprehensive view of their sustainability performance.
Looking Ahead: The Future of Double Materiality and Sustainability Reporting
The Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose more information about material sustainability matters, and undertake a ‘double materiality assessment’ to identify which sustainability matters are most material to the organisation and its stakeholders. The seven-step process for the execution of a double materiality assessment involves identifying and engaging stakeholders, drawing up a list of potentially relevant sustainability matters, defining impacts, risks and opportunities, assessing impacts, assessing financial opportunities and risks, drawing up the materiality overview, and exploring strategic implications.
Double materiality impact assessments are likely to become a key tool for managing sustainability risks and creating value, as companies and investors increasingly recognise their importance. It is expected that double materiality impact assessments will become a standard part of sustainability reporting frameworks, required by regulators and investors, and driving greater transparency and accountability in the corporate sector. In the face of climate change and other sustainability challenges, taking a more comprehensive approach to ERM through double materiality assessments can help companies better position themselves for long-term success and contribute to a more sustainable future.
Conclusion
At The Risk Station, we recognise the importance of the double materiality assessment in managing sustainability risks and creating value, and we are committed to supporting companies in this journey.
We are continually expanding our offerings and developing new solutions to meet the evolving needs of our clients and our experts are actively working on creating insights and developing resources that will facilitate this process. At The Risk Station, we are excited about the potential of the double materiality assessment and its role in driving greater transparency and accountability in the corporate sector.
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