Preparing for CSRD: understanding double materiality

What is double materiality?

Double materiality considers:

1. The impacts that the environment/context/society has on a business and its performance (Outside-in impacts)

2. The impacts a business has on the environment/society (Inside out impacts)

Outside-in impacts may result in financial, reputation, legal or operations risks. This is often referred to as Financial Materiality.

Inside out impacts are the footprint of the business on the environment, society, or industry. These need to be considered in the context of the nature and societal boundaries - this is often called Impact Materiality.

Here is how double materiality applies to your business.

It is important to consider the two aspects of materiality together when identifying the issues that might affect the success of your business. This approach enables you to and better understand your positive or negative contribution to the societal and environmental boundaries.

The higher a business’s carbon emissions are, the more it contributes to climate change which in turn creates more severe risks and damages for the business – this is known as the Feedback Loop. Here’s another example of the Feedback Loop; a company discharges chemical compounds into the waterway thus polluting the water. Consequently, the water requires greater treatment to achieve drinking water standard. The cost of this treatment is passed on to customers, including businesses.

What is climate risk?

One of the Outside in impacts is the risk associated with Climate change. Simplest definition of a ‘climate risk’ is a potential adverse consequence caused by the changing climate. This adverse consequence can apply to anything: a person, a group of people, a product, a business process or, indeed, an entire value chain. 

The truth is every business faces climate risks. 

In addition to having negative impacts on people and wildlife, many climate risks have huge financial implications. In 2022 alone, climate change cost the global economy US$ 313 billion. Only US$ 132 billion of these losses were covered by insurance. SMEs are particularly vulnerable and a UK study found that the average cost of flood damage ranged between £12,000 - £250,000.

Climate risks do not just affect businesses, they impact a lot of aspects of our lives, often in unexpected ways and the effects are felt differently across the world. Countries in the Global South grapple with the daily realities of climate change. Meanwhile, in the Global North, discussions often revolve around "risks" and "potential impacts".

Here are some examples of how climate change is affecting us right now:

Democracy is at risk.

Rising occurrences of natural disasters, such as floods and typhoons, cause people from coastal communities to be displaced. If this happens during an election, they are unable to vote, as these events become more frequent and severe, more people face the possibility of being unable to vote. Sadly, this often occurs within the most vulnerable communities who are already underrepresented.

The future of beer is uncertain. 

Climate change-related events are impacting the crucial ingredients of the beer industry. Barley yields are declining, the flavour profile of hops is shifting, and water scarcity poses a substantial threat to a product that heavily depends on water. Beer represents more than just a drink to be enjoyed socially; its ingredients serve as a livelihood for numerous farmers and their families, supporting millions of jobs globally.

Sleep deprivation is widespread. 

As global temperatures rise our sleep patterns are disrupted and people sleep less on average per night. Sleep deficiency is linked to many chronic health problems, including heart disease, kidney disease, high blood pressure, diabetes, stroke, obesity, and depression. People who are affected by wildfires, hurricanes, and other natural disasters (a growing number annually), often struggle to sleep well for months after the calamity. Add to this the chronic stress caused by climate anxiety, and it’s clear we are all facing more restless nights and the risks associated with these.

What steps should you take NOW to safeguard your business? 

We recommend the following actions:

1. Map your key stakeholders. 

Consider the various stakeholders in your business. Who holds a stake in its success? Who might be in some way influenced by the decisions and actions your business takes? Extend your analysis beyond the conventional groups to encompass often overlooked entities such as local communities surrounding your facilities, non-governmental organisations (NGOs), and the broader environment, including nature. How does your business address the needs of and impacts on nature, reflecting a commitment to ecological sustainability?

2. Conduct a climate risk assessment. 

Examine the vulnerabilities within your value chain concerning physical risks. Assess whether your suppliers operate in regions facing water scarcity. Identify any ingredients crucial to your operations that may be at risk. Evaluate if your business has facilities located in flood-prone areas. While some commodities and locations may have readily available climate risk profiles online, others may necessitate a more in-depth, location-specific analysis.

3. Conduct a lifecycle impact assessment of your product. 

To understand what impacts your product and/ or business has it is crucial to comprehend the entire lifecycle, encompassing the diverse inputs and outputs related to sourcing, manufacturing, transportation, and utilisation of the product. This provides an opportunity to delve into the origins of ingredients, materials, and products. Understanding this provenance will help you identify potential vulnerabilities and significant impacts within the supply chains that might not be immediately apparent.

If you need more help with conducting a material risk assessment, a climate risk or lifecycle impacts assessment, get in touch on  to learn how we can help.

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