Materiality and Influence in Climate Action

Double Materiality 🌎 Beyond compliance with key regulations like CSRD, double materiality assessments are essential for businesses to develop a comprehensive sustainability strategy. This framework helps companies identify how their activities impact society and the environment while also assessing how sustainability-related risks and opportunities affect financial performance. Impact materiality examines how a company’s operations influence people and the planet, covering topics like climate change, biodiversity, and social equity. Financial materiality focuses on how sustainability factors, such as regulatory changes, resource scarcity, or reputational risks, impact business performance and long-term growth. Some issues, like climate change mitigation, resource management, and labor conditions, fall under double materiality, meaning they are significant for both external impact and financial outcomes. By integrating double materiality, companies can align sustainability efforts with business objectives, risk management, and investor expectations, strengthening corporate resilience. This approach ensures that sustainability is not just a compliance exercise but a strategic tool to drive innovation, operational efficiency, and stakeholder trust. It also supports transparent reporting, helping businesses meet increasing demands from investors, regulators, and consumers for credible sustainability disclosures. Sectors like finance, manufacturing, and retail are already leveraging double materiality insights to guide decision-making, investment strategies, and supply chain management. This matrix developed by Vestas in their sustainability report is a great example of how to structure a double materiality assessment, clearly linking environmental and social impacts to financial performance and strategic decision-making. #sustainability #sustainable #business #esg #climatechange #doublemateriality #materiality

🌿🔍 How Corporate Climate Change Mitigation Actions Affect the Cost of Capital Climate change mitigation is becoming a pivotal factor in determining the financial health of businesses. A recent study led by Yizhou Wang, Siyu Shen, Jun Xie, Hidemichi Fujii, Alexander Ryota Keeley, and Managi Shunsuke, published earlier in May 2024 in Corporate Social Responsibility and Environmental Management, sheds light on a critical aspect of this dynamic: how corporate climate actions influence the cost of capital. Key Findings: - Higher Emissions, Higher Costs: The study, which analysed data from approximately 2,100 Japanese listed companies between 2017 and 2021, reveals a clear correlation between corporate emissions and the cost of capital. Companies with higher carbon intensity face increased costs of equity, debt, and weighted average cost of capital. - Benefits of Transparency: Companies adhering to the FSB Task Force on Climate-related Financial Disclosures (TCFD) guidelines and transparently sharing climate-related information benefit from lower overall capital costs. While such disclosure is linked to an increased cost of debt, it concurrently lowers the cost of equity and overall capital, underscoring the financial benefits of transparency and accountability in climate actions. - Commitment vs. Action: Importantly, the study found that mere corporate commitment to climate change, as opposed to tangible climate actions, showed no significant impact on the cost of capital. This highlights the significance of actionable strategies over symbolic commitments. - Industry-Specific Impact: The relationship between climate mitigation actions and the cost of capital was notably stronger in industries where climate change is recognised as a material issue. This suggests that industry context plays a crucial role in how climate actions influence financial outcomes. Strategic Recommendations: - Adopt TCFD Guidelines: Aligning with TCFD recommendations and prioritising actionable climate strategies can lower your company's cost of capital. - Industry Focus: For sectors where climate change is a material issue, such as energy, utilities, and manufacturing, the financial incentives for robust climate actions are even more pronounced. - Move Beyond Commitments: Implementing concrete climate actions rather than just commitments can significantly enhance your financial standing. It's also important to note that as of 2024, the Task Force on Climate-Related Financial Disclosures (TCFD) has transferred its monitoring responsibilities to the International Sustainability Standards Board (ISSB). Conclusion: Proactive climate actions and transparent disclosures are not just ethical imperatives but also smart financial strategies. Access the article here: https://lnkd.in/gb-ke9PP What are your thoughts on the impact of climate actions on the cost of capital? Professor John Cole OAM Brendan Mackey John Thwaites Jacqueline Peel

PhD thesis submitted! My work explored how the pharmaceutical industry can play its part in addressing climate change. Pharmaceuticals are estimated to account for up to 55% of national health systems’ greenhouse gas emissions. There is little research about how pharmaceutical companies are navigating their climate impact, or what shapes their approach to reducing it. I analysed company documents from multinational pharmaceutical companies and conducted in-depth interviews with people working in pharmaceutical companies, industry groups, and health systems. Using a method called argumentative discourse analysis, I examined how people talked about climate action and how these ways of talking influenced real-world practices. What I found: 1. Climate action was often framed as secondary to patient wellbeing, with some viewing climate action as a potential risk to care. This framing was often in the absence of evidence of patient harm from climate action and reflected a narrow understanding of patient wellbeing – one underpinned by reactive, pharmaceutical-dependent modes of care rather than proactive and preventive approaches to health. Some recognised this, and framed climate action as essential for protecting health. 2. Many saw climate action as dependent on financial viability. This was challenged by those arguing that climate action should not hinge on profitability. My findings showed that it is becoming increasingly more financially advantageous to engage with climate action – from a regulatory, market advantage, operational resilience, and reputational perspective. 3. Carbon footprint quantification, disclosure, and data were presented as key steps to climate action, but measuring and reporting this data often became an end in itself rather than a means to an end, reinforced by regulatory and procurement demands for data rather than reductions. Some warned this focus risked delaying actual reductions. 4. Collaboration was widely called for – across supply chains, with regulators and policymakers, and wider health system actors – but was often left vague, aspirational, or used to shift responsibility elsewhere. These narratives can unintentionally slow progress towards net zero. However, alternative narratives already exist. By reframing climate action as integral to patient care, recognising and reinforcing the business case for climate action, focusing on reduction over quantification and reporting, and surfacing and navigating tensions to drive productive collaboration, the pharmaceutical industry and wider health systems can take a more decisive role in tackling climate change. Climate action in health care is not just a scientific challenge, but also a social, organisational, economic, and political one. Changing the stories we tell about climate change and action may be just as important to drive progress towards net zero. (P.S. this is a very basic summary of 272 pages of work! More publications - and Viva - to follow!)

I’m often asked to explain double materiality versus systems mapping. Most companies assume double materiality gives them the answers. It doesn’t. It gives them the questions. Systems mapping gives the answers. Here’s the simplest way I can explain the difference: Double materiality identifies issues. Systems mapping identifies the system that creates them, and therefore the real solution set. Double materiality is designed to answer: – What topics matter most to our business and stakeholders? – How should we classify and prioritise issues like climate, water, waste, and supply chains? What it doesn’t tell you is whether the issue you see is a symptom or a root cause. Systems mapping asks entirely different questions: – What creates these issues? – How do they interact? – Where can we intervene to change outcomes? Because in real systems, nothing exists in isolation. A material issue is rarely caused by that issue alone. If double materiality tells an insurance company that water is material, the instinct is often: “Reduce water use. Improve efficiency. Set new targets.” But in reality, water stress may be driven by land degradation, …which is driven by agricultural incentives, …which are shaped by climate conditions, …which are influenced by carbon-intensive sectors, …which are shaped by consumer demand, …which affects claims profiles, …which affects insurance availability. Systems mapping makes these connections visible. And it often reveals that “water” won’t be fixed by working on water at all. Materiality identifies the topic. Systems mapping identifies the strategy.

#CrowdSourcing for help understanding a deep cut (page 48) in International Sustainability Standards Board (ISSB)'s recently-released (and marvelously comprehensive) educational material, which states: "In some circumstances, information could reasonably be expected to influence primary users’ decisions such that a quantitative threshold could be reduced to zero and the information would still be material. For example, specific types of information about a sustainability-related risk or opportunity might be highly scrutinised by primary users." This seems to say that even if the sustainability issue were going to have no effect on cash flows, financing, enterprise value, etc., it would still be material if it mattered to investors' decisions. Does that create room for #ImpactMateriality or #PortfolioMateriality? That is, does it mean that if investors really care about an environmental or social concern such that they might change a voting or investment decision--even absent a financial impact on the company itself--that the issue becomes material under ISSB? For example, if a company's carbon footprint were determined to be immaterial to its own performance, but threatened the performance of its investors' diversified portfolios such that they might vote their company proxies for climate resolutions, the zero threshold concept seems to deem the company's climate metrics material. I had not seen the "zero threshold" concept before, in either IFRS Foundation material, #ESRS financial materiality discussions, or elsewhere, so I am interested in the source of the concept. https://lnkd.in/eYeVAYZR

As global climate commitments grow, the MENA region has both challenges and opportunities on its journey to a greener future. 🔎 Challenges: Regulatory gaps, financial constraints, and the lack of tailored reporting standards for the region all limit progression. 💡 Opportunities: capitalise on abundant renewable energy, incorporate sustainability into economic diversification, and align with global standards. 📈 Materiality Assessments are critical to ensuring a significant impact on sustainability activities. They benefit organisations by identifying and prioritising the most important environmental and social issues. ▪️ Focusing on areas that matter most to operations and stakeholders; ▪️ Improving transparency and compliance; ▪️ Allocating resources strategically for efficiency and alignment while increasing investor trust and long-term value. These assessments provide a phased roadmap, ensuring that efforts are both effective and regionally relevant. Businesses that use materiality as a foundation can make transformational change and have credible impact. 👉 Explore detailed insights and recommendations for sustainability in the MENA region by sector in the full report here: https://lnkd.in/dajWUAek. World Economic Forum Bain & Company

DO NOT PLACE SUSTAINABILITY IN A MATRIX Why? The matrix only covers the intersection whereas reporting covers the full red circle. Only filling out one quadrant is also decomplexifying double materiality. Recently, a lot of discussions on double materiality have taken place. The perspective of double materiality considers both financial materiality (how ESG issues impact financial performance) and impact materiality (how operations impact the environment and society). This dual approach provides a two-fold view, forcing companies to be aware of and assess their impacts and dependencies stemming from value chain and operational activities. With the CSRD, companies are required include perspectives from a wide range of stakeholders across the value chain. This does not mean that companies are required to ask their stakeholders directly but that they can do desk research or draw on scientific papers to cover salient issues or other stakeholder concerns. Does the double materiality matrix guarantee completeness? Does it encapsulate the diversity in ESG-related matters, data types, and concerns considered in the assessment? No. For ESG to influence decision-making, we should be aware of these matrices. When a company identifies impact matters that do not have a material financial impact, the company is still to report following CSRD requirements, but placing this matter on the financial Y-axis is misleading, and what if it has a negative financial impact? Try downstream activities? Sold products is an example. These have a high impact but financial impact may be related to market changes or disruptions. This can lead to confusion and misinform both stakeholders and shareholders. The concept of double materiality help identify risks related to ESG that might not be apparent through traditional financial analysis (especially the salient issues, residual or inherent risks). This approach may help mitigate potential threats to reputation, legal standing, and long-term viability by uncovering 'unknown unknowns', hence the metrication of non-financial matters and their characteristics seems a difficult task. Obtaining reliable and consistent data is difficult. Data sources might be fragmented, and methodologies for measuring impacts can vary widely, leading to potential inconsistencies and difficulties in making accurate assessments. A matrix is not the answer. Accuracy and completeness around the numbers rely on time. The methodology and processes have to be properly documented, and evaluations and judgments need to be filed. The process of determining what is material from both a financial and impact perspective may be subjective, but the arguments and backed data need to be in place before these statements can be approved as reliable data. Science has never been so available so start exploring how your company impacts society and environment and how dependencies are related to events in the value chain but please do not place these into a matrix.

ESGin3: Sustainability standards and materiality (https://lnkd.in/e7F2KS54) Recent developments in strategic relationships between #ISSB and each of the Transition Plan Taskforce (TPT), Greenhouse Gas Protocol (GHG Protocol), CDP, Taskforce on Nature-related Financial Disclosures (TNFD) and Global Reporting Initiative (GRI) illustrate how collaboration is key to driving harmonization of sustainability standards and frameworks. And harmonization can be key to accelerating progress around 𝘪𝘯𝘵𝘦𝘳𝘰𝘱𝘦𝘳𝘢𝘣𝘪𝘭𝘪𝘵𝘺 of standards and future 𝘦𝘲𝘶𝘪𝘷𝘢𝘭𝘦𝘯𝘤𝘦 considerations (see my prior LinkedIn post on these topics here: https://lnkd.in/eDrxKsiq). Additionally, building off the momentum of the ISSB and #EFRAG interoperability table published in May, EFRAG released a mapping tool (https://lnkd.in/eJs3MjU5) that shows where the TNFD and European Sustainability Reporting Standards (#ESRS) overlap. At the foundation of sustainability standards is materiality determination criteria, and #IFAC (https://lnkd.in/e6xgisK6) also recently reinforced the importance of a robust materiality assessment in accordance with recognized standards and reporting criteria as a critical step in moving from voluntary to regulated sustainability reporting in a manner that will withstand required independent assurance. Our recent Deloitte Heads Up 𝘜𝘯𝘱𝘢𝘤𝘬𝘪𝘯𝘨 𝘵𝘩𝘦 𝘋𝘰𝘶𝘣𝘭𝘦 𝘔𝘢𝘵𝘦𝘳𝘪𝘢𝘭𝘪𝘵𝘺 𝘈𝘴𝘴𝘦𝘴𝘴𝘮𝘦𝘯𝘵 𝘜𝘯𝘥𝘦𝘳 𝘵𝘩𝘦 𝘌.𝘜. 𝘊𝘰𝘳𝘱𝘰𝘳𝘢𝘵𝘦 𝘚𝘶𝘴𝘵𝘢𝘪𝘯𝘢𝘣𝘪𝘭𝘪𝘵𝘺 𝘙𝘦𝘱𝘰𝘳𝘵𝘪𝘯𝘨 𝘋𝘪𝘳𝘦𝘤𝘵𝘪𝘷𝘦 provides really important practical insights on performing a double materiality assessment in accordance with #CSRD and ESRS, with consideration to the #SEC Climate Disclosure Rule and ISSB standards and related materiality criteria as well. A few key points: 1. 𝗣𝗿𝗮𝗰𝘁𝗶𝗰𝗮𝗹 𝗶𝗻𝘀𝗶𝗴𝗵𝘁𝘀: There are four general steps to consider when conducting a #DMA process and related internal controls. Judgment is required to design a process that (1) is in compliance with the standards and (2) reflects the entity’s specific facts and circumstances. Several examples are included to illustrate practical decision-making considerations. 2. 𝗔𝘀𝘀𝘂𝗿𝗮𝗻𝗰𝗲 𝗿𝗲𝗮𝗱𝗶𝗻𝗲𝘀𝘀: A key step in obtaining assurance over an entity’s CSRD compliance is to capture management’s judgments and conclusions in writing throughout the DMA process. 3. 𝗜𝗻𝘁𝗲𝗿𝗽𝗹𝗮𝘆 𝘄𝗶𝘁𝗵 𝗦𝗘𝗖 𝗮𝗻𝗱 𝗜𝗦𝗦𝗕: While the guidance on financial materiality in ESRS and in the SEC’s definition of materiality are different, many of the underlying concepts are generally similar and, in many cases, overlapping. However, the double materiality approach under ESRS further requires companies to disclose matters that may be material from an impact perspective. And EFRAG and the ISSB noted that their guidance is aligned in terms of financial materiality. #deloitteesgnow

Deep Dive #1 – From "Nice to Have" to Financial Alpha If you still think ESG is just a PR exercise, you’re missing the financial signal. After 1.5 years at Columbia, one thing became clear: the "Value vs. Values" debate is over. Environmental and social factors aren't externalities—they're core drivers of risk and valuation. In my first Deep Dive, I’m exploring Financial Materiality – Why sustainability metrics are becoming primary, not secondary, inputs in investment models? It’s a simple but powerful truth: sustainability factors directly impact financial performance, and investors are increasingly using SASB-based materiality metrics to identify which issues will move the needle. Why does this matter for strategy? 1.   Risk Mitigation: Climate risk is financial risk. Identifying key material issues is essential for risk management. Companies that don't account for supply chain disruption or regulatory shifts are effectively "unhedged." 2.   Operational Efficiency: Sustainability often signals management quality. High-efficiency firms with lower waste, lower energy intensity, and green revenue streams typically outperform peers on margins and show greater resilience in downturns. 3.   Cost of Capital: Firms with robust ESG performance are accessing cheaper debt and equity. Investors aren't being "nice"—they're pricing in lower risk. But here's the key: Not all ESG issues are material to every firm. Relevance varies by industry and company. A 2016 study by Khan, George Serafeim, and Yoon found that companies with strong performance on material ESG topics significantly outperformed peers, while performance on immaterial topics showed no correlation—or even detracted value. Research from Schroders and Saïd Business School, University of Oxford, reinforces this: impact materiality can be a genuine source of alpha. Bottom Line: You cannot build a long-term financial strategy while ignoring the physical and social realities of the world we operate in. We are moving towards Double Materiality * Outside-In: How sustainability issues affect the company's value. * Inside-Out: How the company’s actions affect the environment and society. Picture: Another high point at Columbia was attending #ClosingBell at Nasdaq and learning about the Nasdaq Metrio™, a SaaS-based, end-to-end platform that helps firms to better collect, measure, and report sustainability data. For the finance professionals, are you currently integrating materiality-based ESG metrics into your valuation models? If so, which frameworks are you using? Let's discuss in the comments. 👇 Columbia University Sustainability Management #SustainableFinance #FinancialMateriality #ESGInvesting #CorporateStrategy # #DoubleMateriality