Overview of GHGe/ESG Management System Development

1. Scoping – this is an initial outline of the sector and value chains that identifies possible hotspots, key stakeholders and maps key system actors.
2. GHGe/ESG Inventory – through stakeholder engagement, identify all sources of GHGe/ESG impacts including sources, scale, intensity, irremediable character, metrics for quantifying impacts and possible goals/targets.
3. Double Materiality Testing – assessment of financial and physical impacts associated with each GHGe/ESG Inventory item, including dependency on the source and assessment of Risks and Opportunities.
4. Scenario modelling – build scenarios/forecasts that are deemed likely to materialise; and consider GHGe/ESG matters deriving either from situations with a below a “more likely than not” threshold.
5. Definition of critical / important / negligible GHGe/ESG inventory items to be included in the management system and related Transition Plan to achieve your 2030 and 2050 targets of Net Zero emissions or ESG Best Practice.
6. Definition of Monitoring and Evaluation metrics and targets for each item and build appropriate reporting system/software.

OK, let’s get some perspective on impacts and take a closer look at Financial and Impact Materiality, commonly called Double Materiality assessment.

Assessing Financial Materiality

ESG Report Pro guides you through your financial materiality assessment by first asking you to identify risks and opportunities that affect, or could reasonably be expected to affect, the organisation’s financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term. The financial materiality of a sustainability matter is not limited to matters that are within the control of the organisation but includes information on material risks and opportunities attributable to business relationships beyond the scope of consolidation used in the preparation of financial statements. In this context, the undertaking shall consider:

1. the existence of dependencies on natural and social resources as sources of financial effects as they may influence the undertaking’s ability to continue to use or obtain the resources needed in its business processes, as well as the quality and pricing of those resources; and
2. if any dependencies may affect the organisation’s ability to rely on relationships needed in its business processes on acceptable terms.

Financially material matters need to be classified as:

(a) risks that may contribute to negative deviations in future expected cash flows and/or negative deviation from an expected change in capitals not recognised in the financial statements; or

(b) opportunities that may contribute to positive deviation in future expected cash flows and/or positive deviation from expected change in capitals not recognised in financial statements.

Once you have identified your risks and opportunities, you need to determine which of them are material for reporting over the short-, medium- and long-term based on a combination of (i) the likelihood of occurrence and (ii) the potential magnitude of financial effects determined on the basis of appropriate thresholds. We recommend that you build scenarios/forecasts that are deemed likely to materialise; and consider sustainability matters deriving either from situations with a below a “more likely than not” threshold or assets/liabilities not, or not yet, reflected in financial statements. This includes:

1. potential situations that following the occurrence of future events may affect cash flow generation potential;
2. capitals that are not recognised as assets from an accounting and financial reporting perspective but have a significant influence on financial performance, such as natural, intellectual (organisational), human, social and relationship capitals; and

• possible future events that may have an influence on the evolution of such capitals.

Sound complicated? Here are a few examples of how impacts and dependencies are sources of risks or opportunities:

• when the undertaking’s business model depends on a natural resource – for example water – it is likely to be affected by changes in the quality, availability and pricing of that resource;
• when the undertaking’s activities result in negative impacts, e.g., on local communities, the activities could become subject to stricter government regulation and/or the impact could trigger consequences of a reputational nature. These might have negative effects on the undertaking’s brand and higher recruitment costs might arise; and
• when the undertaking’s business partners face material sustainability-related risks, the undertaking could be exposed to related consequences as well.

Assessing Impact Materiality

ESG Report Pro will guide you through the full process, but here’s an outline.

In assessing impact materiality and determining the material matters to be reported, the organisation must follow three steps:

1. Understand the context in relation to its impacts including its activities, business relationships, and stakeholders;
2. Identify actual and potential impacts (both negative and positive), including through engaging with stakeholders and experts. In this step, the undertaking may rely on scientific and analytical research on impacts on sustainability matters;
3. Assess the materiality of its actual and potential impacts and determine the material matters. In this step, the undertaking shall adopt thresholds to determine which of the impacts will be covered in its sustainability statement.

The severity of impacts is determined by the following factors:

1. Scale: how grave the negative impact is or how beneficial the positive impact is for people or the environment;
2. Scope: how widespread the negative or positive impacts are. In the case of environmental impacts, the scope may be understood as the extent of environmental damage or a geographical perimeter. In the case of impacts on people, the scope may be understood as the number of people adversely affected; and
3. Irremediable character: whether and to what extent the negative impacts could be remediated, i.e., restoring the environment or affected people to their prior state.

Any of the three characteristics (scale, scope, and irremediable character) can make a negative impact severe. In the case of a potential negative human rights impact, the severity of the impact takes precedence over its likelihood.  As a quick guide, the ESRS dictates that a group of products and/or services offered, a group of markets and/or customer groups served, or an ESRS sector, is significant for the undertaking if it meets one or both of the following criteria:

(a)  it accounts for more than 10 per cent of the undertaking’s revenue;

(b)  it is connected with material actual impacts or material potential negative impacts of the undertaking.