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As part of the preparation for the European CSRD directive, we are producing a series of articles on Double Materiality. We continue with an article dedicated to Financial Materiality, and to the risks, dependencies and opportunities that the company must identify as material.
While all aspects of the acronym ESG (environment, social, governance) must be taken into consideration when identifying material themes for the company, today we are zooming in on the topic of climate, to illustrate our article.
To understand the origins of Double Materiality, you can consult our previous article.
What is financial materiality?
Financial materiality, in the context of ESG reporting, represents sustainability topics (or even ESG themes) that are important for the value of the company in the short, medium and long term.
This perspective (in comparison to the Impact materiality which we will develop in a future article) includes all the risks and opportunities related to sustainable development that may positively or negatively affect the development, performance and position of the company in the short, medium or long term and therefore create or erode its corporate value.
What are the risks of climate change for businesses?
The risks of climate change to a company's financial performance can be classified as physical risks or transition risks.
Transition risks
Transition risks are business risks that arise from the transition to a low-carbon and climate-resilient economy. They include:
Physical risks
Physical risks are risks to the business that arise from the physical effects of climate change. They include:
Dependence on natural capital
Many businesses are dependent on natural capital. If natural capital itself is threatened by climate change, the business will be exposed to climate-related risks, including physical risks.
Businesses should therefore carefully consider their dependencies on natural capital when identifying and reporting on their climate-related risks.
For example, an agricultural production business may depend on various natural assets such as water, biodiversity, and land and soil productivity, all of which are vulnerable to climate change.
Such a company is therefore expected to explain these dependencies when reporting on its climate-related risks.
Climate-related opportunities
Climate-related risks can often be converted into opportunities by businesses that offer products and services that contribute to climate change mitigation or adaptation.
Adapting to climate change is about anticipating the negative effects of climate change and taking appropriate measures to prevent or minimize the damage they may cause.
It includes business opportunities such as:
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