A clear-eyed double materiality assessment and distillation of its findings can provide a playbook for action.
Double materiality considers the impact of environmental, social and governance (ESG) issues from two different perspectives. Financial materiality, or the “outside in” view, focuses on how moves towards greater sustainability could introduce risks or opportunities capable of affecting a company’s financial performance. Impact materiality — the “inside out” view — looks at the impact an organisation has on people or the environment. In the European Union, double materiality is central to corporate sustainability. However, under the recently legislated Australian climate reporting reforms, the relevant materiality is that of the ASX (financial materiality) rather than the international (ISSB) concept of materiality.
Kristin Moyer, a research VP and distinguished analyst in Gartner’s Global Enterprise Executive Research, would prefer to see Australia follow Europe’s lead. “Double materiality is becoming increasingly important as more and more regulators around the world require companies to report their ESG data in their financial filings,” she says. “It’s good that financial materiality is required, because boards should be monitoring the impact that sustainability is having on new organisational risks, opportunities and future cash flows. But impact materiality is also important to limit global warming to well below 2oC. Increasingly, customers and investors want to understand the environmental impact of companies they are doing business with.”
Gartner survey data shows that 75 per cent of organisations plan to increase their investment in sustainability over the next two years.
“While that sounds encouraging, only 40 per cent say they expect to increase their investment by more than 10 per cent, which barely covers the cost of compliance, reporting and a double materiality assessment,” says Moyer. “They really need to be doing more to make their organisation more resilient in the face of severe weather events and to turn sustainability into a growth opportunity.”
Integrating sustainability into strategy
Today’s boards and committees are required to understand and act on a huge number of sustainability-related obligations.
“The problem is that the new requirements can dominate board attention to the detriment of strategic thinking and action,” says Moyer. “Organisations need to integrate sustainability into corporate strategy, and they can only do that if they go beyond meeting regulatory requirements.”
Anna Hancock GAICD, an executive director at Pollination and a board member of the Carbon Market Institute, says while some of the obligations are threshold matters requiring compliance, most are accompanied by choice, risk and opportunity.
“Without strategic focus, boards and the leadership teams they guide will be unable to direct their financial and mental resources where they matter most,” she says. “They risk being overwhelmed by the task or prioritising pet interests that don’t achieve the change needed.”
Hancock says a double materiality assessment, approached as a cornerstone of strategy, can offer coherence to investments and programs of work that follow. “Double materiality assessments aren’t new to sustainability teams, but they often lack structure or only surface in sustainability reporting. By contrast, if an assessment is used to directly inform strategy and operations, it can connect insight to intent to impact.”
A clear-eyed assessment and distillation of its findings can provide a playbook for action. “Equipped with this information, organisations can prioritise their highest relative exposure areas and translate them into business-useful decisions that maximise positive impact,” says Hancock.
Many companies are already setting sustainability goals, but Moyer believes that in general, they need to invest more in achieving them. “There are also tactical things companies can do like tying board and executive director compensation to sustainability outcomes,” she says. “Some organisations make ESG considerations about a third of their bonus compensation. And one of the most important steps a company can take is to integrate sustainability into everyday decision-making. We call it ‘operationalising sustainability’, and it’s where change really happens. For example, if a company has a goal to reduce greenhouse gas emissions, they need to tie that into the decisions they make about travel.”
Sustainability as an opportunity
In APAC, Gartner has found that 79 per cent of chief executives see environmental sustainability as a growth opportunity.
“What they’re actually doing is following the flow of money, and that’s been changing in the direction of sustainability,” says Moyer. “This is the so-called climate economy — a new economic system that’s clean, circular and digital, with more spending on things like decarbonisation, wind, solar and other low-carbon energy sources. Increasingly, mergers and acquisitions are being driven by opportunities for sustainability, or with sustainability as a part of the evaluation of a company you might acquire. Over the past 15 years, venture capital has also been increasing in the direction of sustainability.”
Organisations best placed to seize opportunities understand their potential for external impact and rising investor and observer expectations. “They can be first to market and stand clear of the false pathways and reputational risks that come from failing to meet the growing sustainability expectations of customers, shareholders and regulators,” says Hancock.
Directors need to be transparent about how sustainability can drive returns.
“It’s important for them to look at the non- financial benefits and what investors gain from the company’s activities around sustainability,” says Moyer. “These could be things like lower risk, better long-term growth opportunities and the ability to attract and retain talent.”
Despite the government’s standpoint, double materiality is attracting interest in Australia. Some companies are voluntarily adopting this approach, while those with European operations or partnerships may need to align with the double materiality requirements of the European Sustainability Reporting Standards. Depending on the outcomes, Australia may eventually embrace the potential benefits of looking inside out as well as outside in.
Collaborating for sustainability
Business leaders understand that when it comes to sustainability innovation, collaboration makes sense. The Baker McKenzie Race to Net-Zero report found 73 per cent of leaders will collaborate with competitors on net zero transition.
Collaboration allows organisations to pool resources and share knowledge. It can also remove the risks and high costs often associated with being the first to introduce a new product or process. But even the best-intentioned collaboration can run foul of competition law.
“Becoming involved in a cartel, even inadvertently, has severe consequences — people can go to jail,” says Paul Schoff MAICD, ESG lead for Competition, Climate & Technology at MinterEllison. “It’s not surprising the corporate community is generally cautious. If you’re a general counsel or compliance officer, the safest approach is to mitigate the risk by telling everyone in the organisation, ‘Thou shalt not talk to a competitor about anything, ever, under any circumstances’. This can have a chilling effect on sustainability initiatives.”
ACCC guidance
In July, the Australian Competition and Consumer Commission (ACCC) published a draft guide on sustainability collaborations in relation to Australian competition law.
“As Australia transforms to a more sustainable economy, there will be instances where businesses seek to work together to achieve better environmental outcomes,” said ACCC acting chair Michael Keogh OAM. “When businesses work together, they sometimes risk breaching competition law, but legal protection via an ACCC authorisation may be available so that they can pursue their goals without that risk.”
ACCC authorisation provides a legal exemption from the competition provisions of the Competition and Consumer Act 2010. Once authorisation is granted, businesses can collaborate without risk of the ACCC or third parties taking legal action against them for a breach of competition provisions.
“Broadly, the ACCC may grant an authorisation when it is satisfied that the likely public benefit resulting from the proposed conduct outweighs any likely public detriment, such as a lessening of competition,” said Keogh. These benefits could include protecting the environment and promoting sustainability.
“The commission is saying it’s OK to have preliminary conversations with a competitor about a sustainability initiative, providing you’ve got a protocol in place that excludes reaching a contract, arrangement or understanding,” says Schoff. “The commission has also suggested the ACCC will streamline the authorisation process. This currently takes about six months, although, as authorisation happened much more quickly during COVID-19, we know what can be done.”
Schoff sees a faster authorisation process as less than ideal, but believes boards can take heart from the ACCC’s willingness to accept that the benefits of sustainability collaboration could outweigh the disadvantages.
AICD submissions
In July, the AICD lodged a submission on the ACCC’s draft sustainability collaborations guide. The AICD supports the draft as a valuable first step, given the complexities of competition law and the pressing need for Australia to meet net zero emissions commitments. However, we encouraged a clearer and more facilitative approach in our submission.
We recommended the ACCC emphasise that many types of sustainability collaborations will not raise competition law concerns and that further detail on data sharing within industries (eg for Scope 3 emissions) be included. Additionally, we urged the ACCC to consider guidance from other jurisdictions, including the EU safe harbour approach. Legislative reform may be needed to address rigidity in Australia’s competition laws to accelerate progress towards national sustainability goals.
In September, the AICD addressed legislative reform to facilitate sustainability collaborations in our submission to Treasury’s consultation on national competition policy. Our submission highlights the timeliness of reviewing competition policy, given sluggish productivity growth in the Australian economy and the long gap since the last comprehensive review. Considering our limited expertise in competition law, we focused our comments on sustainability-related aspects and encouraged Treasury to engage closely with businesses to ensure regulatory settings foster innovation, enhance economic efficiency and reduce costs.
For more details, refer to the AICD’s full submission to both the ACCC and Treasury here.
This article first appeared under the headline 'Seeing Double’ in the November 2024 issue of Company Director magazine.
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