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Chairperson Masterclass: Session 2-7: The Concept of Double Materiality

Updated: Apr 8

On 3rd August 2023, Ms Phang Oy Cheng was invited to speak on “The Concept of Double Materiality” during Climate Governance Malaysia’s second session of the Chairperson Masterclass Series at the Securities Commissions. Ms. Phang currently leads KPMG’s ESG and Sustainability Advisory Services in Malaysia, helping clients explore and implement ESG solutions for a sustainable and responsible future. She brings over 30 years of experience in sustainability and has vast experience in developing and improving ESG/sustainability management programs of public listed companies.

In the masterclass, Ms. Phang emphasized the point that double materiality involves considering both the financial impacts of an organization's operations on the external environment and stakeholders, as well as the environmental and social impacts that can influence the organization's financial performance. The key principles of double materiality include identifying financial materiality and understanding stakeholder and environmental impact. Companies need to assess their broader social and environmental effects of their operations including climate risks as well as social and human rights concerns. Not only should financial institutions (FI) and large corporations ensure double materiality is being practiced, but SMEs must also shift their mindset as well.

The outcome of a robust materiality assessment enables organizations to gain insights into high-performing areas and develop a comprehensive understanding of their business risks and opportunities. Integrating sustainability considerations allows companies to make informed decisions about their strategy, metrics, and targets. Integrating double materiality into sustainability reporting will require organizations to develop their capability in financial impact of their climate risks. It is essential that board members, as well as executives, must shift their mindset to approach sustainability as a business strategy.

High-level application of double materiality can be achieved by adhering to the requirements of various sustainability reporting frameworks, including the Task Force on Climate-related Financial Disclosures (TCFD), Global Reporting Initiative (GRI), and International Financial Reporting Standards (IFRS). These sustainability considerations should be integrated into each company’s enterprise risk assessment tools and by doing so will enable them to understand and quantify the financial and non-financial impacts of climate risk which will serve to drive informed decisions on strategy, investment, and risk mitigation.

In conclusion, the concept of double materiality is a powerful tool for corporations. Integrating double materiality in various levels of corporate governance will enable companies to navigate the complex landscape of sustainability reporting. By understanding the financial impacts of their operations as well as their environmental and social footprints, businesses can make more informed decisions, build resilience, and future-proof their operations.

During the Q&A session, some attendees expressed concerns that excessive procurement and supply chain auditing will potentially alienate business partners. To address these concerns, Phang pointed out that the integration of sustainability considerations into the enterprise risk assessment process is essential for effective decision-making for the medium and long-term future. For example, flood prone sites will require proper flood mitigation procedures which will lead to increased operational costs, revealing a need to identify climate exposures and enhance risk management. Some manufacturers were caught unaware of the impacts of climate change despite benefiting from cheap financing.

Attendees were also concerned that incorporating social and environmental gains into financial calculations could influence the company's overall return. Carbon credits were discussed as a potential revenue stream for companies, while the carbon tax emerged as a significant factor influencing climate change initiatives in Malaysia. The importance of transparency and quantifying efforts related to climate change was emphasized to overcome the conservativeness of reporting and showcase the company's commitment to sustainability.

Kindly click here for the recording and slides

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