Every little bit (of impact) counts

As a global society, we are now in an era of increasing risk, where ecosystems are rapidly changing and less and less able to support our societies. Strong scientific evidence indicates that unless we mitigate ongoing impacts on nature, we are likely to witness further ecosystem change and the collapse of essential ecosystem services we depend on. Therefore, as complete an understanding as possible of cumulative and aggregate human environmental pressures is a prerequisite for understanding not just the risks of transgressing planetary limits, but also how remedial actions taken by companies are likely to mitigate these risks.

Material for companies, for the environment – or both?

Defining what is material is important for our ability to prioritize and act. Financial materiality concerns factors directly affecting a company’s financial performance. It is rooted in well-established understandings from finance and related fields. Consequently, it has historically often overlooked environmental impacts that do not appear to affect a company’s financial performance. To address this shortcoming, and to also direct attention to the impacts of companies on the environment and society, the ‘double materiality’ perspective has been introduced.

Double materiality refers to the inclusion of both financial (also referred to as single) materiality and so-called impact materiality, where the latter aims to capture a company’s most material environmental impacts. The inclusion of double materiality in the recent suite of European legislation (CSRD) to guide corporate reporting is an important step in the right direction. However, ambiguities remain as to how the materiality of environmental impacts will be understood and assessed by organizations seeking to
comply with rapidly cementing sustainability reporting standards. This brings with it three notable risks.

First, for most auditors non-financial or impact materiality is still a relatively new and complex subject compared to its financial counterpart, there is a clear risk that impacts that are not perceived as financiallymaterial will be deprioritized. This will likely lead to non-disclosure of information that is actually essential for assessing environmental status and our collective trajectory vis-a-vis planetary limits. In other words, information that is ‘material for the environment’ – but not perceived as immediately financially material to the reporting organization – is likely to be left out. For example, a particular revenue stream might seem so small in relation to total revenues that the environmental impacts caused by those operations are not considered material. However, due to local conditions and vulnerabilities, the environmental impact from these operations in a particular region
may still contribute to the loss of biodiversity or critical ecosystem services, such as carbon storage, groundwater recharge, etc. It is currently unclear how double materiality will guide disclosures in such situations, and it is an important risk that both corporate actors and standard developers should be aware of.

A second and related risk is that the level at which standard-setters, businesses and auditors determine the threshold beyond which a given environmental impact should be considered material may not align with what an environmental science assessment would deem relevant and necessary. In fact, even small or seemingly financially immaterial environmental impacts are often important because they accumulate over time and across space. In aggregate, thousands or millions of such impacts tend to add up, becoming severe enough to create nature-related risks for businesses and society, often manifesting as storms, floods, fires, resource shortages, or crop failures. While these events often appear quickly and cause immediate disruptions to corporations, communities, and socio-economic systems, the likelihood of their occurrence is directly affected by the cumulative greenhouse gases in the atmosphere and the gradual loss of biodiversity over time. In other words, all the small environmental impacts that may not be captured by disclosing only what is deemed material can still accumulate and cause significant and large-scale risks. Some other examples of such impacts include the cumulative impacts of pesticides and human encroachment into pristine natural environments. In summary, the second risk is therefore that a lack of information about small but gradually cumulating impacts will lower the ability of decisionmakers to assess and handle resulting risks.

Building from this, the third risk is that by placing so much of the responsibility for assessing the environmental materiality on the companies themselves leaves significant potential for misinformation and unfair accountability outcomes. Different companies may assess materiality differently. While the emerging new reporting formats may appear more comparable, such subjectivity impedes the ability of end users to accurately compare environmental impacts across companies and sectors. This has relevance for market discipline and pricing mechanisms. At the same time, subjectivity in materiality assessments of environmental impact also reduces the capacity of public actors to use disclosed data to assess aggregate and cumulative impacts. This ultimately undermines efforts to set reliable environmental targets (see Chapter 2).

Allowing scientific assessments and analysis to help in the prioritization of what environmental impacts to disclose could reduce these three connected risks. Chapter 6 outlines a scientifically grounded approach to such a prioritization process. It illustrates how sustainability science could play a role in helping to streamline reporting, increase comparability, and potentially reduce the analytical burden for companies in assessing what environmental impacts are material.