Double Materiality, CSR, & ESG

Double Materiality, CSR and ESG

Defining Double Materiality requires an understanding of Impact Materiality, Financial Materiality, and the difference between CSR and ESG.

 
Impact Materiality and CSR

 
This concept of Impact Materiality, namely from the inside-out, was developed in response to the need for organizations to be accountable for the impact of their decisions and activities on society, including the company's external and internal stakeholders, such as its employees, as well as the environment (ISO 26000). This is called Impact Materiality, and it entails identifying the most negative and most positive impacts resulting from a company's operations. The negative impacts can be in the form of pollution, violations of human rights, global warming, erosion, flooding, and other consequences. 

Depending on the type of industry, negative and positive impacts may differ. Extractive industries, such as mining, will have the greatest negative impacts on life on land (SDG 15) and climate change (SDG 13). There are several positive impacts, including the creation of jobs (SDG 8), the development of infrastructure, and the innovation (SDG 9). Maritime industry has the greatest negative impact on life underwater (SDG 14), but it also contributes to job creation (SDG 8). Meanwhile, the banking industry can have the greatest negative impact on employee stress levels (SDG 3), but has a positive impact on poverty reduction (SDG 1) and providing funding to remote communities (SDG 10).

Taking responsibility for negative impacts and increasing positive impacts constitute the company's CSR (Corporate Social Responsibility). It is essential for the company to report its CSR activities and programs in a Sustainability Report, so that relevant stakeholders are aware of them, including employees, consumers, government, and NGOs (non-governmental organizations).

 
Financial Materiality and ESG
The ESG perspective is from the outside in. Essentially, the philosophy behind ESG holds that negative impacts resulting from a company, namely ESG issues, as well as other impacts, may pose a risk to the smooth operation of the company, but can also provide a business opportunity to resolve these issues through a business approach.

 
ESG issues are different for different industries, and these issues have a significant impact on companies. Agricultural companies, for example, are very vulnerable to the effects of climate change. Furthermore, the banking industry is subjected to governance risks, such as fraud and the inability of creditors to repay loans due to, for example, social issues (Covid, economic stability, and political stability). Due to this, it is important for organizations to identify the most important ESG issues that are likely to pose the greatest financial risks as well as the most relevant ESG opportunities that are most likely to benefit them, which is what is referred to as Financial Materiality.

 
A company that is not prepared to face outside-in challenges may be exposed to financial risks. Furthermore, if companies are unable to capitalize on business diversification opportunities in the ESG sector, then the sustainability of the company may be adversely affected. Consequently, key stakeholders, such as investors, want to know whether a company is prepared to deal with ESG issues before investing in it. Meanwhile, banks provide low-interest financing for projects that support ESG initiatives, so they desire to know whether companies will be able to pay back their loans if they do face ESG risks.
Due to this, it is extremely important to carry out ESG disclosures, which can demonstrate a company's readiness and capability to deal with challenges and capitalize on opportunities.

*The Following Text is the same content as above but in Bahasa Indonesia.

Double Materiality, CSR dan ESG

Untuk memahami konsep Double Materiality, maka kita perlu memahami arti Impact Materiality, Financial Materiality dan perbedaan antara CSR dan ESG.

Impact Materiality dan CSR

Impact Materiality berawal dari tuntutan kepada perusahaan untuk bertanggung-jawab atas dampak yang ditimbulkan dari keputusan dan aktivitasnya kepada masyarakat, baik masyarakat di luar perusahaan, maupun di dalam perusahaan, yakni karyawannya, serta lingkungan-hidup (ISO 26000), yakni dari dalam keluar perusahaan (inside-out). Perusahaan harus mengidentifikasikan apa dampak paling negatif dan paling positif yang dihasilkan dari operasinya, yang disebut sebagai Impact Materiality.

 
Dampak negatif yang ditimbulkan dapat berupa polusi, pelanggaran hak asasi manusia, pemanasan bumi, erosi, banjir, maupun dampak lainnya. Dampak negatif dan positif dapat berbeda berdasarkan jenis industri. Dimana industri ekstraktif, seperti pertambangan, akan paling banyak menimbulkan dampak negatif kepada life on land (SDG 15) dan perubahan iklim (SDG 13). Dampak paling positif antara lain: penciptaan pekerjaan (SDG 8), pembangunan infrastruktur dan inovasi (SDG9). Industri maritim menimbulkan dampak paling negatif kepada kehidupan di bawah air (SDG 14), serta dampak positif penciptaan pekerjaan (SDG 8). 

Sedangkan industri perbankan misalnya dapat menimbulkan dampak paling negatif kepada tingkat stress karyawan (SDG 3), namun dampak positif pada pengurangan kemiskinan (SDG 1) dan menciptakan akses pendanaan kepada masyarakat yang terpencil (SDG 10).
Aktivitas maupun program untuk bertanggung-jawab atas dampak negatif, dan meningkatkan dampak positif, merupakan CSR (Corporate Social Responsibility) perusahaan. Aktivitas maupun program CSR perusahaan tersebut harus dilaporkan dalam Sustainability Report agar pemangku-kepentingan yang relevan mengetahuinya, termasuk karyawan, konsumen, pemerintah, NGO (Non Government Organisations).

Financial Materiality dan ESG
ESG merupakan perspective outside-in. Filosofinya adalah dampak negatif yang dihasilkan perusahaan, yakni isu-isu ESG, maupun dampak lainnya, dapat menjadi resiko untuk kelancaran operasi perusahaan, namun pada saat yang sama dapat menjadi peluang bagi perusahaan untuk diselesaikan melalui pendekatan bisnis. Beda industri, maka beda issue ESG yang signifikan mempengaruhi perusahaan. Misalnya perusahaan agrikultur sangat rentan terhadap resiko climate change. Sedangkan industri perbankan rentan terhadap resiko tata-kelola, seperti fraud dan ketidakmampuan kreditur melunasi pinjaman karena misalnya persoalan isu sosial (Covid, kestabilan ekonomi dan politik). 

Oleh sebab itu perusahaan penting mengidentifikasikan isu prioritas ESG yang dapat menimbulkan resiko finansial tertinggi dan peluang ESG yang paling cocok untuk perusahaan, yang disebut dengan Financial Materiality. Jika perusahaan tidak siap menghadapai tantangan outside-in, maka dapat menimbulkan resiko finansial. Di saat yang sama, jika perusahaan tidak dapat menangkap peluang-peluang diversifikasi bisnis di bidang ESG, maka keberlanjutan perusahaan dapat terancam. Oleh sebab itu, pemangku kepentingan kunci, seperti para investor, ingin mengetahui apakah suatu perusahaan siap menghadapi issu-issu ESG, sebelum mereka berinvestasi kepada perusahaan tersebut. Dilain pihak, perbankan menyediakan pembiayaan dengan bunga rendah untuk proyek-proyek yang mendukung peluang penyelesaian masalah ESG, maka perbankan ingin mengetahui apakah perusahaan siap menghadapi resiko ESG, sehingga mampu membayar kembali pinjamannya.

Oleh sebab itu dalam konteks ESG, sangat penting melakukan pengungkapan ESG, yang dapat menunjukkan kesiapan dan kemampuan perusahaan dalam menghadapi resiko dan memanfaatkan peluang yang timbul dari topik-topik ESG.