will demand firms measure is a daunting task. Environmental metrics includes not only GHG emissions, which companies are only just starting to estimate robustly, but also various measures of pollution, biodiversity; and water, land, and resource use. Crucially, these impacts are spatially explicit and so require a detailed geographic view of business activities. Or, in other words, sustainability managers must harry operational functions and third parties across all areas of the business for data. Harder still is the quantification of social factors, including the impacts of business on communities, human rights, and social good. Many of a company’s impacts fall outside of its direct operations across the wider value chain (or Announcements of net zero and nature positive can provide the strategic polestar to drive company momentum, but companies must diligently quantify their present impacts on the environment and society and near-term targets to reduce them. Drawing up a net zero flight plan means working bottom-up and evaluating individual, actionable initiatives in terms of their contribution to key targets, as well as their impact on cash flows and risks to business value. Metrics and materiality: weighing the risks A critical, and contested, measure is that of materiality, which defines whether a risk is worth worrying about. In the interest of financial stability, the US Securities and Exchange Commission (SEC) has taken a narrow, single view of materiality by requiring companies to report on climate risks which present a material effect on their financial position. In the SEC’s proposed regulation which should be finalised later in the year, a one per cent loss to a financial line item would be deemed material, although this threshold has proved highly controversial and is likely to be revised upwards. In the European Union, the Corporate Sustainability Reporting Directive (CSRD) has adopted a more holistic approach of “double materiality”, requiring a company to consider and disclose not only the external impacts affecting its financial position, but also its impact on environmental, social, and governance (ESG) factors. Getting to grips with the array of metrics and KPIs that the EU Scope 3). To what extent firms should be accountable for ESG impacts in their supply chains, or resulting from their products’ use or disposal, remains a further point for contention. For example, the SEC is likely to rule that, as a result of heated political debate, indirect, Scope 3 emissions will be not be required in company filings. This is a major concern for investors, as this creates a major blind spot in a company’s view of climate-related risks. Valuing sustainability in future business plans Mandated sustainability disclosures will provide the forcing mechanism to measure business impacts and feed external stakeholders with KPIs. But the greater need – and often Getting to grips with the array of metrics and KPIs that the EU will demand firms measure is a daunting task. Business Finance Monthly. 50
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