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ESG

Don’t be a mixed-up chameleon! How to prioritize your ESG issues

27 June 2022 • by Achim Hupperts, Jan Van der Kaaij in Videos

Making materiality the cornerstone of your sustainability strategy will help you to prioritize ESG issues to ensure they drive a business strategy that benefits both your organization and society...

Making materiality the cornerstone of your sustainability strategy will help you to prioritize ESG issues to ensure they drive a business strategy that benefits both your organization and society.

One way to avoid an incoherent strategy is through materiality assessments. These help you identify and understand the relative importance of ESG issues and sustainability to your organization. 

Increasingly, firms are being asked to consider not only the impact of the outside world on the business, but also how the company impacts society at large. This balance between the ‘outside-in’ and ‘inside-out’ lenses is known as double materiality. 

Materiality & business induced complexities: 

  • The Mixed-up Chameleon Complexity 

In the children’s book The Mixed-Up Chameleon, author Eric Carle describes the tale of a chameleon that  visits a zoo and – awed by the beauty and size of the other animals – wishes it could adopt their attributes. The chameleon grows an elephant’s trunk, a long neck like a giraffe and sprouts the legs of a flamingo. But when it gets hungry, it can no longer catch a fly because “it was a little of this and a little of that.” 

Companies  face the same risk when trying to create a strong and credible sustainability profile. If you have a diverse group of clients, the danger is that you pick and mix from among these stakeholders and develop an incoherent sustainability strategy. 

  • The Geography Complexity 

The coherence of a strategy can be further complicated if an organization has a broad geographic footprint because views on sustainability may vary across regions.  

  • The Hodgepodge Complexity 

In addition, conglomerates with diverse business units may also struggle to prioritize their ESG issues.  

How to create a credible climate strategy 

To avoid the ‘Mixed Up Chameleon’ phenomenon at DSM, we have conducted double materiality assessments for many years to ensure we have a strong process in place to explain our priorities to investors. 

Fifteen years ago, DSM pivoted its strategy to focus on ‘doing well by doing good’. We rebuilt our businesses with innovations and products that help the world become a better place and address the ESG concerns of our customers. We call this strategy purpose led, performance driven, with the aim to create brighter lives for all. 

One of the challenges in implementing double materiality is ensuring that you gather reliable data and information on the impact of your products on society at large so that you don’t make phony claims. 

For example, to build a credible climate strategy, you need to start by measuring the Scope 1, 2 and 3 emissions and creating a net zero roadmap. The next stage is to identify and prioritize climate risks and opportunities and carry out a climate change risk assessment to identify your most vulnerable assets. Finally, firms must quantify the financial impact of various climate change scenarios and ensure their strategy is compliant with the Task Force on Climate-Related Financial Disclosures. 

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Speed: Challenges in Execution 

Another challenge for firms is dealing with the fast-changing topics that affect the business environment. According to the World Economic Forum, the top four global risks in 2020 are environmental and climate related. At the same time, technological risks such as data fraud and cyber-attacks are increasing and follow behind the environmental risks in terms of likelihood. The accelerating pace of biodiversity loss is a particular concern, with species abundance down by 60% since 1970 

By including the ‘inside-out’ view into our materiality assessments, DSM realized we can have a far greater impact than if we focused on just our own business by highlighting the food system challenges the world faces. As a result, our materiality matrix has changed with food security and healthy diets and nutritious food being ranked far higher than six years ago because they have both a strong business and societal impact. We have also upgraded the topic of biodiversity. Since we are active in food systems, we have become more dependent on the way these bio-based raw materials are produced 

Furthermore, water stewardship has become a more material for us since our stakeholders are increasingly expecting us to answer the question of how we manage the water in our supply chain. Since we are not a major consumer of water, we didn’t previously view it as material, but by taking steps to reduce the consumption of our factories we have gained credibility with our stakeholders, including local communities and clients. 

Delivery: Creating value from sustainability 

In 1963, Freddy Heineken, the founder of the eponymous beer company was shocked to discover his firm’s beer bottles littering beaches in the Dutch Antilles. In response, he asked an architect to design a reusable beer bottle that could be used to construct houses. The idea was to turn a material topic – beach littering – into product design. Unfortunately, the bottle – which was shaped like a brick – never got past the prototype stage since it was too heavy for customers to transport home. Nevertheless, the concept was an early example of a company thinking about re-cycling. 

When firms today think about creating value from sustainability, they should ensure their strategy is Authentic, has a Business case behind it, is executed Consistently and is Distinctive. We call this the ABCD approach. 

At DSM, our materiality assessments have helped us to create value in three ways. 

First, it has helped us become the preferred supplier for many of our customers who are increasingly being expected to take responsibility for the sustainability of their supply chains. For many companies, Scope 3 emissions account for around 90% of their greenhouse gas emissions. Therefore, by reducing our carbon footprint, we are helping them. 

Secondly, it has helped us to innovate and design new products to address sustainability challenges.  

Thirdly, having a good ESG performance, rewards us also financially by giving us access to cheaper credit, attracting sustainability-minded investors and making our assets more resilient to climate shocks in the long-term.  

While there may be some resistance to making huge investments to reduce greenhouse emissions, it is important to bear the long-term benefits in mind. Companies that invested in generating 100% of their electricity from renewable sources, will not be exposed to the rising oil and gas prices we are seeing today, making them more profitable than peers.  

Equally, there are many intangible effects. With workers increasingly wanting to work for organizations that have a positive impact on society, making your business model more sustainable is a way to attract and retain skilled labour, also saving the cost of high turnover rates.  

In summary, the heart of sustainability is making more out of less and this is also good business practice. 

Authors

Achim Hupperts

VP Sustainability at DSM

Achim is Vice President of Sustainability at DSM.

Jan van der Kaaij

Jan Van der Kaaij

IMD Executive in Residence and Managing Partner at Finch & Beak

Jan is Managing Partner at Finch & Beak and Executive in Residence at IMD.

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