Refrigerants, ESG Reporting, and Double Materiality

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Refrigerants, ESG Reporting, and Double Materiality

The concept of Double Materiality is a carbon accounting practice that is an extension of the concept of financial materiality. Financial materiality is about reporting information that is material to a company. Double Materiality corresponds with Financial materiality as it standardizes the carbon reporting practices related to reporting emissions and the impact climate has on your business.

We cannot overstate the importance of Air conditioning and Refrigeration in our lives. As science and technology improve our awareness of the impacts realized as a result of emissions, it’s essential to recognize how compliance and reporting change to work toward environmental sustainability.

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To begin the discussion of Double Materiality, lets’ look at two of the most common refrigerants in this generation have significant CO2 environmental footprint.

R-404 (Refrigeration)

3936 GWP

R-410 (Comfort Cooling)

2100 GWP

For compliance-minded people, Scope 1 emissions already include refrigerants and are reported as direct Fugitive Emissions from Refrigeration, Air Conditioning, Fire Suppression, and Industrial Gases. Fugitive Emissions are an essential category of Scope 1 natural Greenhouse Gas (GHG) when working toward corporate sustainability. These result from the direct release to the atmosphere of GHG compounds from various types of equipment and processes. This is why addressing refrigerant emissions is among the leading ways for the world to address climate change.

As we approach COP26, November 1-12, 2021, more attention is focused on all things impacting Global Warming. So it’s increasingly important to fully recognize the many ways that refrigerants impact reporting and subsequently change the way record keeping must evolve in support of providing proper legally mandated disclosures and answering sustainability audit questions.

In 2019, the EPA publicly acknowledged the major impact of refrigerants when they published “Protection of Stratospheric Ozone: Allowance System for Controlling HCFC Production and Import, 2020-2029”

“…given the agency’s assumption that all refrigerant produced is eventually emitted into the atmosphere. More allocated allowances would likely suppress the recovery and reclamation market…”

This reference was the first public acknowledgement that all refrigerants are vented. This fundamental truth goes against what most people falsely believed that regulations limited or stopped venting entirely. Wrong!

Shareholders and investors want the truth. Which is why we need to know how to accurately report these emissions.  Refrigerants are part of a family of materials that have overlapping commitments in both sustainability and compliance circles. However, these circles are not perfectly aligned. For instance, compliance requires that you track leaks and maintenance on systems 50 pounds and over (in the US). While sustainability reporting requires that you track emissions on all systems.

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This all brings us to the story of Double Materiality, and its direct consequences on ESG filings.

“Double materiality was first introduced by the EU Commission as part of the 2019 Non-Binding Guidelines on Non-Financial Reporting Update (NFRD). Under this concept, ESG issues create risks and opportunities that are material from a financial or an impact perspective, or both.”

“Double materiality is an extension of the key accounting concept of materiality of financial information. Information on a company is material and should therefore be disclosed if “a reasonable person would consider it [the information] important”, according to the US Securities and Exchange Commission. This is now widely accepted within financial markets that climate-related impacts on a company can be material and therefore require disclosure.”

Double materiality covers even more territory. By going beyond the basic material climate impact of the company, Double Materiality measures the impacts a company creates on the climate – and all aspects of ESG. To assist in this process, “The Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information,” which includes Double Materiality.

Double Materiality accounting will directly impact your refrigerant reporting on your ESG filings if you are reporting anything on Scope 1 emissions. Essentially you need to start having discussions internally to see how operational data will look at center stage as the industry transitions to expose how operations impact sustainability and reporting.

Right now, and for the foreseeable future, financial markets demand clear, comprehensive, high-quality information – Investor Grade Data – on the impacts of climate change made by publicly traded companies. This includes the risks and opportunities presented by rising temperatures, climate-related policy, and emerging technologies in a world facing increasing threat.

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What does this mean to you?

Basically, if your company reports how climate negatively or positively affects your operations, in addition to disclosing all the associated costs, then you must also report how your operations affect the global environment.

Traditional financial definition of materiality is pertinent, but far too narrow. Investors demand that reporters acknowledge that longer-term issues, such as the impact of climate change on a company, are material to the value of an enterprise.

By promoting “double” materiality investors ask companies and the financial community to acknowledge that a much broader range of issues and events affect an enterprise, like climate change. Regulators now side with sustainability advocates who have long argued this case. Further, the actions of companies can have a drastic impact on society and the environment as well. The concept of double materiality acknowledges that interconnection – hence double.

What are you supposed to report?

The operationalization of the concept of double materiality is key to your sustainability reporting. It will benefit you to adopt conceptual guidelines addressing the definition and implementation of the concept of materiality in each of its two dimensions. Double materiality requires that both impact materiality and financial materiality perspectives be applied without ignoring their interactions:

1. Financial materiality: Identifying sustainability matters that are financially material for the reporting entity based on evidence that such matters are reasonably likely to affect its value beyond what is already recognized in financial reporting. The financial materiality of a sustainability matter is not constrained to matters that ware within the control of the reporting entity. The determination of financially material effects on the reporting entity can rely on non-monetary quantitative, monetary-quantitative, or qualitative data, while recognizing the dynamic relationship between the two. Many impacts on people and the environment may be considered ‘pre-financial’ in the sense that they may become material for financial reporting purposes over time (so-called ‘dynamic materiality’). Financial materiality for sustainability reporting cannot be extrapolated from financial materiality for financial reporting.

2. Impact materiality: The impact materiality on an entity’s sustainability matter is similarly not limited to what is under a reporting entity’s direct control or influence. It also depends on evidence of a direct link between the impact and the entity’s own operations, products, or services (including through the value chain), and on an assessment of the relative severity of the impact, with the most severe impacts being judged material. Identifying sustainability matters that are material in terms of the impacts of the reporting entity’s own operations and its values chain (impact materiality), based on:

  • the severity (scale, scope, and remendability) and, when appropriate, likelihood of actual and potential negative impacts on people and the environment.
  • the scale, scope and likelihood of actual positive impacts on people and the environment connected with companies’ operations and value chains.
  • the urgency derived from social or environmental public policy goals and planetary boundaries.

Double materiality assessments are key to proper sustainability reporting. They should be performed by the standard setter (for sector-agnostic and sector-specific disclosures), and by the reporting entity itself under a process defined by an appropriate standard (entity-specific disclosures and ‘comply or justify’ principle). The ‘comply or justify’ principle enables a reporting entity to determine and duly justify when a mandatory disclosure is not relevant and not applicable in its specific circumstances. It should not be perceived as a way to avoid mandatory disclosures.

Now that you understand the concept to Double Materiality, let’s apply the thinking to refrigerants. Here are a couple of examples*:

1. Your infrastructure relies on two large R-123 systems that have entered obsolescence. Although they were installed in 2017, they will be fully obsolete by 2030 when stock for the material will no longer be available. Consequently, report the need to retire these systems early and report the climate impact from the material in the system. Then report the planned end of life disposition for the material and any associated financial and environment costs and benefit. For instance, destroying the refrigerant could lead to an insured end of life destruction so no further venting will be allowed. There are many aspects to this reporting. But the concept is to pay attention to the overall impact, not just bury it on a line item under maintenance.

2. Retrofits. Any system with an obsolete refrigerant must have its refrigerant swapped for another allowable refrigerant. The reporting should include the financial cost of replacing the material and the associated environmental benefit of removing the harmful refrigerant and using the allowable refrigerant. Include adjustments to the Top line GWP installed base and future benefits / impacts to energy or other associated financial or environmental impacts.

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The European Union continues to set the standard for sustainability reporting, with much of the world following their lead. As such, the European Financial Reporting Advisory Group (EFRAG) Published these recommendations in February 2021, in a report called: PROPOSALS FOR A RELEVANT AND DYNAMIC EU SUSTAINABILITY REPORTING STANDARDSETTING. EFRAGs published use of the concept of Double Materiality is a further example of how rapidly business practices are evolving related to ESG filings.

The findings of this report concluded:

  • The EU has a unique sustainable development and sustainability reporting landscape which constitutes strong foundations for standard-setting.
  • Standard-setting should be built on robust EU conceptual guidelines, addressing public good alignment, expected qualitative characteristics of information, relevant time-horizons, clear boundaries, double materiality and connectivity between financial and sustainability reporting.
  • The overall target architecture of standards should be coherent and comprehensive and reflect appropriate layers of reporting (sector-agnostic, sector-specific and entity-specific), relevant reporting areas and a coverage of sustainability topics classified under an ESG+ categorization. Presentation should preferably be organized under ‘sustainability statements’ and digitization should be considered from the start.

Also, Trakref recommends an important white paper produced by GRI, The double-materiality concept: application and issues, investigated the “application of materiality in sustainability reporting – highlighting why disclosing impacts that go beyond those that are financially material benefits organizations while supporting sustainable development.” GRI standards are the world’s most widely used standards for sustainability reporting, enabling organizations to be transparent and take responsibility for their impacts. Among other findings, the white paper concludes that,

  • The identification of financially materiality issues are incomplete if companies do not first assess their impacts on sustainable development.
  • Reporting material sustainable development issues can enhance financial performance, improve stakeholder engagement and enable more robust disclosure.
  • Focusing on the impacts of organizations on people and planet, rather than financial materiality, increases engagement with the Sustainable Development Goals.
  • Double-materiality is central to the European Commission’s proposed Corporate Sustainability Reporting Directive (CSRD), while it also closely aligns with the materiality approach in the GRI Standards.

Your material balance sheet should be the foundational reference point for all your reporting needs.  You will find this with your operations teams at every property and in every region. In order to report, you will need to know the calculus your group is using to track these materials. There are a few options when deciding how to manage this internally, but there is no avoiding the requirement to report these emissions.

This is where Trakref is essential to your Double Materiality reporting. Although the Double Materiality discussion is heavily weighted toward EU companies and those non-EU companies with more than 250 employees in the EU, the global; reporting demands will likely nudge all of us to adopt a standard that includes this concept to streamline data collection and shareholder engagement.

If you’re looking to better track Double Materiality, get in touch with Trakref. We’re a software corporation that has been in the regulatory compliance software and environmental compliance calendar software space for years. As an environmental software provider, we make sure our refrigerant tracking capabilities are there to not only keep you in compliance, but work toward sustainability goals. Get in touch with one of our Refrigerant Geeks today.

 

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* Disclaimer: this concept is just a concept, and the solutions are based on hypotheticals situations.

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