Duration: 6-8 Weeks
Checklist of previously completed work:
Double Materiality means considering both the impacts on people & planet from the organisation as well as the reverse – the impacts that people & planet may have on the organisation. In practice, this means combining the issues identified by the stakeholder engagement process in the Stage 2 ‘Preparation’, with an assessment of the risks and opportunities that you might face from climate change, as well as from society as it adapts to a changing environment. This will produce a ‘long list’ of potential material topics, which are then cut down to a list of actual material topics, by applying thresholds.
Some of the precise details of this stage are up to implementers to determine in response to the circumstances of each organisation. Larger organisations will be expected to undertake a more rigorous analysis that fits their more complex circumstance. EFRAG’s implementation guidance document IG1 specifically states that “the ESRS do not mandate how the materiality assessment process shall be designed or conducted by an undertaking. This is because no one process would suit all types.” (EFRAG IG 1, p.19) Instead “an undertaking shall design a process that is fit for these purposes based on its specific facts and circumstances, including consideration of the depth of the assessment, as per the requirements of ESRS 1 Chapter 3 and of the DRs regarding the materiality assessment and its outcome.”†
The process outlined below is intended as a starting point for game businesses, providing a minimum level of confidence in the double materiality assessment. Keep in mind that ESRS preparers must exercise some of their own judgment, informed by their understanding of their particular circumstances.
In future, the EU plans to develop sector-specific standards that will mandate specific, sector-relevant sustainability topics are addressed by specific industries. While these are more likely to affect high-emitting sectors like cement and steel, the SGA feels that it is advantageous to proactively establish our own sector-specific norms.
The image above illustrates the main components of the Double Materiality Analysis – with each component contributing part of the picture. At the end of the process, we are left with just the material impacts, risks and opportunities (IRO).
† ESRS 1, Chapter 3 is the section of the ESRS that explains “Double materiality as the basis for sustainability disclosures” and is worth reading in full; DRs refers to the “Disclosure Requirements” which are individual sub-topics within the Topical ESRS – for example, within E1 “Climate Change” a subtopic is “Disclosure Requirement E1-2 – Policies related to climate change mitigation and adaptation”)
In the previous Stage, your engagement with stakeholders will have identified the impacts that the organisation has on people and planet. The other half of the DMA process is to examine the risks that people (transition risks) and planet (physical risks) might have on the organisation. While doing this, opportunities will also become apparent along the way.
The results of this three-part analysis will be combined with your long list of actual and potential impacts from the stakeholder engagement process (see Stage 2: Preparation) and a materiality screening process will be applied to ranks issues by severity and likelihood of impacts.
Once ratings are in place, you will then be able to set appropriate materiality thresholds, to determine cut-off points below which issues are considered “non-material” and do not need to be disclosed. Items above the threshold are considered “material” and will need to be reported on. The final list of material topics will be carried forward into Stage 4: Data Collection and Gap Analysis.
The goal of this section of the DMA process is to identify the kinds of risks and opportunities from climate change that your organization may face in the years ahead, informed by the range of possibilities outlined by the latest climate science. To do this, we need to employ climate scenarios to understand the possible range of future risks and opportunities.
Climate risks facing game businesses can be placed into one of two buckets – physical or transition risks.
Physical risks are impacts from changing environmental systems, like increased duration of heat waves, more powerful storms, or changes to patterns of precipitation resulting in longer droughts and more intense flooding.
Transition risks are impacts of political and social changes as society, businesses and governments respond to the need to address climate change. This can take many forms, like increased costs from carbon taxes, higher electricity prices that incentivise energy efficiency, changing customer expectations, demands for greener products, and even changing access to credit or finance.
The potential impact and likelihood of both of these types of risks will vary depending on the way that society and the planet itself respond to emissions of greenhouse gases – under a higher emissions scenario, we will face more physical risks, while under a lower emissions scenario in which society takes more drastic action to curb emissions, we may face greater transition risks.
Opportunities also exist along the entire spectrum of future possibilities. This might include the ability to reduce costs through improving energy efficiency, or by installing solar panels to provide most of your own electricity needs. Opportunities aren’t limited to just saving money, they can also produce other benefits: like gaining a reputation for sustainability that helps to retain top employees, or the opportunity to attract climate-conscious customers with sustainable products.
To analyse the physical and transition risks and opportunities facing an organisation, we need a sense of the possible range of futures that we might face. This is where scenario analysis comes in, and it is a requirement baked into the ESRS. The topic of scenario analysis alone could be at least as long again as this page – and others have already written fantastic guides to the concept and fundamentals.
The Potsdam Institute for Climate Impact Research (PIK) has developed a comprehensive and accessible primer on climate scenarios. They describe them as:
not predictions of the future, but rather projections of what can happen by creating plausible, coherent and internally consistent descriptions of possible climate change futures. They can also constitute plausible, coherent and internally consistent descriptions of pathways towards certain goals. So climate change scenarios can come in two different forms, projections “What can happen?” and goal-oriented pathways “What should happen?”, depending on the type of question they aim to answer.
For the purposes of ESRS compliance, we want to use climate scenarios to answer two questions for our particular organisation and context: 1) what can happen? and 2) how resilient is our organisation if this does happen?
On their own, a single scenario doesn’t provide much information. Their real value for decision-making is when they are used for comparisons:
As scenarios are not about predicting the future, a single scenario is virtually meaningless. Scenarios are rather used in pairs or larger sets to contrast different futures and choices. For example, scenario-driven climate policy analysis relies on comparing a projection without policy intervention (typically called baseline scenario) with a pathway towards a desired goal (e.g., the 2 °C goal).
While there are several possible sources for climate scenarios, the SGA recommends using the world-leading NGFS “Scenarios Explorer”, which contains 7 scenarios. Instructions on how to “use” these scenarios can be found here – the SGA can also help you to understand which scenarios to choose and how to interpret them for your organisation.
There are few “rules” about how to use scenarios for ESRS reporting as this is an area of emerging consensus and evolving best practices. However, the ESRS does specify some requirements.
First, physical risk assessment must consider “at least high emission climate scenarios” as well as “how [the organization’s] assets and business activities may be exposed and are sensitive to these climate-related hazards, creating gross physical risks for the undertaking.” (ESRS 2 IRO-1) This means analysis that applies at least one of the NGFS scenarios “fragmented world”, “NDCs” or “Current Policies” scenarios, and the types of risks that would eventuate for the organisation if these scenarios played out. (Assuming that you are using the NGFS scenarios)
Second, the ESRS also specifies that transition risk analysis considers “at least a climate scenario in line with limiting global warming to 1.5°C with no or limited overshoot”. This means considering at least one of the NGFS scenarios with high transition risks, such as “Net Zero 2050” or “Delayed Transition”.
When undertaking a scenario analysis, it is important to analyse risks and opportunities across different time horizons. The ESRS requires the analysis to consider risks and opportunities in short, medium and long-term time horizons. For the ESRS, short time horizon means, typically, the same period as the reporting time frame (i.e. one year), medium typically means up to 5 years, and long term means beyond 5 years. So for example, when you examine the physical risks your organisation is exposed to in the short term you are thinking about one year ahead, in the medium term about five years ahead, and long term means thinking about beyond 5 years – potentially out to milestone years, such as 2050, 2040 or other key dates on the road to net zero.
Physical risk analysis starts with the previous work done in Stage 2: Preparation. Make a list of the critical or essential locations of your operations and value chain. For each location, site, or element of the value chain you will consider its exposure to each of the physical hazard types required by the ESRS (fire, flood, storm, water stress, etc – see the SGA template for the full list as required by ESRS). Adjust the size of your location list to fit your organisational capacity. Larger organisations may need to list more value chain elements, and smaller organisations may only need 1 or 2 – for example, a main office and a crucial data centre might be all that is required for a company of 200 employees. For a company of 20,000 employees, a more rigorous process would be expected.
For each site or critical element of the value chain you will use the SGA physical risk assessment template to examine each risk and record whether the type of risk is material.
Assess the materiality of the risk by opening the link to the linked risk evaluation tool, and apply the applicable scenario(s) and year you wish to assess. In most cases, you may need to do this multiple times, as at least two scenarios should be addressed.
Some experience is necessary to interpret the output of these hazard representations, coupled with an understanding of the location or value chain component being assessed. The SGA can help with interpreting the output of these tools – reach out if you feel you need assistance in this aspect.
If the hazard tool shows a relevant hazard you will make a record of it, along with its “likelihood” and “severity”, and whether it For hazard types that are not applicable, mark them “not material” and write a short explanation why.
For example: if a flood risk map of your location shows an increased risk of a 1-in-100-year flood occurring, mark the risk as “potentially material”, and record the level of “likelihood” of the risk (the SGA template recommends a 1-5 point scale) along with the “severity” of the impact (also on a 1-5 point scale). If the expectation of events that cause severe flooding in the location being analysed goes from being 1-in-100 years to 1-in-20 years in the particular scenario, then the likelihood is increasing, and over a 20-year time horizon, at least one event of that scale would be expected, making its likelihood quite high. Similarly, if a hazard tool shows the degree of water stress in a location going from “medium” to “extremely high” under the scenario being considered then the severity of that hazard for a data centre that relies on a supply of water for cooling might also be considered to be quite high.
To be clear, many, if not most of the climate risk types the average game developer must consider are likely not to be material for typical organisations – but this will always depend on the location and context of each. The SGA template will help you to document your decision-making in this process and demonstrate the process you have taken to analyse the risks you may be exposed to.
In the CDProjektRED ESG report covering 2023, the following three physical climate risks were assessed as material. Other possible threats are likely to have also been evaluated and considered “not material”.
Take-Two in their TCFD climate risk report for 2024 identified the following physical climate risks. Elsewhere in the report it was stated that three scenarios were considered: IPCC RCP8.5 (business as usual), NGFS Disorderly: Delayed transition, and NGFS Orderly: Below 2°C.
Assessing transition risks is much like the process of identifying physical risks, and should be informed by scenario analysis. Here, instead of looking at scenarios that are high in emissions, lower emissions scenarios should be used as these may entail more dramatic transformations of society.
There is no exhaustive or simple approach to assessing transition risks – it is inherently a speculative and creative exercise that involves imagining what might be possible. Transition risks can come from changes in government or legislation, social attitudes, customer behaviour, or any other feature of society that might – as a result of mitigating or adapting to climate change. They can result in anything from higher operating costs to a loss of social license to operate.
Transition risks, like physical risks, can occur over short, medium, or long time horizons, and are typically classified as belonging to into one of four categories: Policy and legal risks, technology risks, market risks, or reputational risk.
Below are some examples of the transition risks that game companies have identified and disclosed in their annual reports:
Increased pricing of GHG emissions
Enhanced emissions-reporting obligations
Medium
Short
Substitution of existing products and services with lower-emission options and costs to transition to lower-emission technology
Energy transformation
Medium
Long
Changing customer behavior
Uncertainty in market signals
Rising cost of energy
Cost of market mechanisms used to achieve climate commitments
Long
Short
Medium
Medium
Increased stakeholder concern about climate action
Reputational risk from increasing expectations of how we address climate change
Short
Medium
Medium
Use the SGA template to describe the transition risks your organisation faces, applying the same assessment criteria as for physical risks: note the effect of each of your chosen climate scenarios on both the likelihood and severity of this risk eventuating.
Keep in mind that transition risks may not apply to the organisation’s specific locations so much as the operating environment the organisation finds itself within.
The SGA can also help here by running a transition risk workshop with you.
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Here are two examples of how an organisation might implement climate scenarios, use them to assess the physical and transition risks to key elements of their value chain (which they have identified in Stage 2: Preparation), and establish one or two main physical risk impacts identified as material.
Example 1: A game development studio based on the outskirts of Lisbon, Portugal conducts a scenario analysis using RCP2.6 (low emissions scenario) and RCP8.5 (high emissions scenario). They select a number of different potential impacts and consider many to be non-material. Being in an area prone to droughts, and requiring water as part of their office operations and cooling systems, they consider changes in precipitation, identifying a substantial possibly impact here that may affect the business. The climate impact tool used shows that in 2050, under a high emissions scenario, southern Portugal may be at risk of receiving more than 10% less rainfall per year, which the team considers to be a potential impact based on past droughts, and places on its list of physical risks. They also identify the possible opportunity to prevent this disruption by installing a rainwater collection system for the studio, and add it to their long list.
Example 2: A Hamburg, Germany based game developer undertakes a scenario analysis that compares RCP2.6 and RCP8.5, using the Climate Analytics impact explorer to consider a number of impacts, many of which they decide are not material. When they consider the changing likelihood of “extreme rainfall events”, they find that under the high emissions scenario the risk of “Extreme Rainfall” is 15% higher relative to the low emissions scenario. Considering that the studio is located not far from a river, they decides that extreme rainfall and associated flooding is a potential physical risk to their offices, potentially producing disruptions and damages, and they add this to their list of physical risks.
The undertaking shall describe the process to identify and assess climate-related impacts, risks and opportunities.
This description shall include its process in relation to:
(a) impacts on climate change, in particular, the undertaking’s GHG emissions (as required by Disclosure Requirement ESRS E1-6);
(b) climate-related physical risks in own operations and along the upstream and downstream value chain, in particular:
(c ) climate-related transition risks and opportunities in own operations and along the upstream and downstream value chain, in particular:
When disclosing the information on the processes to identify and assess climate impacts as required under paragraph 20 (a), the undertaking shall explain how it has:
(a) screened its activities and plans in order to identify actual and potential future GHG emission sources and, if applicable, drivers for other climate-related impacts (e.g., emissions of black carbon or tropospheric ozone or land-use change) in own operations and along the value chain; and
(b) assessed its actual and potential impacts on climate change (i.e., its total GHG emissions).
When disclosing the information on the processes to identify and assess physical risks as required under paragraph 20 (b), the undertaking shall explain whether and how:
a) it has identified climate-related hazards (see table below) over the short-, medium- and long-term and screened whether its assets and business activities may be exposed to these hazards;
b) it has defined short-, medium- and long-term time horizons and how these definitions are linked to the expected lifetime of its assets, strategic planning horizons and capital allocation plans;
c) it has assessed the extent to which its assets and business activities may be exposed and are sensitive to the identified climate-related hazards, taking into consideration the likelihood, magnitude and duration of the hazards as well as the geospatial coordinates (such as Nomenclature of Territorial Units of Statistics- NUTS for the EU territory) specific to the undertaking’s locations and supply chains; and
(d) the identification of climate-related hazards and the assessment of exposure and sensitivity are informed by high emissions climate scenarios, which may, for example, be based on IPCC SSP5-8.5, relevant regional climate projections based on these emission scenarios, or NGFS (Network for Greening the Financial System) climate scenarios with high physical risk such as “Hot house world” or “Too little, too late”. For general requirements regarding climate-related scenario analysis see paragraphs 18, 19, AR 13 to AR 15.
We are constantly iterating and improving our resources. If you have feedback on any of these tools – please reach out, and we may be able to help improve your experience with them.
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