All you need to know about double materiality
With the implementation of the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS) have become the cornerstone of sustainability accountability. This shift introduced the concept of double materiality, which has created real confusion in the business world. Despite the European Financial Reporting Advisory Group (EFRAG) providing guidelines on materiality assessment, there is still a need for a clearer, step-by-step understanding of the double materiality assessment process. To aid in better comprehending this concept, we present an overview of the initial steps companies should take.
Double materiality
Traditional materiality assessments primarily focused on the impact of external factors on a company. However, the concept of double materiality expands this viewpoint by balancing how a company affects the environment and people (impact materiality) with how these external factors, in turn, influence the company’s financial position (financial materiality).
Impact materiality refers to a company’s effect on the environment and people, encompassing not just the direct financial impact but also its responsibility towards stakeholders, such as employees, communities, and the environment.
Financial materiality relates to how environmental, social, and governance (ESG) factors impact a company’s financial outcomes and operational processes. This aspect includes assessing both risks and opportunities.
This dual assessment ensures a more comprehensive and balanced approach to a company’s sustainability, guaranteeing that all significant sustainability issues are identified and reported.
Where to start?
Step 1: Get a full picture of your business context
For a company starting to prepare sustainability reports, it’s crucial to conduct a thorough assessment of its current situation. The complexity of this process will depend on the specifics of the organization. It would be beneficial to examine:
Business core: review your company’s business plan, strategy, and financial statements.
Product and service footprint: examine the offered products and services, including their geographical distribution.
Value chain dynamics: assess all connections to your business, including direct and indirect business partners and customers.
Public perception: evaluate media reports reflecting your company’s image.
Competitive landscape: investigate what other companies in your sector are doing, as well as industry benchmarks.
Sustainability context: keep abreast of general sustainability trends and related research.
Step 2: Identify impacts, risks and opportunities
After conducting an analysis of your company, compile a comprehensive list of its impacts on people and the environment.
Identify the risks and opportunities arising from each impact your company has on people and the environment. This will aid in better understanding the risks and opportunities stemming from these impacts and in discerning the connections between them. Critically evaluate how these factors might affect your financial position.
While risks and opportunities often arise from impacts, they are not always directly related. Therefore, it’s crucial to thoroughly review the list and include risks or opportunities that may not be linked to the direct impact of the company.
Examples
A logistics company with a fleet of diesel and gasoline-powered vehicles directly impacts the environment through the emission of greenhouse gasses (GHGs). This situation poses financial risks, such as potential carbon emission taxes and damage to reputation. However, it also presents opportunities, like gaining an edge in public procurement competitions by modernizing the vehicle fleet.
A manufacturing company specializing in the production of packaging materials from recycled waste positively impacts the environment by reducing waste. However, it faces a risk unrelated to this impact: fluctuating raw material prices can affect the company’s profitability.
Step 3: Prioritize identified topics
Once you have a detailed list of your company’s impacts, risks, and opportunities, prioritize them considering the complexity of your organization. Simplify the process by merging recurring or closely related issues. In doing so, you’ll focus on the most critical areas that require immediate attention.
Step 4: Involve your stakeholders
Once the final list of topics is prepared, involve stakeholders. Their insights can confirm, challenge, or enrich your list with new important topics. The main challenge here is not only to identify all relevant stakeholders but also to choose the most appropriate form of their involvement, thereby balancing the ratio of efforts invested to the expected outcome.
Examples
Identifying stakeholders: in a company where reducing greenhouse gas emissions is a significant issue, involving the HR manager might be superfluous. However, their expert opinion is crucial for addressing employee welfare issues.
Forms of stakeholder involvement: for a retail company assessing customer satisfaction, online surveys might be the most effective way to gather feedback. Conversely, for complex issues like ethical supply chain management, detailed workshops or individual meetings with supply chain leaders or external partners could provide deeper insights.
Step 5: Conduct final evaluation
After gathering extensive data from internal research and input from stakeholders, the next step is the evaluation process. This crucial phase involves applying a systematic methodology to identify significant topics. The ESRS don’t set a specific methodology due to the diversity of organizations. Instead, they outline key elements to consider in double materiality assessments, allowing organizations to adapt these to their unique situations.
The practical double materiality assessment process outlined in this article is not one-size-fits-all. Depending on your company’s size, complexity, and progress in sustainability, the significance and order of the steps may vary. To obtain a solution tailored to your company’s specific needs, we invite you to contact us.
