What is double materiality?
Double materiality assessment in sustainability reporting has become mandatory for thousands of EU (and soon non-EU companies) that fall within the scope of the EU Corporate Sustainability Reporting Directive (CSRD). Companies need to ensure that they have the right strategies, mechanisms and information gathering processes in place to begin preparing for double materiality assessments.
What does ‘double materiality’ mean?
Double materiality refers to the process of assessing the impact of ESG factors on the company (this is called financial materiality) as well as the impact that the company has on the environment, such as climate change and biodiversity, and the wider society (this is called environmental and social materiality).
Traditionally, ESG reporting has been focusing on financial materiality, which looks at ESG only from a business context, rather than the wider umbrella of sustainability. You can read more about this in our article ‘The difference between sustainability and ESG’.
Depending on which industry a business operates in, where it is located and other individual circumstances, a company has both internal and external impacts.
Assessing internal impacts can help a company understand how ESG issues affect its profitability and long-term financial stability, whereas assessing external impacts helps a company understand the business’s reputation and the external environmental and social ramifications to conducting its business. Double materiality therefore gives a company a more holistic view of how sustainability plays out in its operations and allows businesses to plan for the future.
You can read about ‘What does ESG stand for?’
Should companies consider conducting double materiality assessments?
The CSRD isn’t the only reason businesses should think about conducting a double materiality assessment. Investors are becoming interested in not only the profitability of the company, but also about how their investments impact people and the environment. This has been partly due to a growing market for sustainable investment products as well as the requirement for some investors to report on the impact of their investment.
In addition, there has been increasing pressure from civil society, trade unions and other stakeholders, who are concerned about the treatment of society and the protection of the environment and whether some businesses are negatively or positively contributing to this. Many consumers are also concerned about ‘greenwashing’ and are demanding for more sustainability information to make more informed choices on what products to buy and what services to use.
The wave of sustainability reporting is moving towards more transparent, detailed and reliable information, which has been driven by social pressure and an evolving regulatory landscape. Businesses that cannot keep up face the risk of falling behind on effective risk management, business opportunities and profitability.
How to prepare for double materiality?
Materiality assessments require engaging with key stakeholders, identifying relevant and important factors for both internal and external impacts and assessing the severity of the impact and determining the level of materiality on these issues. The impact of those material issues should also be measured using relevant performance indicators and monitored to identify any changes to the materiality landscape.
Getting ready for double materiality assessments therefore requires a significant amount of preparatory work, information gathering, resources and expertise. This is because all materiality assessments are carried out on a case-by-case basis for each individual company and no materiality assessments are identical.
It is therefore important to speak to experts who have the knowledge and skills in the field on how to best approach double materiality assessments in sustainability reporting.
How can we help you?
As sustainability is pushed to the top of the agenda. Corporates, investors and financial institutions require environmental, social and governance (ESG) plan and a path to achieve it.
We help leaders put together these ESG plans and work with them to implement them. We diagnose their current sustainability issues, establish baselines, define their goals and design the execution plan.
To find out more about how we can help with your sustainable finance strategy, get in touch.
