Double materiality: double the trouble or double the benefit?
The EU Corporate Sustainability Reporting Directive (CSRD)¹ came into effect earlier this year, and many organisations are now required to meet its reporting requirements. The first step in identifying what disclosures apply to your business is performing a double materiality assessment, which identifies impacts, risks, and opportunities that are material across your entire value chain.
This process demands more resources, time, and budget, which may explain why 17% of in-scope companies have not yet completed their double materiality assessment1 and another 47% are still finalising this step. Beyond reducing compliance-related risks, companies that complete a double materiality assessment can unlock significant strategic value, leading to numerous business benefits.
What are the advantages of completing such a comprehensive assessment, and should you consider performing it even if your business is not (yet) subject to CSRD?
Strategic insights from double materiality
Double materiality acknowledges the impact businesses have on social wellbeing and the environment and how sustainability issues, in turn, affect a business’s financial standing.
Compared to previous methods, double materiality requires more information from companies, as the CSRD demands more supporting evidence. While gathering this extensive data can be challenging, it is highly valuable. With this data, business leaders are better equipped to build trust, innovate, and elevate their competitive advantages. A robust double materiality assessment, done correctly, can:
- Expose clear links between sustainability issues and business value creation, including interrelationships between impacts, risks and opportunities and their financial effects.
- Break down silos among sustainability, risk management and finance teams to build stronger cross-functional collaboration.
- Provide a clear view of a business’s positive and negative impacts from its operations across its entire value chain, enabling better decision-making. Understanding the business’s impacts on sustainability topics like human rights, own workforce, and climate change will be crucial for investors. Therefore, business leaders should incorporate these considerations into their decision-making process.
- Map a wide range of affected stakeholder concerns and perspectives on the company’s impacts, which can support the creation of a sustainability strategy and drive a positive brand reputation.
Due to its comprehensive approach, a double materiality assessment provides critical insights to generate long-term business value from sustainability, going beyond mere compliance.
What is double materiality?
Double materiality assessment leads you through a process of identifying your business’ most significant environmental, social and governance issues. The process is much more robust than we might be used to from past materiality approaches, taking a two-angled approach, acknowledging environmental and social impacts across a company’s value chain; impact materiality and identifying its linked risks and opportunities and their financial implication on the business; financial materiality. Unlike past materiality approaches, which would privilege one perspective over the other.
- Impact materiality, based on best practices like the Global Reporting Initiative (GRI) and taking an “inside out” perspective, focuses on how business activities impact people and the environment.
- Financial materiality aims to inform investors and financial stakeholders about risks and opportunities. It evaluates how sustainability-related financial risks and opportunities impact an organisation’s prospects, position, and profitability. From an “outside-in” perspective, it shows how external ESG issues financially affect a business, crucial for investor decision-making.
Combined, an assessment provides organisations with a full understanding of their material sustainability-related impacts, risks and opportunities across their entire value chain linked to related sustainability topics, including current and emerging issues.
Double the benefit
A robust double materiality assessment can indeed bring double the benefit, offering multiple advantages beyond mere compliance. The thorough process provides organisations with detailed, actionable insights to drive business value through sustainability. This information can help decision-makers address a wide range of strategic themes effectively:
- Resilience Planning
By considering both financial materiality and impact materiality, businesses can better identify emerging risks related to environmental regulations, changing consumer preferences, and supply chain disruptions. Managing these risks leads to stronger business continuity planning and resilience.
- Opportunity Identification
Double materiality enables businesses to capitalise on new opportunities arising from sustainability trends, including innovations in clean technologies, access to new markets with sustainable products/services, and enhanced brand reputation through responsible practices. Integrating sustainability into a business strategy can also create competitive advantages.
- Stakeholder trust and reputation
A double materiality assessment involves building relationships with diverse stakeholder groups to collect their perspectives and integrate them into an organisation’s sustainability agenda. Through this engagement, companies indicate they value stakeholders’ views and seek to fully understand the implications of sustainability topics.
As a company progresses its sustainability agenda, transparency into commitments and the proactive management of environmental and social impacts can further build stakeholders’ trust and enhance a brand’s reputation. Demonstrating corporate responsibility can lead to increased customer loyalty, talent attraction, and improved investor confidence, thereby strengthening the business’s long-term sustainability.
- Long-term value creation
Integrating double materiality into business strategies fosters long-term value creation by aligning financial performance with sustainability goals. This approach helps businesses to mitigate risks, seize opportunities, and drive innovation that not only enhances profitability but also contributes positively to society and the environment, thus securing sustainable growth over time.
Reframing the value of double materiality
Double materiality assessments identify and address impacts and both financial and non-financial risks and opportunities, which is crucial for determining the contents of a sustainability report. Moreover, businesses that use this assessment beyond compliance to drive value will gain the most benefit from the process.
Insights from a double materiality assessment can enhance decision-making, drive long-term value, and align strategy with stakeholder expectations. Businesses that complete this assessment early are better positioned to design a strong, sustainability-focused strategy and drive business value. Being proactive builds trust, improves stakeholder relationships, boosts resilience, and fosters innovation and competitive advantage.
Author: Joaska Mischke, Head of ESG and Sustainability Strategy, Simply Sustainable
To integrate a double materiality assessment into your strategy, connect with one of our experts here.