What is double materiality?
Double materiality is the assessment of how sustainability issues affect a company financially (outside-in) and how the company impacts society and the environment (inside-out).
For example, a company faces increased costs due to cotton shortages caused by climate-related droughts (outside-in). Meanwhile, its extensive use of non-biodegradable materials positively contributes to environmental pollution (inside-out).
Conducting a double materiality assessment is crucial because it helps the company identify and address these sustainability risks and impacts comprehensively. This understanding enables better strategic decision-making, promotes transparency, and helps align business practices with expectations.
Double materiality assessment for CSRD
The double materiality assessment gained popularity with the introduction of the Corporate Sustainability Reporting Directive (CSRD). Under CSRD, double materiality is a requirement, emphasizing that companies must evaluate how sustainability issues affect their financial performance and impact.
This assessment is essential for CSRD because it ensures that sustainability reports cover both the financial risks and the societal impacts of business activities. This comprehensive approach helps stakeholders make informed decisions and promotes a more sustainable global economy.
Double materiality is important because it helps companies understand two key aspects. First, it shows how environmental and social issues can impact their financial performance. Second, it reveals how their operations affect the environment and society.
This dual perspective ensures that companies address both their risks and their responsibilities. By considering both sides, companies can make better decisions and improve their sustainability. This approach also helps them meet stakeholder expectations more effectively.
Double materiality assessment checklist
The double materiality checklist is a structured approach to help companies assess their sustainability impact and financial risks due to ESG factors. This checklist guides organizations through the essential steps of aligning their business strategies with sustainable practices.
- Focus on your business and strategy
- Identify and engage with stakeholders
- Build your list with relevant ESG themes
- Find the risks, opportunities and impacts (IRO)
- Scoring the IRO’s and set the threshold
- Make a materiality matrix (optional)
1. Focus on your business and strategy
The first step in the double materiality assessment is to focus on your business and strategy. This is essential but often overlooked and underestimated. Begin by thoroughly summarizing your core values and mission statement.
Following this, develop comprehensive tools such as a business model canvas, value creation model, and CSRD value chain model. These frameworks provide deep insights into how your business operates and creates value.
By aligning these models with the company’s environmental, social, and governance (ESG) topics, you ensure that sustainability efforts are seamlessly integrated into your strategic objectives. This foundational step not only aligns with ESG considerations but also enhances overall business coherence and strategic focus on sustainability.
2. Identify and engage with stakeholders
The second step in the double materiality checklist is to identify and engage with stakeholders. Start by identifying relevant stakeholder groups. These include primary stakeholders directly involved with your business. Also, identify affected stakeholders impacted by your operations and silent stakeholders who may not have a direct voice but are influenced by your activities.
Stakeholder engagement
Engagement is the next critical phase. There are various methods to connect with and involve stakeholders in discussions about sustainability. Choose the appropriate techniques to ensure effective communication and meaningful dialogue.
For primary stakeholders, roundtable discussions are common, allowing for in-depth conversations and feedback. For affected stakeholders, surveys can be an effective tool to gather a broad range of opinions and insights. Silent stakeholders, who might not actively voice concerns, can be represented by experts who understand their perspectives and impacts.
3. Build your list with relevant ESG themes
The next step in the double materiality checklist is to build your list with relevant ESG themes. Compile a comprehensive list that encompasses environmental, social, and governance themes, based on insights gained from previous steps.
Many companies start with a broad CSRD longlist of potential themes. Through analysis and prioritization, this list is refined down to a shortlist. This shortlist highlights the most critical themes specific to the company’s context and stakeholder concerns.
4. Find the risks, opportunities and impacts (IRO)
The next step involves finding the risks, opportunities, and impacts (IRO) for each sustainability theme listed in your shortlist from the previous step. This analysis is required only for the ESG themes identified as most critical.
The goal is to pinpoint risks and opportunities related to financial materiality, and impacts concerning impact materiality. Compile a detailed list of these CSRD IROs, which will be essential for scoring them in the subsequent step. This approach helps clearly define each element’s significance and influence on the company’s strategy and operations.
5. Scoring the IRO’s and set the threshold
In the scoring phase of the double materiality checklist, the assessment is divided into two distinct areas: impact materiality and financial materiality. Each area has its specific criteria, which are scored on a scale from 1 to 5.
This scoring system utilizes a formula to calculate a total score for each criterion, resulting in a comprehensive list where all ESG topics are ranked according to their scores. This score is then used to set a threshold, determining which ESG topics are material for the company.
Impact materiality criteria
Impact materiality focuses on how a company’s actions affect the environment and society. The criteria used to assess this are:
- Scale: Measures the intensity of the impact on an individual level.
- Scope: Assesses the breadth of the impact across individuals, organizations, or ecosystems.
- Recoverability: Evaluates whether and how quickly the impact can be reversed or mitigated. This is only applicable for negative impacts.
- Probability: Estimates the likelihood of the impact occurring.
Financial materiality criteria
Financial materiality evaluates how sustainability issues can affect the financial performance of the company. The criteria for this assessment include:
- Scope: Looks at the extent of financial impact across the organization.
- Resource: Considers the availability of natural, social, and economic resources.
- Relation: Evaluates the strength and significance of business relationships.
- Probability: Assesses the likelihood of potential financial impacts.
Setting a threshold
Setting the threshold is a key step in the double materiality assessment process. For both the financial and impact lists, you must determine a threshold that aligns with your company’s strategic priorities and risk tolerance.
Typically, setting a threshold such that only themes scoring in the top quartile or above a certain number are considered material ensures that the focus is on the most critical issues. This method is chosen to concentrate efforts on sustainability themes that pose the greatest risks or opportunities.
6. Make a materiality matrix (optional)
Making a materiality matrix helps to clearly identify which topics are most important to your company. It provides a graphical representation of where each theme stands in terms of its impact and financial significance. This facilitates easier communication and understanding of priority areas among stakeholders and decision-makers.
Tips for your CSRD double materiality assessment
Most companies must conduct a double materiality assessment as part of their CSRD compliance. This step is required under ESRS2. These tips aim to help companies complete this important process effectively and meet CSRD standards.
Record every decision
When conducting a double materiality assessment for CSRD, it’s essential to clearly explain and record every decision throughout the process. This thorough documentation is crucial for ensuring that the assessment can be easily reviewed and verified by accountants.
Keeping detailed records not only maintains transparency but also supports accountability. This makes it easier for stakeholders to understand the basis of your decisions. This step aligns with CSRD requirements, facilitating compliance and future audits.
Equal importance of financial and impact materiality
In the materiality assessment process, both impact materiality and financial materiality should be given equal importance. Each sustainability topic must be evaluated from both the impact and financial perspectives independently. A topic is considered material if it is deemed significant from either perspective or from both.
These assessments are interconnected, and their interdependencies should be taken into account. Typically, the assessment begins with the impact perspective, as sustainability impacts may translate into financial effects over time.
Additionally, companies must consider how external sustainability matters affect them. The results of these assessments guide the company in proposing necessary disclosures according to reporting standards. This may vary based on the materiality of the topic from either perspective.
Level of detail
When reporting on material impacts, risks, and opportunities, companies must tailor their disclosures based on the significance and location of these elements. Information should be detailed enough to reflect variations between countries or linked to specific business locations or assets, if these distinctions are significant.
The level of detail in the reporting should align with the breakdown used in the company’s materiality analysis and may extend to the subsidiary level as necessary. Companies ensure that aggregating data across different levels or locations does not obscure crucial details needed for accurate interpretation.
When sector-specific information is required, the reporting adheres to established ESRS sector classifications. It prioritizes specific ESRS requirements where applicable.
Use CSRD software for double materiality
Using CSRD software can greatly assist with the double materiality assessment by offering a structured approach to stakeholder engagement. It serves as a centralized hub for all relevant data, simplifying the management and editing of information.
Additionally, the software supports the visualization of data, making it easier to understand and communicate the findings. This comprehensive tool helps streamline the entire assessment process, ensuring efficiency and coherence.
