What is the definition of 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).
In other words, double materiality means that companies need to consider both how they affect the world and how the world affects them. When discussing the impact on the world, we refer to impact materiality, while financial materiality is the effect of the world on them.
- Impact materiality: This is when a company asks, “How do we affect the world?” They consider how their activities might impact the environment, and society.
- Financial materiality: This is when the company flips the question and asks, “How does the world affect us?” Things like environmental changes, new regulations, or shifts in customer preferences.
Examples of double materiality
A fashion company considers how its operations affect the world. Are they using materials that harm the environment, like non-recyclable fabrics? Are the factories they work with paying fair wages and providing safe conditions for workers? If they’re creating pollution or treating workers unfairly, this has a negative impact on the planet and society.
The company also needs to think about how the world affects them. For example, if customers start demanding eco-friendly clothes, or new laws ban harmful materials, this could impact their profits. They might need to invest in new technologies or materials to stay competitive and avoid losing customers.
Double materiality under CSRD and ESRS
The double materiality assessment gained popularity with the introduction of the Corporate Sustainability Reporting Directive (CSRD). Under CSRD the double materiality assessment is requirement. The goal is to identify the most relevant sustainability themes for a company.
Companies must identify the most relevant sustainability themes and link these material topics to the corresponding European Sustainability Reporting Standard (ESRS). This will determine the specific standards the company should use for reporting.
An example of CSRD double materiality
An example could be that a production company discovers, through a double materiality assessment, that it has a significant negative impact on the environment due to air pollution. They also find a potential negative impact on employees by exposing them to risks in the factory.
After identifying several impacts, the company considers the financial perspective. The air pollution poses potential reputational risks. The exposure to risks in the factory may lead to lawsuits and dissatisfaction among workers. Opportunities include improving workplace safety and developing specific employee safety programs.
As a result, air pollution and workforce safety might become material topics for the company. If these topics remain material after the double materiality analysis, which involves scoring these impacts, the company will need to report on ESRS E2. This standard focuses on pollution. They will also need to report on ESRS S1, which focuses on the company’s own workforce.
Within ESRS E2 and ESRS S1, there are various data points that must be reported by the company under the CSRD. An example of this would be disclosing policies designed to ensure a safe workplace.
Double materiality assessment example
This double materiality analysis example is a structured approach to help companies assess their sustainability impact and financial risks due to ESG factors. This example 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
- Find the risks, opportunities and impacts (IRO)
- Link your materiality IROs to sustainability themes
- 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 this double materiality assessment example 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 is the next 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. Find the risks, opportunities and impacts (IRO)
The next step involves identifying the risks, opportunities, and impacts (IRO). A common approach is to begin by identifying impacts. Start by making a list of all the impacts your company might have or already has on people or the planet. These impacts can arise from your strategy, activities, and resources.
Once you have identified all relevant impacts, you can proceed with listing risks and opportunities. Like impacts, risks and opportunities can also arise from your strategy, activities, and resources. Another effective method for discovering potential risks and opportunities is to review your list of impacts.
Compile a detailed list of these CSRD IROs, which will be essential for scoring them in the subsequent step. Review this list with various departments and external stakeholders. They can help refine the list and make it as complete as possible.
4. Link your materiality IROs to sustainability themes
The next step in this double materiality checklist is to link your impacts, risks, and opportunities to relevant sustainability themes. These themes are also referred to as ESG themes or sustainability matters.
You can use the list of sustainability matters in the CSRD documentation to identify the most relevant themes. For example, if we consider the impact on worker safety, this can be linked to the sustainability theme of working conditions, which in turn is connected to ESRS S1.
Many companies start with a broad CSRD longlist of potential impacts, risks and opportunities. 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.
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 (negative): Evaluates whether and how quickly the impact can be reversed or mitigated. This is only applicable for negative impacts.
- Probability (potential): Estimates the likelihood of the impact occurring.
Recoverability is only considered when an impact is negative, which makes sense since a positive impact doesn’t require recovery. The probability of the impact is only taken into account when the impact is potential and not currently occurring.
Financial materiality criteria
Financial materiality evaluates how sustainability issues can affect the financial performance of the company. The criteria for this assessment include:
- Magnitude: Looks at the extent of financial impact across the organization.
- Likelihood: 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 ESRS 2. 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.
Make your double materiality analysis more efficient
Conducting a double materiality analysis can be time-consuming. However, doing it the right way can save you time and help you uncover valuable insights for your business strategy. Here are several tips to make your analysis more efficient.
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.
Involve different stakeholders
Engaging stakeholders is crucial for ensuring that your double materiality analysis is comprehensive and addresses the key concerns of all relevant parties. Stakeholders have different perspectives on what issues are material both from a financial and non-financial standpoint.
By involving stakeholders early and frequently, your double materiality assessment will better reflect your company’s risks, opportunities, and its environmental and social impacts. This engagement not only improves the quality of the analysis but also accelerates the process, as stakeholders become active participants in refining material issues.
Work together with different departments
An efficient double materiality analysis also requires close collaboration across multiple departments within your organization. Each department holds unique insights and data that are critical for assessing both financial and non-financial materiality.
To streamline the process, consider forming an interdepartmental task force with representatives from finance, sustainability, risk management, HR, legal, operations, and other relevant areas. This team will ensure that all perspectives are incorporated into the analysis and that the flow of information is well-coordinated.
Regular meetings and workshops between departments are essential for maintaining collaboration. These sessions can be used to track progress, address challenges, and discuss opportunities for improving the materiality assessment process.
