Double Materiality: A new frontier on materiality assessment

Double Materiality: A new frontier on materiality assessment

Materiality is a core requirement of many sustainability standards, including GRI, TCFD, ISBB, and SASB. However, with the approval of the European Corporate Social Responsibility Directive (CSRD), a new concept of materiality has been introduced.

European Sustainability Reporting Standards (ESRS), the standards stemming from CSRD, have developed a new approach to the materiality assessment: Double Materiality.

Double materiality is a fundamental step to support companies that need to navigate the increasingly complex landscape of sustainability reporting.

What is a materiality assessment?

Generally, a materiality assessment determines which disclosures and data points should be included in an organization's sustainability reporting, and which ones can be left out. But a materiality assessment not only determines the scope of the organization’s sustainability reporting, it ensures that all sustainability matters which are most material to the organization and its stakeholders are considered. Furthermore, the results of the assessment provide valuable insights for shaping the organization’s strategy and allow an efficient allocation of the resources needed for the preparation of the sustainability reporting.

Stemming from the guidelines on conducting materiality assessments in sustainability reporting published by the Global Reporting Initiative (GRI), materiality originally had a single, clear focus: Material topics are those that reflects a reporting organization's significant economic, environmental, and social impacts over the short-, medium-, or long-term.

Double materiality concept

Double materiality takes the concept of materiality in sustainability reporting one step further. The word “double” refers to the fact that companies reporting on sustainability must consider the relevance of a sustainability matter from two perspectives: impact materiality and financial materiality.

Double materiality = impact materiality U financial materiality

Impact materiality measures the effect - negative or positive - the organization has or could have on the economy, environment, and people, including on their human rights, which in turn can indicate its contribution to sustainable development. Accordingly, a topic is a material in case the organization generates significant impacts on environment or society (inside-out effect), for example on labour conditions or on degradation of ecosystems. According to the ESRS standards “A material sustainability matter from an impact perspective includes impacts caused or contributed to by the undertaking and impacts which are directly linked to the undertaking’s own operations, its products, and services through its business relationships. Business relationships include the undertaking’s upstream and downstream value chain and are not limited to direct contractual relationships.”

Financial materiality instead deals with sustainability-related matters and developments that create risks and opportunities for the organization itself. The organization may be heavily impacted - currently or potentially - by e.g. the financial condition or operating performance. The reporting entity needs to adapt its business model accordingly and this adaptation may trigger positive or negative impacts. Examples for this outside-in view are reputation risk due to incidents of corruption, the introduction of carbon pricing mechanisms or opportunities for development of new sustainable products. Financial materiality is an approach included in disclosure frameworks such as SASB and TCFD.

These two dimensions are inter-related and the inter-dependencies between the two dimensions shall be considered: A sustainability impact may be financially material from inception or become financially material when it becomes investor relevant. A sustainability matter meets the criterion of double materiality if it is material from both perspectives or only either from the impact perspective or the financial perspective.

According to the new European Sustainability Reporting Standards, impact materiality is the starting point for double-materiality assessments. In addition, impact matters must be reported upon regardless of whether they are or will become financially material for an organization.

Goals

Leading a robust materiality is essential for building a reliable sustainability report. With the double materiality approach, companies can develop a comprehensive report which is aligned with the most recent sustainability reporting standards and legislations.

How to conduct robust double materiality assessment?

To conduct robust and reliable double materiality assessment, companies should follow 6 steps:

Step 1: Engage with stakeholders. Organizations should identify and interact with stakeholders and analyse their interest and needs as well as understand how they are impacted by the organization.

Step 2: Define the set of potentially material topics, through the collection of multiple sources such as sector reports, benchmarks, insights from stakeholder engagement etc.

Step 3: Assess impacts, risks and opportunities. The next step is to quantify existing and potential impacts, risks and opportunities connected to each sustainability topic.

Step 4: Prioritize the most significant sustainability topics by applying a threshold or cut-off point. Accordingly, impacts, risks and opportunities above the determined level of severity must be included in the report.

Step 5: Develop an effective governance: The organization should embed the materiality assessment in a systematic, documented, replicable, and consistently used procedure.

Step 6: Monitor the dynamic development of materiality. The materiality assessment should change as the reality of the company changes. Therefore, the process of materiality analysis should be reviewed and revised on a regular, routine basis.