August 22, 2024
In a recent blog post, my colleague Andrea Shea discussed the materiality assessment process and its importance to setting meaningful sustainability goals. As she said, a materiality assessment “creates a robust picture for building and/or evolving the sustainability strategy and the approach to reporting.”
The idea of “evolving” is key here, as expectations surrounding ESG reporting seem to be constantly transforming. We’re seeing more stringent guidelines, rules and regulations from several notable sources – including the EU, where the Corporate Sustainability Reporting Directive (CSRD) was recently enacted, and the revised voluntary Global Reporting Initiative (GRI) Standards. Meanwhile, a variety of internal and external stakeholders continue to be interested in having a more complete picture of a company’s interaction with sustainability topics. All of this is driving an important new concept in sustainability strategy and reporting: the double materiality assessment.
What Makes It a Double?
In a standard materiality assessment, an organization weighs its impacts on the environment and people – essentially an “inside looking out” approach. A materiality assessment engages with stakeholders to gather their perceptions about an organization’s impact on people and the environment.
In a double materiality assessment, an organization also takes an “outside looking in” approach, assessing the new risks and opportunities that will emerge because of sustainability-related developments, such as new regulations or increased consumer demand for sustainable products. The double materiality assessment also has a financial focus that requires the company to consider the material financial impacts on the company of sustainability topics over the short, medium and long term. Some of these impacts are risks, such as potential cost increases related to integrating sustainable solutions or the possibility of damage to the brand or reputation if the organization is discovered to be acting in less than ethical ways.
Many companies recognize the importance of combating climate change, and they include it in their materiality assessment. In doing so, they can establish quantifiable targets to reduce their Scope 1, 2 and 3 greenhouse gas emissions. In the financial portion of their double materiality assessment, a company would assess the potential impacts of climate change on their cash flows and financial performance. Are their operations in a region that would be more severely impacted by extreme weather occurrences? Then climate change would score higher on their assessment.
Other factors could be considered opportunities. Here’s how that works: A company that manufactures solar panels might decide that issues surrounding the fight against climate change would improve their bottom line as more homes and companies move to renewable energy sources. That positive impact would also be a factor in their double materiality assessment.
Of course, these two assessment lenses are not mutually exclusive. They exist in a Venn diagram, and many topics would be found squarely in the overlapping section between the two circles. In fact, for many companies, the overlap could be significant, as external forces and impacts are so often related. Even so, it’s important for companies to consider the whole picture, not just the areas of intersection, to ensure a complete understanding of their material topics.
Should You Make Yours a Double?
Double materiality assessments are required under CSRD, which currently applies to over 40,000 companies headquartered in the European Union, as well as several thousand companies headquartered outside the EU. Although it’s not a requirement for most companies based outside the EU, language in CSRD goes a long way toward pointing out the advantages of adopting the double materiality approach – and in having all relevant ESG information up to date in one place.
As CSRD states, “The growth in the number of investment products that aim to pursue sustainability objectives means that good sustainability reporting can enhance an undertaking’s access to financial capital. It can provide a basis for better dialogue and communication between undertakings and their stakeholders, and can help undertakings to improve their reputation. Moreover, a consistent basis for sustainability reporting in the form of sustainability reporting standards would lead to relevant and sufficient information being provided and thus significantly decrease ad hoc requests for information.”
Even organizations that aren’t currently subject to CSRD might have good reasons to perform a double materiality assessment. For one thing, companies are often part of a larger value chain that includes companies that are subject to CSRD. There’s a benefit to having a wide range of ESG data at hand when the need arises.
Dix & Eaton’s double materiality assessment process is designed to help companies gain a complete understanding of their impact from both perspectives. It looks like this:
- Research: We do a deep dive into your company’s current sustainability strategy and priorities, giving us a complete picture of your business before we begin.
- Stakeholder Identification: We help you determine the right people, both upstream and downstream in your value chain, to talk to about your sustainability priorities.
- Topic Identification: We use our research to build a funnel of potential topics, as well as priority areas aligned with the business strategy.
- Stakeholder Engagement: We conduct interviews with key internal and external stakeholders – as few as five to seven people and as many as 50 or more – using quantitative discussion guides to “score” the relevance of various ESG topics.
- Analysis: We crunch the numbers gained through the Research and Stakeholder Engagement phases to identify the impacts, risks and opportunities that make up a double materiality assessment.
- Material Topics: We make recommendations for your ESG priority topics, presented in a variety of easy-to-use formats for internal and external use.
- Report: We develop and present our findings, refining as needed as we use these results to guide the outline and topic priorities for your ESG strategy and your next ESG report.
Wherever you are in your materiality assessment process, Dix & Eaton can help. Feel free to reach out to us today, and we can you help determine the course of action that’s right for your company.
