Four questions (and answers) about the double materiality assessment
Four questions (and answers) about the double materiality assessment
Companies face the challenge of looking for ‘shared value creation’: “How do you continue to create value for your company, its stakeholders and the planet in a rapidly changing society?” A double materiality analysis makes it clear which topics are extremely relevant for your company and your stakeholders, and therefore forms the foundation for a future-oriented (business) strategy. All companies impacted by the new European reporting requirement – the CSRD, or Corporate Sustainability Reporting Directive – are obliged to perform such a double materiality analysis.
What impact(s) do your company’s activities have on people and the environment? Which ESG risks might soon entail a financial cost, and which sustainability-related opportunities are currently not on your radar? With a double materiality analysis, you are able to map out this dual perspective.
No business is completely isolated. Your activities have an impact on your environment: your greenhouse gas emissions contribute to climate change and, at the same time, your business operations may well have an impact on the safety or mental wellbeing of your employees. Even further down the value chain, your business has an impact: through your subcontractors, your business may affect workers’ human rights, e.g. by making people work in poor conditions in Southeast Asia. This perspective is captured by the so-called impact materiality, which outlines the company’s impact on people and the environment.
On the other hand, external evolutions or trends in society can also affect the financial value of your business. Think, for example, of climate change or the impact of extreme weather conditions on the agriculture and agri-food sector. Geopolitical conflicts, such as the wars in Ukraine and Gaza, can also have an impact on European companies. Think of fluctuating energy prices or disruptions in supply chains. All these external evolutions entail certain financial risks for European companies. Other evolutions bring opportunities; just think of the circular economy or the increased financial valuation of companies strongly committed to sustainability. It is crucial for a company to also have insight into this so-called financial materiality and to properly identify ESG-related risks and opportunities.
A double materiality analysis brings together both perspectives. Impacts, risks and opportunities (IROs) are inherently linked. Suppose your company causes high greenhouse gas emissions: this will eventually lead to higher costs. Moreover, your investors and stakeholders are also looking at your climate performance. High emissions can lead to stricter or more expensive financing conditions and, in the long run, also to reputational damage. This principle also works in a positive sense. Investing in a forward-looking HR policy that pays attention to the personal development of your employees can win over potential young employees, thus giving you an advantage as a company in the war for talent.
Double materiality is a crucial part of the European Sustainability Reporting Standards (ESRS). Read here how the ESRS is a key driver for making European companies and our economy ever more sustainable.
2. What is a materiality study?
Within a materiality study, you will (literally) look for which topics are material to your company. Where do your activities have the greatest (negative or positive) impact? Which topics form a risk or opportunity for your further growth?
One of the key elements to the double materiality analysis is that you have to consider your entire value chain. So you think beyond your ‘own’ activities: for example, for a food company, both farmers – who supply products – and consumers are important links in the value chain. To determine whether an IRO is material, you use several objective criteria. For example, for impacts you look at the scale, the scope, whether you can actually remedy them, the likelihood, etc. For risks and opportunities, you check their potential size, the likelihood, etc.
But you don’t perform this exercise alone: you involve your stakeholders. After all, a good materiality analysis does not start from the top down, but involves all players: your customers and suppliers, your employees and investors, financial institutions that (may) invest in your company, NGOs and trade unions, among others.
The European Financial Reporting Advisory Group (EFRAG) published guidance on materiality analysis in late 2023. We summarise the essentials for you in this article.
3. Which companies is this important to?
Having a good view of your company’s ESG materiality is important for every company. Every company benefits from knowing exactly which IROs factor into its operations.
The materiality analysis is mandatory for a number of companies. These are the 50,000 large European companies covered by the CSRD. Each of them is also required to document its materiality analysis in the annual report. In the mandatory audit for the sustainability report, the double materiality analysis is a key focus point of the auditor. This is because the analysis determines which data points your company has to report on, so it has to be done thoroughly.
A double materiality analysis is thus the starting point for reporting on your sustainability strategy and efforts. Financial institutions, investors and other stakeholders are also increasingly demanding clear information on a company’s ESG efforts.
We have already helped many companies that have to comply with the CSRD, such as Soudal. Other organisations are also increasingly adopting a sustainable approach. Discover here how we assisted VUB in formulating its first sustainability report.
4. How do you use a double materiality analysis to develop your company or ESG strategy?
The double materiality analysis helps to plan a clear roadmap aimed at continued value creation (‘shared value creation’) in the climate-neutral economy of the future. By gaining more insight into your key impacts, risks and opportunities, you can proactively pick the most important strategic focus areas, targets and KPIs on which to focus.
And there’s one more advantage besides: The process of a double materiality analysis relies on the involvement of many stakeholders. These include your customers, suppliers, banks and investors, consumers, NGOs, etc. Including their opinions and priorities from the start means that they are (indirectly) involved in your strategy. By mapping out your sustainable path together with all the people and organisations that are important to your company, you build a shared sustainable future and that is exactly what the CSRD aims for.
There are many further benefits that you can gain from the CSRD. We listed five more in a specific insight.
Double materiality is a complex exercise, especially the first time you start working with it. We are happy to help you get started. Are you ready to start your double materiality analysis or take it to the next level? Contact us at mail@pantarein.be.
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