Making Sense of Double Materiality

Environmental, social, and governance (ESG) considerations have transitioned from optional initiatives to core components of strategic planning and now even to SEC-mandated climate disclosures – pending the un-pausing of this rule.

Central to a cutting-edge ESG program is the concept of double materiality. This nuanced approach extends beyond the traditional confines of materiality assessments to encapsulate a dual-focus evaluation.

This blog will explain the basics of double materiality, highlight its importance, and lay out steps for your business to take for this assessment.

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What is Double Materiality?

Double materiality signifies a shift in the methodology organizations use to assess and report their ESG impacts.

Diverging from the conventional materiality scope, which considers the financial repercussions of ESG issues, double materiality introduces a dual perspective:

1. Financial Materiality focuses on the influence of ESG issues on an organization’s fiscal health and operational effectiveness.
2. Impact Materiality focuses on the organization's broader effect on society, their community, and the environment.

Adopting this dual perspective fosters a comprehensive ESG strategy, recognizing that an organization’s sustainability endeavors cover more than risk mitigation. They acknowledge and actively address its extensive impact on the world.

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Why is Double Materiality Important?

Embracing double materiality is not just a trend within the ESG realm but a strategic necessity.

It allows companies to meet stakeholder demands for transparency, showcasing the impact of their decisions on the environment, society, and the organization itself. Double materiality can also influence investor decisions, attracting capital from those who prioritize sustainability factors in their investment strategies.

When an organization integrates double materiality into accounting and reporting practices, it can drive growth, ensure business continuity, and deliver on sustainability goals. It can also help organizations understand the broader implications of sustainability issues, enabling companies to manage risks and safeguard their long-term success proactively.

For some companies, the benefit of a double materiality assessment lies in the legal need for compliance. The introduction of the CSRD made double materiality a legal requirement for organizations in the EU.

Outside the EU, double materiality can strengthen an organization’s stature as a sustainability frontrunner. For U.S.-based organizations, the adoption of double materiality can help strengthen their preparation for the finalization of the SEC climate disclosure rule.

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What are the First Steps in a Double Materiality Assessment?

A double materiality assessment helps organizations determine which sustainability topics potentially have the greatest impact. This information can then provide direction for the sustainability report on material topics.

The content is considered “material” if it meets the criteria for financial materiality, impact materiality, or both.

Implementing double materiality assessments can be difficult, especially for organizations without in-house ESG experts. Make the process more manageable with this process:

1. Engage with Stakeholders: The first phase entails identifying and engaging with pivotal stakeholders – investors, customers, employees, and community members. Their insights are instrumental in discerning material issues.
2. Map Materiality: Leverage the stakeholder feedback to perform a materiality mapping exercise. This involves cataloging and prioritizing ESG issues based on their relevance to organization operations and their impact on stakeholders.
3. Incorporate Assessment Insights into ESG Strategies: The insights gained from the materiality assessment should then be integrated into ESG strategies, guiding resource allocation and establishing tangible goals.

“As regulatory landscapes evolve and the push for transparency intensifies, the significance of double materiality assessments grows,” said Matt Williams, Solution Lead at Clearview Group. “These assessments are undoubtedly challenging, yet they offer profound value, not only to the organizations that undertake them but also to society.”

“Double materiality is more than just a current trend in sustainability; it's a practice set to become a cornerstone, increasingly embedded within frameworks and regulations."

“Double materiality is more than just a current trend in sustainability; it's a practice set to become a cornerstone, increasingly embedded within frameworks and regulations," said Williams. "Companies proactively embracing this approach will find themselves ahead of the curve, navigating their ESG responsibilities with foresight and precision while paving the way for a more sustainable future.”

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How to Overcome Double Materiality Challenges

Despite its many benefits, implementing double materiality assessments comes with challenges like the intricacies of data collection and securing stakeholder consensus. Organizations are encouraged to cultivate a sustainability-centric culture, harness technology for efficient data management, and maintain transparent communication with stakeholders about their ESG endeavors.

You may be thinking, “It’s not that easy.” It’s especially difficult for organizations that lack in-house ESG expertise.

Specializing in ESG Advisory services, our team of experts is dedicated to steering companies through their ESG journey, whether that’s initiating double materiality assessments or enhancing existing ESG frameworks.

Double materiality assessments are more than mere regulatory formalities or checkbox exercises. They are strategic instruments that significantly amplify a company's sustainability measures. For those organizations operating in the EU, the assessment is a compliance requirement.

By embracing this methodology, organizations can navigate risks, cultivate stakeholder relations, and contribute meaningfully to the global environment.

Start achieving your ESG goals.