A materiality assessment is the strategic foundation for ESG planning, budget allocation, risk management and, of course, reporting. It identifies and prioritizes the climate-related impacts that can affect a company’s performance, value creation, reputation, and legal position. Essentially an assessment of risks and opportunities that might affect the company, the outside-in view. What does it all mean?
What is double materiality?
This adds the dimension of capturing a company’s impact on the environment and communities, adding the inside-out lens. Assessing ESG impacts from these two angles is double materiality: how a business is financially impacted by ESG topics, also known as financial materiality, and how a business impacts people and the environment (impact materiality).
By considering both financial and non-financial impacts, the concept of double materiality aims to encourage greater transparency and accountability from companies and to promote more holistic decision-making that considers the broader implications of business activities and be held accountable for it. This shifting lens means potential impacts to internal team structures, external suppliers, and stakeholder awareness.
Who’s required to report double materiality?
Right now (2024), no US company is yet required to use this standard. And, while the concept of double materiality isn’t new, there was a huge rise in awareness and interest over the last year due to its requirement for CSRD, and CSRD reaching beyond Europe to American companies with significant business in the zone. Companies, even private companies of scale, who meet certain thresholds in Europe will be required to report. In the US, it remains unclear if double materiality will be required by the SEC’s upcoming climate mandate, but over time, US regulations in this arena tend to follow the EU.
How to prepare
If you’re already reporting with GRI (Global Reporting Index) or ISSB (International Sustainability Standards Board), you are in good shape.
If you’re just getting started, here are the key steps to conducting a double materiality assessment:
Identify relevant sustainability issues: Consider the full list of SASB (now IFRS) and ESRS topics and sustainability topics specific to your company’s operations.
Engage with stakeholders: Determine which stakeholders are impacted by company operations and which have the power to affect the company. Engage them by understanding what material topics are important to them, and how that intersects with your identified list.
Look at your impact assessment: Identify the impacts the company has relating to these topics and the risks and opportunities presented. This requires a company to consider the negative impact of activities, who may be affected, and how a negative impact may be avoided or reversed. An in-depth analysis will help a company to later determine which disclosure information and data is relevant.
Separately, assess your risks and opportunities: Assess the impact of risks and opportunities regarding the company’s financial value.
Create your double material overview: The CSRD provides some guidance on how to set thresholds as to what constitutes material issues, however, it’s a determination that ultimately needs to be made by the organization itself. To get started, see this article.
Articulate the effects on the company’s strategy: Provide information on what measures they will take to manage the impacts. Companies must disclose the metrics and targets they have set for each sustainability topic, as well as their strategy for achieving any targets.
If your company will be subjected to CSRD or wants to move toward this more robust framework, get started right away. The analysis can yield recommendations that take time to implement.
Get Guidance: Consider expert help
If you find yourself struggling to get started with your double materiality assessment, consider expert help. We’ve engaged in reporting strategy and Materiality discussions with clients and created many stakeholder-pleasing sustainability/ESG reports as well as impact communications. Email us to get in touch if you need help with your next step.