Double materiality: What you need to know
Double materiality expands the traditional focus on financial materiality to include a company’s impact on stakeholders and society. Double materiality is expected to form part of the UK’s regulatory requirements and is already a requirement for companies reporting under the EU’s Corporate Sustainability Reporting Directive (CSRD). It is key strategic tool for others to help them navigate the complexities of sustainability impacts, risks, and opportunities on their business.
The double materiality framework enables companies to assess and report their impact on society and the environment, and the influence of sustainability issues on their financial performance. We anticipate the UK’s adoption of ISSB’s international standards on sustainability will be enhanced by including a double materiality requirement, aligning the UK with the EU.
Understanding double materiality assessments
A double materiality assessment (DMA) encompasses two distinct yet connected perspectives which can shift and evolve over time:
- Impact materiality: Assessment of the actual or potential impacts of the company’s operations and value chain on people and the environment.
- Financial materiality: Evaluation of how environmental, social, and governance (ESG) matters may pose material risks or opportunities that could affect the company’s financial performance over time.
Steps for a double materiality assessment
Whether you are performing a DMA as a requirement of CSRD or as an initial stage in your broader ESG strategic goals, the process is broadly consistent:
1. Define your business model and value chain
Conducting a double materiality assessment is a multi-step process that requires you to first obtain an in-depth understanding of the company’s business model and value chain. This enables you to map the key business areas, internal and external stakeholders, and take stock of your existing sustainability-related data.
2. Establish your internal sustainability team
Engaging internal stakeholders across all areas of the business is integral to gaining diverse perspectives on sustainability topics relevant to the business and its value chain.
3. Identify the sustainability topics that matter to the business
CSRD provides a long list of sustainability topics that can be used as a starting point for the sustainability team to identify those that are pertinent to your company. Alternatively, companies can use gap analysis based on their current sustainability disclosures. Caution should be taken under this approach due to the risk of omitting sustainability issues.
4. Obtain external stakeholder input
Engage with a broad range of stakeholders, including customers, employees, suppliers, and investors, to gain insights into the sustainability matters that are most relevant to them and your business.
5. Define the impacts, risks and opportunities of these sustainability topics
It is important to frame your identified sustainability topics in the context of the impacts your business creates and the risks and opportunities they present. These IROs should be categorised as short, medium and/or long-term.
6. Quantify impacts, risks and opportunities
Having defined the IROs related to your identified sustainability topics, it is integral to quantify these in financial terms. i.e., the potential cost to the business in the case of an extreme weather event.
7. Conclude on your material sustainability topics
The final stage in the double materiality process is to use the outcome of the IRO assessment to support you in determining your final list of sustainability topics. Your internal sustainability team should then rank the final list of sustainability topics in terms of financial and impact materiality.
8. Embed your material sustainability topics into an ESG strategy
Having established your material sustainability topics, the next step is to consider the strategic implications of each topic. You should consider how you manage the IROs related to each topic, what goals and KPIs are relevant to track progress, and how sustainability goals interact with the wider business strategic direction.
Common pitfalls
Underestimating how complex and resource-intensive an assessment can be, failing to gain enough internal and external stakeholder engagement and not starting preparations early enough are common pitfalls. Engaging a trusted adviser who can support you through your DMA assessment is advised.
We can help
Whether you need to comply with CSRD in the EU or you wish to improve your overall sustainability strategy as a business, we are equipped and experienced to provide you with a fully tailored double materiality assessment. Please contact Charlie Killingbeck or Lydia Bennett-Li in our ESG team.
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