In Environmental, Social, and Governance (ESG) reporting, double materiality is a crucial concept that extends beyond traditional materiality assessments. It not only considers how sustainability issues impact a business but also how the business impacts the environment and society. This holistic approach is increasingly becoming a requirement, especially with the Corporate Sustainability Reporting Directive (CSRD) mandating large companies, including EU and non-EU entities, to perform double materiality assessments.

In this article, I explain what a double materiality assessment is, and why it’s becoming an important tool in corporate sustainability reporting.

What is a Double Materiality Assessment?

Double materiality assessments are conducted to identify and prioritize sustainability issues based on their relevance and potential impact on a business. Unlike traditional materiality, which focuses primarily on financial implications to the business, double materiality also considers the company’s external impacts on environmental and social factors. This dual approach provides a comprehensive view, enabling companies to address issues such as climate change, biodiversity loss, and human rights more effectively.

Benefits for US Companies: Going Beyond Compliance

Double materiality assessments are becoming increasingly important in both the US and EU, particularly from a compliance standpoint. This trend is driven by the evolving regulatory environment, including the EU’s Corporate Sustainability Reporting Directive (CSRD) and the anticipated regulations from the U.S. Securities and Exchange Commission (SEC).
Double materiality assessments are increasingly critical for US and EU companies due to:

1. Customer Compliance: US companies supplying EU businesses will need to provide comprehensive data and qualitative analysis to meet the stringent requirements of their European partners.
2. Staying Competitive: As more companies adopt double materiality, those who do not may fall behind in ESG and disclosure rankings. This trend also aligns with SEC disclosure standards, adding pressure to disclose sustainability performance.
3. Internal Clarity and Alignment: A double materiality assessment helps companies prioritize their ESG and sustainability challenges, creating a clear action plan for improvement.
4. Strategic Insights: By understanding the full scope of their environmental and social impacts, companies can protect their brand equity and enhance their performance.

How Sustainability Consultants Conduct Thorough Double Materiality Assessments

Sustainability consultants play a pivotal role in facilitating double materiality assessments. Here’s what they do:

• Compliance and Beyond: Consultants ensure compliance with CSRD and help companies align with the requests of CSRD-subjected partners.
• Customized Assessments: They utilize proprietary lists of material sustainability and ESG megatrends, combined with quantitative data (like environmental metrics) and qualitative data (from stakeholder interviews).
• Financial Impact Modeling: Consultants use scenario analysis to estimate potential financial impacts, helping companies understand the economic implications of sustainability issues.
• Gap Analysis: By comparing current practices against CSRD requirements, consultants help identify gaps and propose solutions, enabling companies to enhance their reporting and performance.
• Peer Benchmarking: This component informs companies about state-of-the-art practices in their competitive niche, ensuring they stay ahead in the ESG landscape.

After identifying key issues and assessing maturity, consultants help companies develop an actionable roadmap. This includes:

• Assigning responsibilities for data collection and performance improvement.
• Identifying necessary tools and resources.
• Providing implementation support to fill any internal resource gaps.
• Assisting with technical communications to stakeholders.

Differences Between Double Materiality and Regular Materiality Assessments

Regular materiality assessments focus solely on the financial impacts of sustainability issues on the business. In contrast, double materiality assessments consider the company’s contributions to environmental and social challenges, such as climate change, biodiversity loss, and social inequality, and evaluate efforts to mitigate these impacts.

Is There a Right or Wrong Way to Conduct a Double Materiality Assessment?

While there is no one-size-fits-all approach, certain best practices can guide the process:

• Avoid Generic Lists: Tailor the assessment to the company’s unique context, considering factors like product specifications, customer demographics, and supply chain challenges.
• Challenge the Status Quo: This strategic process is a perfect opportunity to spur new product development ideas. On the heels of a materiality assessment process, we’ve helped clients rethink product and packaging materials, upgrade employee policies, and formalize SOPs for environmental risk reduction.
• Use Both Quantitative and Qualitative Data: Incorporate stories and insights from stakeholders across the organization, including commercial, procurement, engineering, R&D, legal, and facilities teams.
• Reduce Bias by Obtaining Third Party Support: Companies can conduct double materiality assessments with or without outside help; however, having a trusted consultant involved in stakeholder engagement ensures a higher level of objectivity, especially when incorporating external stakeholder viewpoints such as NGOs, customers, and government jurisdictions.

Timeline and Costs of a Double Materiality Assessment

The duration of a double materiality assessment can range from 6 to 16 weeks, depending on the company’s size, geographic footprint, and organizational structure. The cost varies based on factors such as on-site work, C-suite facilitation, and the extent of stakeholder engagement. Generally, the assessment is less expensive than other professional services audits or studies.

Creating Business Value Through Double Materiality

Performing a double materiality assessment helps companies:

• Conduct Gap Analysis: Identify gaps in current reporting standards and practices.
• Develop Solutions: Formulate actionable strategies to manage and disclose material issues.
• Benchmark Against Peers: Understand industry standards and stay competitive.

Implementing Findings from a Double Materiality Assessment

The findings from a double materiality assessment can be translated into actionable plans, including:

• Roadmap for CSRD Compliance: Outline steps to achieve compliance efficiently and stay competitive.
• Assign Responsibilities: Clarify accountability for data collection and performance improvement.
• Identify Tools and Resources: Determine the necessary tools and resources to address priority issues.
• Implementation Support: Provide guidance to address gaps and enhance performance.

Conclusion: Taking the Next Step

The double materiality assessment is more than a compliance exercise; it’s a strategic tool that offers deep insights into a company’s sustainability challenges and opportunities. By adopting this approach, companies can enhance their ESG performance, stay competitive, and create long-term value.

For more information on how to implement double materiality in your organization or to speak with an expert, contact us at Third Partners. Let’s work together to build a sustainable future.