Double materiality is a smart way to turn sustainability challenges into business opportunities. It goes beyond the usual financial metrics, asking companies to look at not only how sustainability issues affect their operations, but also how their actions impact society and the environment.
Introducing the Corporate Sustainability Reporting Directive (CSRD), an EU regulation adopted in November 2022. Currently, the CSRD requires around 50,000 companies to report on their environmental, social, and governance (ESG) impacts, but it is expanding its scope to include more entities, such as SMEs. Replacing the previous Non-Financial Reporting Directive (NFRD), the CSRD is being rolled out in phases to give companies time to establish the necessary processes and controls for data collection. The directive highlights the importance of double materiality, pushing businesses to evaluate both how they impact sustainability and how sustainability issues affect them. Ultimately, the goal is to improve transparency and accountability in corporate sustainability.
So how does a double materiality assessment work?
A double materiality assessment takes a two-sided approach:
- Firstly, there's Impact Materiality (the "inside-out" view), which looks at how a company’s actions impact natural and human resources—both the good and the bad. This focuses on the company’s effects on people and the environment, including its operations and value chain.
- Secondly, there's Financial Materiality (the "outside-in" view), which flips the script and examines how sustainability risks and opportunities could affect the company’s financial performance. It’s about understanding potential risks or opportunities that might impact the company’s bottom line in the short, medium, and long term.
We cover this in more detail here: CSRD: what is double materiality?
How will a double materiality assessment help my business?
A double materiality assessment will bring many benefits to your business:
- Holistic Understanding: It gives you a full picture of how sustainability issues affect your operations and how your company impacts society and the environment which leads to smarter decisions.
- Risk Management: By spotting financial risks and environmental impacts, you can fine-tune your risk strategies and uncover new opportunities.
- Stakeholder Alignment: Aligning your sustainability efforts with what your stakeholders care about helps build trust, boosts your reputation.
- Regulatory Compliance: It keeps you in line with ESG regulations like the EU’s CSRD, increasing transparency and helping you avoid any costly penalties.
- Competitive Advantage: Showcasing your commitment to sustainability helps you stand out in the market, attracting investors and customers who prioritize responsible businesses.
FAQs
Do the SEC and EU require double materiality?
The EU CSRD rules call for companies to use a double materiality approach. This involves getting input from stakeholders on the issues they care about most, as well as the biggest sustainability risks and opportunities the company might face.
The SEC on the other hand only classifies an issue as “material” if it poses a financial risk to the company, so a double materiality approach isn't required by the SEC.
Do the CSRD double materiality requirements still apply to my company if we are not based in the EU?
It depends! At least 10,000 companies outside of the EU are expected to have to abide by CSRD reporting rules, whether it applies to your business will depend on various factors such as whether it is listed on an EU-regulated market or has EU-based subsidiaries.
It is important to review the CSRD parameters and what applies to your company.
Do the existing mechanisms that I am already reporting under require double materiality?
Again, it depends. Some frameworks focus solely on what matters to investors. SASB, TCFD, and the newly launched ISSB Standards emphasise disclosures that help investors assess a company’s environmental, social, and governance (ESG) risks.
On the other hand, frameworks like GRI take a broader approach with double materiality. The GRI Standards, including their General and Sector Standards, require companies to consider both how an issue affects their business and its broader impacts on the economy, environment, and society.
The CSRD materiality guidelines are based on this double materiality approach outlined in the GRI Standards.
Does double materiality still matter to our business if none of the above is applicable?
Definitely. Using a double materiality approach allows you to take a more comprehensive view of environmental, social, and governance (ESG) issues by looking at both how these issues affect your company and how your company affects them.
This approach helps you better understand your potential impact on key stakeholders, both inside and outside your organisation. Therefore, double materiality is a crucial concept for all businesses.
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