Double Materiality: One of the fundamentals
The world of ESG can be its own worst enemy, creating terminology that is at best confusing and at worst can act as a deterrent to companies taking action. Double Materiality is a prime example.
Undertaking a ‘Double Materiality Assessment’ may sound tedious and uninspiring but it is in fact one of the most insightful, informative and important actions a company can take.
So what is Double Materiality?
In a nutshell, Double Materiality is an exercise that captures and prioritises your company’s environmental, social and governance related risks and opportunities, identifying where you should focus your resources. The ‘double’ part of the name references a two perspectives view;
i) Impact materiality: the risks and opportunities a company's activities pose to the environment and society e.g. the GHG emissions a company produces.
ii) Financial materiality: ESG-related topics which affect a company’s main stakeholders and therefore impact the bottom line e.g. the ability to attract top talent through an engaging company culture.
Why is it important?
It provides clear direction for your company's strategy (not just ESG)
Conducting a Double Materiality assessment answers the question; ‘where do I start with ESG?’ by providing clarity on the priority environmental, social and governance areas that are most material i.e. most important for your business to focus on.
2. It is expected by your investors
Investors now expect companies to undertake a Double Materiality assessment to identify and address their material ESG priorities.
“Looking at material risks from both a financial and wider sustainability perspective is becoming standard practice for investors and companies”
Head of EMEA equity research and co-head of global ESG research at JP Morgan
3. Double Materiality is mandatory for companies listed (or with large subsidiaries) in the EU
Conducting a Double Materiality assessment is a key requirement of the Corporate Sustainability Reporting Directive (CSRD). For now this only applies to companies listed in the EU but the number of companies covered by this directive will broaden over the next few years.
5 steps to undertaking a Double Materiality Assessment
Step 1: Identify the impacts your business has on the environment and on society
Map out the business’ value chain and identify where your organisation has positive and negative impacts on the environment and on society. When identifying impacts look both at actual impacts and potential impacts i.e. a positive impact the company could have in the future or any risks of negative impacts.
Cross-check the list of impacts against ESG standards e.g. SASB, GRI and the material topics identified by peers to ensure the list of impacts is comprehensive.
Step 2: Identify the severity of each impact and rank them accordingly.
Identify the severity of each impact by considering: the scale of the impact i.e. the extent to which the company has or could have a significant effect on the impact, the scope of the impact i.e. how widespread an impact does/could the company have on the impact and the irremediable character of the impact i.e. how hard it is to counteract or make good the resulting harm. Rank the impacts according to the relative severity.
Step 3: Summarise the prioritised the impacts
Consolidate the identified impacts into around 10-15 ESG related topics i.e. greenhouse gas emissions, diversity and inclusion and create 10-15 statements that clearly articulate the topic area e.g. becoming a net carbon business, promoting diversity and inclusion,.
Step 4: Identify and survey stakeholder groups
Identify the stakeholder groups that are most important for your organisation e.g. clients, employees, investors. Survey these groups to understand which of the 10-15 identified ESG related topics are most important to them and therefore are the most material to the commercial success of your business.
Step 5: Summarise the data in a Materiality matrix
Plot the Impact Materiality (i.e. the severity measure for each topic) on the y-axis and the Financial Materiality (i.e the results of the stakeholder groups surveys) on the x-axis to identify the top 8-10 ESG related topics for your business to focus on.
Example of a materiality matrix (Telecom Plus PLC ESG Report 2023)
If you would like help with conducting a Double Materiality assessment, or just an informal chat about how to get started, we are here to help:
