Materiality is a key concept in the sustainability strategy and reporting world these days.
Information reported in a sustainability report, for example, is considered “material” or “relevant” if it has the potential to influence the decisions of relevant stakeholders.
What matters is not only “what” is meant by information but also “who” the stakeholders are.
Are they only financial decision-makers, such as investors and financiers? Or does it also include other stakeholders, such as employees, suppliers, customers, and communities, that is, the socio-economic environment?
Companies are now anticipating preparing double materiality assessments in expectation of the upcoming issuance of the EU’s draft ESRS based on the concept of the double materiality principle.
However, we should understand double materiality at first, and successful assessment is a big challenge.
This article briefly explains the concept of double materiality and provides 3 points for a successful double materiality in your sustainability strategy.
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※On 22th of December, 2023, EFRAG has published its first draft ESRS Implementation Guidance Double materiality assessment documents for public feedback by the 2nd of February, 2024. This guidance is supplementary to the ESRS outlined in Directive 2013/34/EU but isn’t part of it. ESRS prevails over any contradictions. It’s issued under EFRAG’s responsibility, which assumes no liability for the content or outcomes of following this advice. Users should use their judgment when applying ESRS and not replace professional services.
Double Materiality in brief
There are two main directions in the concept of materiality, which constitute the concept of “double materiality”.
In a nutshell, double materiality means that a company considers relevant topics material from the following two perspectives in the conduct of its business.
Resource: “The materiality madness”
Why double materiality is important?
Clearly distinguish between inward and outward impacts.
In other words, understanding the link between an issue’s inward and outward impacts can help companies develop appropriate management plans and report to various stakeholders.
Respond to external pressures and expectations from multiple stakeholders and improve all external evaluations.
This process helps companies build a solid foundation for their sustainability strategy and is essential for communicating with stakeholders about financial and impact (non-financial) performance. It also can answer stakeholder pressure for greater corporate transparency.
In recent years, stakeholders’ expectations have become more strict in implementing this process, especially from regulations, reporting standards and investors.
Focus on the truth of business concerns from a financial perspective.
By identifying financial material issues, companies can promote priorities that are true of a business concern. At the same time, identifying and disclosing key sustainability issues improves the organisation’s financial performance.
Distinguish between true risk and mitigation of impact on the environment and people.
When developing a plan to manage a certain impact in the value chain or supply chain, understand whether it is a true risk to the business or part of the company’s responsibility to mitigate the impact on people.
3 points for a successful double materiality assessment
Deciding what approach to evaluate and implement takes time and effort. Here are 3 points for using double materiality effectively.
1. Understand the company’s impact perspective
Understand the impact by compiling a basic overview of the company’s business activities, suppliers and customers, relevant megatrends, materiality in the industry, and relevant stakeholders.
In addition, it is essential to understand not only the impact of the company itself but also the impact as perceived externally through dialogue with relevant experts and stakeholders.
This dialogue is also essential for the second and third approaches described below.
2. Approach of time horizon
Because a company’s impact changes vary across the ages, we recommend using forward-looking sources and different time horizons, such as short-term (less than one year or 1 to 3 years), medium-term (2 to 5 years or 3 to 5 years), and long-term (more than 5 years).
Discussing the time horizon approach as a sustainability management strategy is very effective at board meetings and management meetings such as the Sustainability Committee.
3. Approach of geographic
Since a double materiality assessment requires active stakeholder involvement to assess the key impacts properly, risks and opportunities that may arise from an impact perspective as well as from a financial impact perspective, by considering and reporting on how the stakeholders’ interests and the impact of the business on sustainability are required.
It means taking into account different regions and business units, i.e., understanding them from a geographic (global and local) perspective, because the impacts, risks, and opportunities differ depending on the region or business unit in which the company operates.
All 3 points require the identification of actual and potential impacts.
We recommend 1)using external tools to measure the company’s impact, such as GRI standards, and 2)periodic evaluation and analysis be conducted (not one time only, for example, per 3 to 5 years).
The next step is a 5 steps of double materiality assessment.