A different approach to double materiality assessments through quantification

Sustainability reporting regulations require businesses to assess their double materiality

3/4 of the EU’s business is set to report on sustainability according to the Corporate Sustainability Reporting Directive (CSRD), with phase-in starting in 2025, for financial year 2024. Concretely, businesses with at least two of the three following criteria are affected

a)??? Balance sheet exceeding 25 M €

b)??? Net annual turnover exceeding 50 M €

c)??? Average number of employees exceeding 500

CSRD requires businesses to report on sustainability topics that are material to their business, determined based on a “double materiality” approach. Other countries are issuing similar requirements.

Determining double materiality is about understanding both impact materiality (inside-out) and financial materiality (outside-in)

Impact materiality refers to the impact of a business's operations on its stakeholders and society for a sustainability topic.

Financial materiality refers to the effect of a sustainability topic on the future financial performance of a business based on related risks and opportunities.

In a double materiality assessment, impact and financial materiality must be determined for each topic of the reporting framework (e.g. for CSRD’s ESRS standards, climate change, water, worker conditions of own workforce, worker conditions of workers in the value chain, etc.). Businesses need to report on material topics according to the results of the double materiality assessment.

Many double materiality assessments today are a tick-box exercise with limited business utility and outcomes

When done right, double materiality assessments can be more than just a compliance exercise. They can be a powerful tool for businesses to understand and prioritise what matters to them and their stakeholders. However, they often become costly exercises that tie up internal resources and result in limited insights.

This is due to two main reasons:

• The subjectivity of the materiality assessment process, which is typically based on qualitative information gathered through surveys, interviews, and existing reports
• The lack of measurable and standardised threshold criteria, which leads to inconsistencies in how businesses determine materiality, even in the same industry sector

Logically, those limitations often lead to prioritising many issues instead of a few, or worse, the wrong ones, pulling sustainability teams in many directions. As sustainability departments already face constrained budgets, this often means that resources must be diverted from innovation and executing challenging commitments to maintain compliance.

Impact quantification provides a different, pragmatic, and cost-effective approach that drives change

Route2, with impact quantification, offers a different and more meaningful approach to determining material sustainability topics based on objectivity, measured thresholds, and engagement:

• Underpinning the double materiality assessment process with state-of-the-art research ensures that the materiality of sustainability topics is determined objectively
• Quantifying and valuing each sustainability topic based on impact and financial materiality means clear, measurable thresholds can be established based on relevance to stakeholders and the business
• Transparency and standardisation of the methodology make the double materiality process easier to understand, communicate, and engage with

This approach enables businesses to prioritise sustainability issues more pragmatically and focus on what matters to their stakeholders and their business. Equipped with this critical understanding, businesses make better decisions, deliver value, and eventually meet their commitments.

R2’s double materiality assessment requires little effort and data to generate meaningful insights, unfolding in the three key steps: data collection, analysis, and double materiality map.

Below is the outline according to the ESRS standards for CSRD compliance, featuring the materiality matrix at the ESRS standard level for representation. More granular, topic-level, materiality matrices can also be provided.

Once material issues are determined and prioritised, businesses can settle on a double materiality map and consolidate their business and sustainability strategies.

As next steps, quantified targets for material sustainability topics can be set year on year to drive accountability and the execution of the roadmap. Effective progress tracking and communication increase the likelihood of successful strategy implementation, ultimately enabling sustainability teams to deliver and demonstrate business value.

Interested in turning your double materiality assessments from paperwork and overhead to efficiency and tangible business value? We’d love to help. Get in touch with us at [email protected]!