Double Materiality, what is it NOT?

After spending the last six months helping more than 10 companies get started with their CSRD reporting, including their double materiality assessment, and participating in and speaking at a series of conferences on the topic, I have compiled some of my reflections and considerations in this article. My experience is that many are confused about the double materiality assessment and the specific requirements it places on the company, so let's start with what it is NOT!

- It is not an extensive consultant report filled with incomprehensible mathematics and colorful dashboards.

- It is not an AI-generated analysis based on random questionnaires to stakeholders.

- It is not a method for quickly eliminating data points from the EU's new reporting standards.

- Nor is it a simple agenda item that can be approved in board meetings without further consideration.

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So, what is it?

Double materiality assessment is a key element in sustainability reporting. In light of the EU's approval of the reporting standards (ESRS), where all standards except ESRS 2 are subject to the company's materiality assessment, this assessment becomes crucial. It reflects the company's awareness and understanding of its own sustainability challenges and solutions, which emphasizes two aspects of a company's activities:

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1. Impact Materiality which focuses on how the company's activities affect the environment and society. It's about the company's 'footprint' in a broad sense, including its impact on environmental and social factors. This part of the assessment helps to identify and assess the negative and positive impacts a company has on the outside world.

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2. Financial Materiality which focuses on how external conditions – such as environmental, social, and governance factors (ESG) – can affect the company's financial and strategic objectives. It's about the risks and opportunities for the company itself, arising from its interaction with the outside world.

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Together, these two perspectives provide a holistic understanding of the company's overall sustainability profile, which is crucial for both identifying areas for improvement and communicating the company's sustainability efforts to stakeholders such as investors, customers, and authorities.

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Market Challenges?

Unfortunately, there is a tendency to offer "quick fixes" and ready-made solutions, which are ineffective. No technology or external consultant can completely perform your materiality assessment. The ultimate responsibility lies with you and your company's management.

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How to get started?

Start by looking at your value chain and business model. How does your company create value? What resources does your company need to create value? Which partners is your company dependent on to create value? Which geographies is your company present in? Where are the materials and components made?

Once you have an overview of your value chain and business model, you can start researching the known sustainability challenges related to these questions.

Once you have identified the relevant sustainability issues, you can begin to assess them according to the following criteria and better understand how your company is involved with these matters:

- Scale: What damage can the company's activities cause to the environment, social aspects, employees, human rights, or corruption?

- Scope: How many people or areas are affected by the company's activities?

- Irremediability: How difficult is it to repair the damage caused by the company's activities?

- Likelihood: How likely is it that the company's activities will cause damage?

These assessments are used to prioritize the sustainability issues that are most material to the company.

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Double Materiality Assessment is a Process, Not a Product!

The double materiality assessment is not a product that can be bought or ordered from a consultant. It is a process that the company itself must carry out, possibly with help from consultants, as well as asking experts and affected stakeholders.

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Think about it, as a continuous process of analysis and assessment!

The analysis provides the company with the knowledge necessary to make an informed decision about which sustainability issues are most material.

The assessment is the final decision on which sustainability issues are material enough to be included in sustainability reporting.

The double materiality assessment is therefore a snapshot in time. It reflects the knowledge that the company has built up at the time the assessment is made. The company should therefore reconsider the assessment continuously as the company evolves and new sustainability challenges arise.

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Final Comment

The double materiality assessment is an important process that can help companies understand their sustainable impact. It can also provide input for improving the company's strategies and thus be beneficial for both the company and the outside world.