From Zero to Double Materiality – How to conduct a Double Materiality Assessment in 7+1 steps?
We have already covered the concept of double materiality in several blog posts (see here, here and here). However, doing so has led to the question of how to conduct a double materiality assessment. In this final instalment of our series on double materiality, we provide a high-level view of the process.
While each company will have an individual materiality universe, the process described in this blog post may be a good starting point when assigned to conducting a double materiality assessment.
If you need assistance with the process, we got you covered. You can book a free discovery call here and learn how our sustainability experts can help you.
Why the effort of conducting a double materiality assessment?
Conducting a double materiality assessment is complex and requires time along with other resources. So why should a company conduct such an assessment at all?
Simply put, it is in the best interest of corporations to proactively
- find ways to mitigate and finally
- manage (potential) sustainability issues
A materiality assessment is a process or “tool” that does just that: Identifying those materiality issues so that they can then be ranked related to their impact on
- the company’s ability for long-term value creation
- and the demands of the companies’ stakeholders.
Furthermore, a double materiality assessment is vital to developing a company’s long-term sustainability or ESG strategy and setting related sustainability goals or defining structured and data-driven KPIs.
Finally, another essential aspect of conducting a materiality assessment is stakeholder engagement. Engaging with stakeholders and stakeholder groups is vital in understanding their viewpoints and priorities. Doing so enables an understanding of what is material. The focus is to find ways of working together to establish solutions for future challenges – even if there are rivalling or conflicting perspectives of different stakeholders. Focusing solely on the demands of investors and financial materiality – or single materiality – will not provide the holistic overview needed to achieve this.
The Concept of Double Materiality
Double materiality combines the “Outside-In” and the “Inside-Out” perspective. As the draft of the ESRS mentions (more details here), “Double materiality is a concept which provides criteria for determining whether a sustainability matter must be included in the undertaking’s sustainability report. Double materiality is the union (in mathematical terms, i.e., union of two sets, not intersection) of impact materiality and financial materiality. Therefore, a sustainability matter meets the criteria of double materiality if it is material from either the impact perspective, the financial perspective, or both perspectives.”
The Process of Conducting a Double Materiality Assessment
The process of conducting a double materiality assessment may initially feel intimidating. So we have broken down the entire process into manageable steps. You may wonder what the most important one is: Preparation – since not only the results but the whole process will be subject to scrutiny in the form of assurance by auditors (before publishing) and various stakeholders (after publishing). Therefore underperforming on the task can lead to reputation risks and charges of greenwashing. So prepare as best as possible.
Step 1: Preparation
Conducting a materiality assessment will provide a lot of valuable insights. But on the other hand, it also requires resources and support. Hence, the first step is preparation, including planning, securing the needed resources and identifying the people contributing to the project. Typical tasks of this stage will consist of the following:
- Getting an overview of the timelines – when will the assessment process start, what will be the milestones, and when should the results of the double materiality assessment be available?
- Get the C-suite involved from the start so they can support the project.
- Most likely, every department will be involved in the process. Identify the departments that will be a part of the process and the key personnel.
- Decide on who and how will steer the project and provide guidance. One option is to establish a steering committee for that.
- Speaking of roles: Define the critical roles in the project. Who will play what position, and what is the responsibility associated with that?
Step 2: Getting started
Getting started with a kick-off meeting is the easiest way to onboard everyone relevant to the process. However, before that, make sure to inform appropriately about the “why”, the “how”, and the expected outcomes of the materiality assessment to ensure an (at least basic) understanding of the process by everyone involved. During the kick-off meeting, the steering committee can be established too.
Step 3: Mapping the materiality landscape
Before asking “what is material to our company?” ask the question “what could become material to our company?”.
In other words: This stage is not about deciding what is material but about collecting information and evidence about potential material issues that could be relevant to your organisation. The actual assessment will happen in the next process step.
Tools like the “SASB Materiality Finder” or the “MSCI Industry Materiality Map” make a great starting point, provide industry-specific insights into materiality topics, and help you get started. However, these should not be the only sources to consider when identifying what could be material to your business: Other sources include but are not limited to industry reports, reports by your peers, best practices on a national or global level, and emerging trends to your industry as well as trend forecasts.
The goal is to collect as much information about potential material issues, either regulatory or market driven.
At this stage, as mentioned above, it is all about collecting and providing an overview, not about assessing the individual material issues. So it is better to add more potential material issues than to overlook one.
As a result of this process step, an extensive and agnostic overview of all potential materiality issues should be established.
Step 4: Assessment
As pointed out earlier, a sustainability matter meets the criteria of double materiality if it is material from either the impact perspective, the financial perspective or both perspectives.
Each potential material issue identified while establishing the materiality landscape has to be assessed in this process step. That includes providing data and evidence that substantiate the assessment. In general, the concept of a data and evidence-backed evaluation should be applied. That is also relevant to avoid the “opinion-trap” (more on that later).
Step 5: Engaging with stakeholders
The ESRS defines stakeholders as individuals, groups, institutions, […] on whom the company’s activities can have an impact or which themselves have an impact or can influence the company’s activities.
During the stakeholder engagement, two main stakeholder groups should be identified:
- Those on whom the company’s activities have an impact on:
- Examples are individuals or groups whose interests are or could be affected by the company’s activities (this may also include value chain activities).
- Users of sustainability reports like investors, financiers, (existing and potential) business partners, trade unions, social partners, civil society, NGOs, and others.
While some stakeholders may belong to both groups, the reporting company should consider the impact on all affected stakeholders.
Internal stakeholders like board members and the c-suite are also part of the stakeholder groups to be considered during the process. They play an essential role since this group will have to make the judgement call whether an issue is material or not.
In general, stakeholder engagement should focus on evidence-based data (see steps 3 and 4) to avoid the “opinion trap”. Opening up the discussion on opinion on what is or could be material to a company would render the previous steps unnecessary.
Hence, the discussion should focus on the implications of sustainability issues identified as material to the company. That is another reason the work carried out in steps 3 and 4 is essential to prepare for stakeholder discussions about the implications established in earlier process steps.
As always, there is no rule without exception: Any potential materiality issues brought up by a stakeholder that could be relevant to the company but have not been identified in steps 3 and 4 should be added to the materiality landscape and considered accordingly.
Step 6: Presenting the results
Even if it is called a double materiality assessment presenting the results in one matrice will be good enough. The challenge is to present the results of a complex process and an even more challenging topic in a way understandable by all stakeholders. A proven approach is to present a graphical representation of the results.
Step 7: Documentation of the process
With the CSRD comes the demand for limited assurance (more about that here). Considering this, only presenting the results of the double materiality assessment is no longer good enough. Instead, thorough documentation of the entire process is expected. Therefore, the documentation should not be limited to a general description of the process but should include explanations of how sustainability matters were identified and assessed.
That also includes how the evidence or information was used during the consideration process, the thresholds applied, and why and by whom sustainability matters were finally deemed material either from a financial, impact or both perspectives.
Going one step further is learning about the expectations of the third-party assurance company on how to document a double materiality assessment process since this can contribute to streamlining the overall process.
The “Bonus Step” or Step 7+1: Monitor changes or your materiality landscape
Once conducted, a materiality assessment should not be understood by the organisation that carried it out to be static and an end in itself. Having gathered all the information and insights, it would be a waste not to leverage this information for future use.
The results and the materiality universe should be reviewed regularly to clarify if already identified potential sustainability issues have reached the threshold to become material or if new trends have emerged and put new potential sustainability issues to the table. (more about dynamic materiality here).
Monitoring future developments can also be a task assigned to the already established steering committee that can meet at regular intervals to review those topics and present them to the c-suite and board members for consideration. Following this approach will also contribute to perpetuating the overall process and aligning corporate and sustainability strategies.
The materiality assessment results will provide insights for c-suite and board members on risks and opportunities that stem from what is material for their organisation – from the outside-in and inside-out perspective. In addition, a better understanding of materiality and its relation to the overall business strategy can help create long-term value by aligning both sustainability and business strategy.
Conducting a materiality assessment is a complex task. It is time-consuming and requires expertise and resources. No one-size-fits-most approach exists, and it may feel not very comforting to pick this task. On the other hand, starting early comes with the advantage of working through the steps without haste. We propose not to underestimate the challenge. The results, however, will compensate for that. Finally, it is a process, and with each iteration comes the potential to improve even more.
NordESG is an advisory firm helping corporates develop, articulate and execute their ESG and sustainability strategies. Our work includes sustainability performance reporting support under various ESG frameworks, strategy development or conducting materiality assessments. By doing so, we help businesses meet their disclosure compliance requirements like CSRD but also help them proactively communicate their strategy to other stakeholders like investors, customers and local communities in which they operate. Our work is focused mainly on Europe and North America. You can get in touch by e-mail or book a free discovery call by following this link.