Author: Rebecca Oliver
Double Materiality – Defining resilient companies on a resilient planet
The new EU Corporate Sustainability Reporting Directive (CSRD) requires companies to perform a Double Materiality Analysis, exploring the interfaces between business and a defined set of environmental, social and governance topics. But how can what some companies see as “red tape” be used to gain a deeper understanding of impact and a pathway to necessary change?
As with data collection and reporting, companies can tend to see the double materiality process as an act of compliance; in other words, a burden or a box ticking exercise. However, every company is now charting its journey into a future that will be heavily influenced by the sustainability efforts of others in the value chain. The double materiality assessment provides an opportunity to improve inputs to company strategy by connecting with stakeholders and experts, aligning both new knowledge and future priorities.
Unlike the “ESG” label, which refers to an unaudited scanning of risk indicators in the financial sector, the double materiality assessment expects companies to dig deeper and stipulates that they are transparent about what they find. The expectation is that the results will focus and fuel the active management of sustainability topics, speeding up a more effective transition to a sustainable economy.
Borrowing the term “materiality” from finance but expanding beyond short-term return on investment, the assessment looks at direct impacts by the company, also called “externalities”, as well as the potential future financial impacts to the company from changes related to sustainability topics, such as climate change.
In keeping with a need to understand how business influences long-term environmental and social developments, indirect impacts are getting more attention — such as the wellbeing of workers in the supply chain and scope 3 greenhouse gas emissions. The double materiality process asks companies to focus on the critical relationships that they have with their key stakeholders and the capital it depends on (social, natural and others). This allows better management of critical issues, helping to create a more sustainable economy as a whole.
At the time of our interviews, few companies had made a start on double materiality, but for the past few years, Purple IVY has used a digital tool to run careful processes for companies to help them establish which sustainability topics:
- are most relevant to their business
- have the most impact on both internal and external stakeholders
- have the most potential to generate risks or opportunities in the future
We are updating our tool to match the specific requirements of the CSRD and have a long experience of how a well-run double materiality process can deliver a great deal of value.
These are some of the benefits of carrying out a double materiality process:
- Aligning sustainability targets with suppliers
- Revealing synergies between supplier innovations and customer needs
- Triggering deeper engagement with internal stakeholders, bringing in their knowledge and ideas
- Bringing sustainability fully into enterprise risk management, and vice versa (with financial impact analysis)
The beauty of double materiality is that it aims to create a future for both the planet and the companies that operate on it — resilient companies on a resilient planet. At every step, the process creates an opportunity to better understand the path forward in the transition to sustainability.