Double materiality is a concept that has gained significant attention in the last year, particularly in the context of sustainability & ESG reporting. It refers to the idea that a company's environmental and social impacts can affect not only the company's own financial performance but also the broader economic, social, and environmental systems in which it operates. In other words, a company's materiality extends beyond its own financial performance and includes the impacts it has on the world around it.
Investor interest and strengthening the business case
Double materiality has become a crucial consideration for businesses and investors as they seek to address the risks and opportunities associated with sustainability issues. For example, a company that relies heavily on fossil fuels may face financial risks from regulations and market shifts related to climate change. At the same time, the company's emissions may also contribute to broader environmental risks such as biodiversity loss and ecosystem degradation. This approach recognizes that sustainability risks and opportunities can affect a company's long-term value and that of the broader economy.
New EU legislation
The European Union (EU) has been actively working to integrate the concept of double materiality into its sustainability reporting framework, including through the proposed Corporate Sustainability Reporting Directive (CSRD). By requiring companies to report on their direct impacts on their own operations and financial performance, as well as their broader societal and environmental impacts, the directive will help to ensure that investors and other stakeholders have the information they need to make informed decisions about companies' long-term value and sustainability performance.
Assessing double materiality by companies
The concept of double materiality is still evolving, and there is ongoing debate over how to measure and report on it. At Flagship, we have developed our own methodology of approaching the double materiality scoring process that evolves around the impact and financial materiality assessment. We have tailor-made assessment tables, as well as questionnaires that are in line with the European ESRS reporting in order to gain valuable feedback from all stakeholders.
To summarize, assessing double materiality involves several steps:
(1) Identify and prioritize your material sustainability issues:
Start by identifying the most significant sustainability issues for your business, including environmental, social, and governance (ESG) risks and opportunities.
(2) Assess financial impact:
Evaluate the broader societal and environmental impact of the sustainability issues identified in step one. This can include assessing the potential impact on stakeholders, such as employees, customers, and communities, as well as the potential environmental impact.Start by identifying the most significant sustainability issues for your business, including environmental, social, and governance (ESG) risks and opportunities.
(3) Determine materiality threshold:
Establish a materiality threshold for each sustainability issue. Materiality refers to the significance of an issue in terms of its potential impact on a company's financial performance and the broader economic, social, and environmental systems in which it operates.
(4) Quantify impact:
Quantify the impact of each sustainability issue using relevant metrics, such as carbon emissions, water use, or social impact indicators.
(5) Report on material issues:
Report on the sustainability issues that meet the materiality threshold established in step four. This can include reporting on financial and non-financial impacts, as well as the company's approach to managing these issues.
(6) Monitor and update:
Continuously monitor and update your assessment of double materiality as new sustainability issues emerge, and as the impact of existing issues changes over time. Regularly report on progress made towards addressing these issues.
Overall, the concept of double materiality is gaining traction as more and more companies recognize the importance of managing sustainability risks and opportunities. By adopting a double materiality approach, companies can contribute to a more sustainable and resilient economy while also protecting their own long-term value and competitiveness.
Contact us for a materiality assessment for your company.
Useful links for double materiality:
- The Global Reporting Initiative (GRI) provides guidance on sustainability reporting, including the concept of double materiality.
- The Task Force on Climate-related Financial Disclosures (TCFD) provides recommendations for companies to disclose information on their climate-related risks and opportunities. The TCFD framework also incorporates the concept of double materiality.
- The United Nations Global Compact provides resources and guidance on sustainability issues, including the concept of double materiality.
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