Double Materiality Assessments: all you need to know

In today’s rapidly evolving landscape of Environmental, Social, and Governance (ESG) reporting, the concept of double materiality is emerging as a critical tool for businesses aiming to meet the growing demands of sustainability and transparency.

The introduction of double materiality into ESG frameworks, particularly under the EU’s Corporate Sustainability Reporting Directive (CSRD), has transformed how businesses understand and address their impacts.

This article delves into the concept of double materiality, its regulatory importance, different approaches to conducting an assessment, and the unique methodology employed by Ikano Insight that simplifies the process and drives efficiency.

What is double materiality?

Double materiality refers to an advanced approach to ESG materiality that considers two key perspectives:

• Financial materiality: How environmental, social, and governance issues impact a company’s financial performance and risk profile.
• Impact materiality: How a company’s activities affect the environment, society, and broader stakeholder groups.

Unlike traditional materiality assessments, which focus primarily on the financial implications of ESG risks, double materiality incorporates both the financial perspective and the external impacts of a business’s operations.

This dual-lens approach ensures companies not only comply with regulations but also strategically align their operations with sustainability goals, investor expectations, and broader stakeholder concerns.

Regulatory context: the rise of double materiality

The shift towards double materiality has gained significant traction, particularly with the introduction of the EU’s Corporate Sustainability Reporting Directive (CSRD). As part of the CSRD and the European Sustainability Reporting Standards (ESRS), large companies and listed small and medium-sized enterprises (SMEs) are now required to conduct double materiality assessments (DMAs) to provide a comprehensive picture of their ESG performance.

Key implications of these regulations include:

• Scope expansion

The CSRD mandates companies to evaluate both financial materiality (how ESG factors affect the business) and impact materiality (how the business affects the environment and society). This expands the scope of ESG reporting and drives a more holistic understanding of corporate sustainability.

• Global relevance

Non-European companies with significant operations in the EU are also subject to these requirements, making double materiality a truly global phenomenon.

• Framework alignment

Double materiality aligns with international ESG reporting standards like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), ensuring that companies’ reports are both compliant and comparable across borders.

The Ikano Insight approach to double materiality assessments

While many consultancies adopt a “CSRD-aligned DMA” methodology, where they start by simply following CSRD topics and assessing their materiality, Ikano Insight takes a more strategic and streamlined approach. This unique methodology ensures businesses focus on the key ESG issues that are most relevant to their strategy and industry, saving time and resources.

Here’s how this approach stands out:

•   Business strategy and industry focus

It begins with each DMA being aligned with the company’s overarching business strategy. This ensures that the most material ESG topics are identified based on the business’s core operations, industry trends, and long-term sustainability objectives. 

Instead of working from a pre-set list of CSRD topics, this method allows for the prioritising of issues that have the highest potential to impact the company’s financial performance and stakeholder relationships.

•   Mapping key issues to CSRD

Once the relevant ESG issues are identified, they are then mapped to the CSRD requirements. This process not only ensures compliance but also ensures that the company focuses on the most critical aspects of ESG reporting.

Unlike the typical approach, which generates a long list of mandatory disclosures for the company to report, Ikano Insight’s approach identifies which issues should be reported on, and more importantly, which ones can be excluded.

•   Avoiding over-reporting

One of the main challenges businesses face when conducting a traditional double materiality assessment is the sheer volume of disclosures required by CSRD. Many consultancies leave businesses with an extensive list of mandatory disclosures, making the process cumbersome and time-consuming. This approach minimises this issue by identifying the most relevant material topics from the outset and streamlining the reporting process.

This strategic, industry-first approach enables companies to focus on the most impactful ESG risks and opportunities, without getting bogged down by unnecessary disclosures.

Why conduct a double materiality assessment?

There are several compelling reasons for businesses to conduct a double materiality assessment, particularly with the looming regulatory pressures and growing stakeholder expectations. The key benefits of our approach are:

Enhanced decision-making

Double materiality assessments provide businesses with a comprehensive understanding of both the risks and opportunities they face. By addressing both financial and impact materiality, businesses are better equipped to:

• Identify emerging ESG risks, such as those related to climate change or social unrest.
• Seize opportunities for innovation and sustainability-driven growth.
• Align business strategy with sustainability goals, ensuring long-term profitability and resilience.

Regulatory compliance and readiness

Conducting a DMA in alignment with CSRD requirements ensures businesses are well-prepared for audits and regulatory reporting. Ikano Insight’s method ensures that companies are not only compliant but also focused on relevant issues, reducing the time and resources spent on irrelevant disclosures.

Strengthened corporate reputation

By transparently addressing their environmental and social impacts, businesses can improve their credibility and build trust with stakeholders. Proactively identifying and reporting on material ESG issues positions a company as a leader in sustainability, reducing the risk of accusations of greenwashing.

Support for long-term sustainability goals

A well-conducted double materiality assessment supports long-term goals such as carbon footprint reduction, sustainable supply chain management, and responsible corporate governance. By focusing on material issues, companies can implement strategies that truly drive positive social and environmental change.

How to do a double materiality assessment?

While there are common steps that most businesses will follow in conducting a double materiality assessment, we emphasise a focused, strategic approach that saves time and increases the effectiveness of the assessment. Here are the steps involved:

Step 1: Align with business strategy and industry context

The first step is to align the materiality assessment with the business’s strategy and industry trends. This includes identifying the most critical ESG issues that are directly relevant to the company’s goals and operations. The focus on industry context ensures that the assessment is tailored and strategic.

Step 2: Engage stakeholders and collect data

Stakeholder engagement is crucial for understanding their concerns and expectations. We believe in working closely with businesses to map key stakeholders, from investors to customers, and gather data from both internal and external sources. This qualitative and quantitative data forms the foundation of the assessment.

Step 3: Map material topics to CSRD

Once relevant ESG topics are identified, they are mapped to the CSRD framework. This ensures that the business remains compliant while focusing on the most important ESG factors. Our method avoids over-reporting by helping businesses decide which topics can be excluded from their disclosures.

Step 4: Prioritise key issues and report

The final step is to prioritise the key ESG issues based on their financial and impact significance. Our approach simplifies this step by focusing only on the most important issues. This leads to more actionable reports that reflect the company’s true sustainability priorities.

Challenges and solutions in double materiality assessments

• Data availability and quality

One of the main challenges businesses face when conducting a DMA is the availability and quality of ESG data. We typically address this by leveraging advanced ESG analytics tools like IBM Envizi to gather reliable data and ensure accuracy in reporting.

• Stakeholder engagement complexity

Engaging a diverse range of stakeholders can be challenging. To overcome this, we would use effective engagement strategies and consulting services to ensure that all voices are heard and that the materiality assessment is comprehensive.

•  Inconsistent methodologies

The lack of standardised methodologies can lead to inconsistencies in double materiality assessments. Our approach adheres to established frameworks like GRI, SASB, and TCFD, ensuring that the assessment is methodologically sound and globally recognised.

Best practices for successful double materiality assessments

• Adopt a collaborative approach: Engage stakeholders at all levels of the organisation and externally to ensure diverse perspectives are considered.
• Leverage technology: Use advanced ESG analytics tools to streamline data collection, analysis, and reporting.
• Seek external expertise: Partner with experts to ensure alignment with global standards and best practices.
• Focus on continuous improvement: Regularly update the assessment to reflect changes in the business environment and stakeholder expectations.

Navigating the future with double materiality assessments

Double materiality assessments are an essential tool for businesses looking to stay ahead in the competitive ESG landscape. By adopting Ikano Insight’s strategic approach, companies can focus on the most relevant and impactful ESG issues, ensuring compliance while saving time and resources.

This holistic, business-first approach helps businesses drive long-term sustainability, strengthen their reputation, and unlock new value through innovative, socially responsible practices.

Contact Ikano Insight today to start your double materiality assessment journey and achieve your ESG goals.