.png)
In 2023, the Corporate Sustainability Reporting Directive (CSRD) came into effect as an update to the requirements companies should fulfill when reporting on the social and environmental effects of their activity.
63% of companies are confident they’ll correctly report under this new directive. Yet, the same PwC survey reveals that almost two-thirds of them haven't yet prepared anything to confirm their reporting options, run disclosure gap analyses, or conduct double materiality assessments.
In this double materiality assessment guide, we'll tackle why that double materiality assessment is one of the first things you should focus on to align with the requirements.
What is a double materiality assessment?
A double materiality assessment (DMA) is a concept that prompts organizations to assess how their actions impact the planet and people, while also considering how sustainability issues impact their financial well-being.
To run a double materiality assessment, there are two distinctive dimensions an organization must analyze:
- Outside-in materiality: Any external risks from environmental, social, and governance (ESG) factors that leave their mark on how a company performs financially.
- Inside-out materiality: The impact a business has on nature, society, and the general surrounding environment.
This two-way assessment ensures that companies not only identify risks and opportunities stemming from sustainability issues but also evaluate their own impact on society and the environment. This holistic approach helps companies adapt their strategies to align with both regulatory requirements and societal expectations.
With this double-sided approach, double materiality assessment is set to aid both societal and environmental factors alongside the business itself. By identifying related risks and opportunities, an organization can see exactly what’s impacting its financial performance and avoid legal penalties or other negative reputational and market implications.
The image below is a materiality matrix chart that shows different sustainability topics based on their financial materiality and impact materiality. It categorizes these topics into environmental, social, and governance issues, showing their relative importance to business performance and societal impact.
The benefits of double materiality assessment
As mentioned, double materiality assessment reporting gives our nature, society, and businesses plenty of benefits. Besides influencing how a business makes decisions in the future, the benefits of DMAs include:
Improving risk management efforts
Organizations ultimately use a double materiality assessment matrix to get a better feel of where they stand from a sustainability point of view. This lets them improve their risk management strategies and mitigate risks and errors before they impact their market positioning.
The McKinsey 2023 ESG report underscores that embedding ESG into business strategies helps reduce reputational risks. Managing ESG effectively can become a competitive advantage, contributing to long-term reputational resilience by aligning operations with sustainable and ethical practices, which enhances consumer trust and stakeholder support.
Keeping customers happy
Additionally, more people demand the business they work with or purchase from to do what’s right on climate change. Double materiality assessment lets you keep up with these requirements by helping you adopt better socially responsible practices and publicly displaying the steps you’re taking towards a change.
PwC's 2024 Voice of the Consumer survey reveals that 80% of people are willing to pay more for sustainable products. Emphasis on sustainability is becoming crucial even as consumers face financial pressure alongside environmental concerns.
Staying compliant and aligned with stakeholder expectations
There’s also a regulatory side to it all. Simply conducting a double materiality assessment ensures you’re following CSRD requirements. But your stakeholders also come into the picture as ESG matters to them.
Particularly, they expect transparency and accountability, not just compliance. Engaging with their concerns is essential for building trust and enhancing your company’s reputation.
Below is a stakeholder diagram showing the relationships between a company's Board and various stakeholder groups. It categorizes stakeholders into three concentric circles, with the Board at the center, emphasizing the importance of internal and external relationships in decision making.
How to conduct a double materiality assessment? + A double materiality assessment example
Here’s a quick step-by-step look at how you can use a double materiality assessment to assess not only how sustainability issues affect your financial performance, but also how your operations impact the environment and society:
Step 1: Tracking topics and metrics
Start by identifying key areas relevant to your business that are also considered “material” under the double materiality assessment. Map out relevant topics, set metrics for each, and determine what classifies as material.
As a rule, material issues are those with a significant impact on our health or broader social and environmental footprints. For instance, a manufacturing company might want to prioritize pollution and waste management topics, while tech companies will want to focus on data privacy and workforce diversity.
Step 2: Assessing and tracking progress
Once you've selected your topics, it's time to track your metrics. At this stage, you'll be monitoring progress on how many metrics you started and how many you're still working on. Use a digital platform as a tracking system that can show you the status of each metric and give you a full audit trail.
Step 3: Connecting your double materiality assessment process results to CSRD reports
Once you've completed the double materiality assessment, you're simultaneously fulfilling the Corporate Sustainability Reporting Directive requirements. Use the DMA results to transparently report on the financial impacts of sustainability issues affecting operational costs as well as sustainability impacts on the planet and society.
Running a double materiality assessment will ultimately give you the focus you need to turn CSRD demands into a business advantage. Connect the results of the assessment to plausible business goals and stay compliant with many future regulatory changes before they happen.
What to avoid in your double materiality assessment
When conducting a double materiality assessment, avoid underestimating the effort required, as it can lead to incomplete evaluations. Failing to plan ahead may result in missed deadlines and uncoordinated efforts. Ensure thorough documentation and communication to leave no room for confusion or data misinterpretation.
Additionally, maintain a balance between assessing the impact of the company on ESG factors and the influence of ESG regulations on your company. Neglecting either one will only compromise the results and lead to inaccurate reporting.
Need help with conducting your double materiality assessment? Reach out to us to book a free demo.
