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Ed. note: Advisory Board Member Donato Calace prepared this short series on designing and implementing a process for double materiality assessment. Yesterday covered the background and today covers best practices for the process.

Based on the preliminary examination of the methodology used by early adopters of double materiality, a process based on 5 steps is proposed.

Step 1: Identification through collection of data across multiple sources

The initial step of materiality assessment is the identification of a broad universe of potentially material issues. Referencing multiple sources (industry and peer reports, mandatory regulatory requirements, best practices and recommendations from voluntary policies, online news and media) is essential to minimize the risk of overlooking any emerging issue and ensuring a comprehensive and credible analysis. 

In addition, a multi-source approach ensures a more objective analysis, as data can be triangulated and reduce subjectivity of specific stakeholders’ points of view. From a dynamic materiality perspective, identifying sources that are driving the importance of each issue can reveal key forward-looking signals that approach the materiality threshold.

Step 2: Assessing evidence of impact and financial materiality

Double materiality involves explaining issues that are material from an impact and/or financial perspective. In practical terms, the initial broad universe of potentially material issues should be analyzed to identify evidence of materiality from both points of view. Some examples of elements of evidence that should be taken into consideration in this phase include:

  • For impact materiality
    • international standards on responsible business conduct, such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises; 
    • context of legal requirements, local practices, political, economic, market and security conditions, technological developments and the state of the local, regional and global environment;  
    • negative impacts across activities and business relationships on the basis of their severity and likelihood; 
    • positive impacts across activities and business relationships on the basis of their scope, scale, and likelihood; 
  • For financial materiality
    • global standards and/or regulatory requirements that demonstrate evidence of financial impact and investor interest, 
    • issues addressed in the context of a company’s financial position (e.g., its balance sheet), financial performance (e.g., its income statement and cash flows) or risk profile (e.g., its cost of capital), all of which influence a company’s enterprise value in the short, medium and long term

Step 3: Engagement with internal and external stakeholders, including the Board and Executives

When it comes to engaging internal stakeholders, board members and executives play a crucial role in the materiality process, as they define the boundaries of the accountability of the organization by making materiality judgements. From a business strategy perspective, a double materiality assessment helps management, senior leaders, and Board members understand and distinguish between outward impacts and inward dependencies of the company’s business model. This can then provide a comprehensive picture and solid foundation to identify priorities, critical vulnerabilities, and emerging risks and opportunities.

A data-driven approach enables informed materiality threshold setting, providing the necessary evidence to build the boards’ and executives’ proficiency on emerging ESG issues. 

In engaging external stakeholders, It’s important to clarify here that stakeholder engagement does not equal materiality assessment. A materiality assessment is in many cases trivialized among practitioners as just administering stakeholder survey or engagement activities such as workshops or roundtable discussions. While those elements are a necessary part of a materiality assessment, they are not sufficient. Stakeholder engagement supports results of data-backed analysis to tease out limitations, implications, and forward looking insights. Coupling evidence through systematic stakeholder dialogue grounds the discussions in reality and aligns perceptions. 

A data-driven approach, based on integrating multiple sources of information ensures more fruitful stakeholder engagement as the conversations with internal and external stakeholders can focus on implications for the organization rather than data collection.

Step 4: Reporting & audit of the process and results

A systematic and documented assessment process is a must-have given the wealth of evidence such a process entails and the mandatory third party limited assurance introduced by the CSRD.

Detailed disclosure on the process is indeed a requirement of the EU Standards. This does not mean that, in order to visualize a double materiality assessment, you need to draw two different matrices. On the contrary, what is required is an explanation demonstrating materiality of issues from each perspective, impact and financial. The explanation should be grounded in the evidence gathered during the assessment process (step 2). 

When preparing double materiality assessment disclosures, the following questions should be answered:

  • What sources of information were analyzed to determine materiality?
  • For each material issue, what is the evidence that demonstrates financial materiality and/or impact materiality?
  • How was the evidence presented and discussed with executive leadership to determine the impact and financial materiality thresholds?
  • What is the process for monitoring dynamic materiality?

Step 5: Monitoring the evolution of material issues in a dynamic way 

The EFRAG report indicates that “sustainability risks may generate obligations in due course; however, it is a progressive evolution where financial materiality may increase over time until there is sufficient ground to disclose a risk and then to recognise a liability in financial reporting. Such an evolution needs to be monitored carefully[1].” 

In light of this, it is critical for companies to build a structured process to track how materiality dynamically evolves over time. Such an approach requires continuous monitoring of sustainability issues, their integration in the risk register, detailed annual reporting, and board oversight.

Although technology solutions might appear as an optional enhancement that can be added at a later stage, designing this process including digitization from the beginning is optimal, as digital solutions enable reliability, scalability, and breadth of data that a manual approach would not provide to back-up decision-making. In other words, in a context where sustainability priorities are not static and new risks can quickly emerge and become financially material, technology is the most efficient way to ensure a rapid and ongoing identification and assessment of emerging issues.

You can read and download the full paper on conducting a double materiality assessment here

[1] EFRAG’s report ”Proposals for a relevant and dynamic EU sustainability reporting standard”, p. 76.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile