What is Double Materiality Assessment? Meaning, Process, Matrix & ESG Relevance
What is Double Materiality Assessment & its Dimensions
Materiality assessments are designed to furnish valuable information about your business to investors and other stakeholders. Through these analyses, businesses are able to determine their scalability and the scope for value-creation over time. Financial performance indicators have been one of the longest-standing focuses when it came to materiality assessment.
In 2019, the European Commission formally introduced the notion of double materiality in the Commission’s guidelines for non-financial reporting. It aims to understand the macro impact of a company’s activities. Under the CSRD (Corporate Sustainability Reporting Directive), companies are now bound to accurately report on how their activities impact communities and the environment. It is no longer limited to reporting on the financial impact of the sustainability issues on companies but includes both assessments. Therefore, a double materiality assessment includes two dimensions:
- Impact Materiality: How the business activities of a company impact the world.
- Finance Materiality: How sustainability and world issues impact the company/business.
Why Double Materiality Assessment is Important For Sustainability and Compliance
Through the DMA (Double Materiality Assessment), businesses can comply with the updated ESRS (European Sustainability Reporting Standards) materiality guidelines that stand at the centre of the Commission’s CSRD.
Alignment with ESRS
It makes your business an attractive, competitive player for investors to bet on.
Transparent Reporting
It aids your business in mitigating risks and utilising opportunities for innovation and more.
Double Materiality Analysis and How it is Conducted
Here’s how a double materiality analysis is conducted:
Step 1: Stakeholder Involvement & Data Collection
It aids your business in gaining valuable feedback on sustainability issues that directly impact people and their environment.
Step 2: Define Sustainability Matters & Their Impact
In the guidelines provided by the ESRS, certain sustainability matters have been identified and outlined for businesses to consider when conducting DMAs. Moreover, the effect of a business on people, along with the risks their activities pose and the opportunities they usher in, has to be defined.
Step 3: Highlight Priority Issues
A thorough assessment of all sustainability matters has to be followed up by a clear overview highlighting the materiality factors with the highest priority.
Step 4: Strategy and Disclosure
A DMA analysis is incomplete without effective policy changes or initiatives undertaken by the business to tackle existing sustainability issues. Details about the action plans have to be disclosed, and their integration into corporate strategy has to be demonstrated.
The Double Materiality Matrix and Its Role In Decision-Making
A common visual tool when conducting comprehensive DMA analyses, the double materiality matrix is used to graph two dimensions of impact. A graph is plotted with two axes indicating the two dimensions of DMA:
- The impact of a company's activities on communities and the natural world.
- The impact of the natural world and other external factors on the company
Compliance with ESRS guidelines or a lack thereof can also be flagged and taken action on. Overall, it serves as a significant visual analysis for making long-term business decisions.
Double Materiality Vs Single Materiality
A comparison between various factors involved in double materiality and single materiality analyses can enable strategic decision-making:
| Parameter | Double Materiality | Single Materiality |
|---|---|---|
| Focus | The impact of the environment on companies, as well as the impact of companies on the environment and communities. | Impact of sustainability issues/natural environment on the company. |
| Scope of Analysis | Financial materiality and impact (non-financial) materiality. | Only financial materiality. |
| Framework Used | ESRS frameworks under CSRD. | ISSB (International Sustainability Standards Board) and other traditional frameworks. |
| Example | The way a high carbon footprint negatively impacts the environment while also raising long-term financial risk. | Increase in business costs due to climate regulation policies. |
| Objective | Enhancing long-term financial gains and growing sustainably. | Protection of short-term financial revenue. |
How Double Materiality Assessment Supports ESG Reporting
ESG (Environmental, Social, Governance) reporting has transformed with the introduction of DMAs. Here’s how:
Risk Management
DMAs require thorough monitoring and accurate reporting of sustainability efforts carried out by a business, along with its impact. This is established by tracking and measuring performance metrics like carbon emissions, fair labour practices, and executive compensation. Identifying business opportunities is thus simplified, and risks can be flagged and managed early.
Improved Decision-Making
DMAs aid businesses in making calculated decisions for the long-term health of a business while balancing shareholder interests. You’re able to optimise strategies and outline objectives based on your business’s resilience to adverse conditions.
Enhanced Reliability
Through DMAs, businesses are able to carry out accurate and pertinent ESG reporting. It contributes to building trust among all stakeholders and boosts the credibility of a business in the market.
Common Challenges In Double Materiality Assessment
Companies can run into trouble and suffer legal risks as well as revenue losses when they are unable to overcome common challenges while conducting double materiality assessments.
Lack of Clear Planning
The lack of a clear plan before conducting a double materiality analysis will result in low-quality reporting and compliance issues.
Gaps in Research
Incomplete data collection, stakeholder feedback and research insights can contribute to serious loopholes in your DMA.
Neglecting Dynamism
Since CSRD reporting requires annual reporting, neglecting the dynamic aspect of it can contribute to additional work for teams and auditors.
Double Materiality Assessment: Key Takeaways
A constantly growing market for sustainable products has piqued the interest of investors in DMA reporting.
- Mandated under CSRD through ESRS guidelines, it is a mandate for companies functioning within the European Union.
- DMAs evaluate the impact of sustainability factors on companies as well as the effect companies have on the environment and communities.
- A comprehensive data collection, analyses and reporting process goes into this annual exercise.
- DMAs aid better decision-making through the double materiality matrix and support ESG reporting efforts, too.
With Oren, businesses are able to credibly report in alignment with ESRS and CSRD standards. Automated data mapping simplifies the preparation of data, and Oren’s CSRD Sustainability Reporting supports the generation of reliable assurance-ready reports. Use pre-configured templates and boost the quality of your DMA reporting.
Frequently Asked Questions (FAQs)
Q1. What is double materiality assessment in ESG reporting?
Double materiality assessment in ESG reporting refers to evaluating two dimensions of impact in companies. It evaluates the impact of materiality and financial materiality of businesses and their operations.
Q2. How is double materiality different from single materiality?
Single materiality evaluates the financial materiality of a business or the impact that external factors or sustainability issues have on a business. Double materiality, in contrast, involves conducting an additional analysis of the impact that companies have on the natural environment and communities, along with the financial materiality.
Q3. What is a double materiality matrix?
A double materiality matrix is a tool in the form of a visual graph. Dual materiality issues are plotted on the graph based on their dimensions to provide businesses with a visual framework to identify priority areas and high-impact issues that need reporting.
Q4. Who is required to conduct a double materiality assessment?
All businesses that fall within the scope of the European Union’s CSRD have to comply with the ESRS guidelines and conduct double materiality assessments. It is an annual exercise that seeks to measure sustainable growth and potential in companies.
Q5. Is double materiality mandatory under CSRD?
Double materiality is absolutely mandatory under the ESRS guidelines of the CSRD and has to be complied with. Failure to comply leads to legal implications and damage to the reputation of brands.
Q6. How often should a double materiality assessment be updated?
Double materiality assessments have to be updated annually. Dynamic aspects of the reports have to be updated, while the status aspects can be sustained.
Q7. What data is needed for double materiality analysis?
A high-quality double materiality analysis includes impact data based on ESG standards, operational data of a business, information on the value chain, stakeholder feedback, and methodology details.
