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How can the benefits of double materiality assessment be unlocked?

The Corporate Sustainability Reporting Directive (CSRD) expands the scope and level of detail in sustainability reporting. How the increasing demands of regulation can be met is on the mind of many sustainability professionals. Is there any silver lining to tackling the numerous qualitative and quantitative data points in the first set of draft European Sustainability Reporting Standards (ESRS)?


With the CSRD, reporting on some sustainability topics becomes mandatory. Beyond this, the principle of double materiality guides what sustainability topics a company should focus on in their reporting. The CSRD and the ESRSs, which provide instructions for implementing the directive in practice, build on existing sustainability frameworks that many leading companies have already adopted and applied in their sustainability reporting. In this short article, we consider how adopting double materiality assessment may benefit your business.


Demonstrate the value of sustainability in order to facilitate growth

Being compliant in corporate responsibility and sustainability goes beyond reporting. Sustainability is business critical, and companies giving little consideration to sustainable business practices and/or overlooking sustainability in their reporting can be negatively perceived by investors and financiers.  Furthermore, as the double materiality concept requires companies to disclose information on how sustainability risks and opportunities may impact on the company’s value in the future, the companies are challenged to think about other forms of capital in addition to financial capital and think about what is the value of those matters that cannot be easily translated into euros.

Because of double materiality reporting, the implications of sustainability for companies become increasingly accessible and tangible for investors. Thus, reporting on double materiality can have direct impacts on the capital the company attracts. Similarly, companies can be disregarded by their business partners for not meeting their sustainability requirements and expectations. Going forward, unsustainable companies could even be excluded from some geographies and markets due to local sustainability or environmental policies and regulations.


Utilise double materiality concept to leverage strategic sustainability work

Companies should also discuss sustainability from the strategic perspective of ensuring growth and business continuity. The concept of double materiality is crucial from the viewpoint of strategic sustainability work. Materiality should be embedded into the company’s purpose and values, and the assessment provides the basis and direction for sustainability efforts by prioritising the focal topics. By understanding the company’s sustainability impacts, as well as risks and opportunities that affect their value and the operational environment, the company can plan and create strategic direction, develop tangible and measurable targets, and link these to operations development.


Engage stakeholders to build trust and inclusion

It is recommended to include stakeholders in the double materiality assessment process. Building efficient, inclusive and transparent assessment processes enables the company to clearly describe the rationale behind the selection of which efforts to prioritise, as well as the process of getting to such a conclusion. This enhances both internal and external stakeholder engagement and dialogue. By strengthening sustainability buy-in among key stakeholders, a company can build trust in their sustainability work and results. Reporting on double materiality helps the company to communicate their impacts on the environment, people and society on the one hand and, on the other hand, the impacts that the operational environment has on the company and its business. Thus, the company can increase the stakeholders’ understanding of their sustainability performance.


Collect input for risk management and other risk assessments, and vice versa

The double materiality concept connects sustainability impacts and risks to enterprise risk management. Double materiality assessment provides an excellent opportunity to embed sustainability into overall risk management processes and to establish a common understanding of the sustainability risks and opportunities impacting on the company in the short and long term. In addition, there are other potential value-adding synergies that a company should consider in terms of double materiality and risk assessments. 

If a company has not yet conducted a human rights impact assessment, double materiality assessment provides an opportunity to get to know some of the key concepts. In assessing impacts on people and the environment, the ESRSs use the same dimensions of severity as the UN Guiding Principles (UNGPs) on business and human rights: scale, scope, remediability and likelihood. Reflecting on impacts on people in the double materiality assessment helps to understand the approach of the UNGPs in identifying and prioritising human rights risks.

Reporting information on financial risks and opportunities related to climate change in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) significantly helps in meeting the disclosure requirements of the CSRD. The TCFD guides evaluating the impact that climate issues have on the value of a business. Assessing what kind of financial impact climate-related transition risks (for example, policy or technology risks), physical risks and opportunities (such as resource efficiency) may have on a company’s income statement, cash flow statement and balance sheet serves as an important input to the double materiality assessment.

All the TCFD disclosures are covered in ESRS E1, which focuses on climate change and is among the mandatory disclosure requirements of the ESRS. In addition, assessing the financial impact of climate-related risks and opportunities moves the discussion on from being about ticking a box indicating that mandatory reporting requirements have been met onto being about having the perspective of a strategy and company purpose.

With the rise of the importance of biodiversity on the sustainability agenda, the Taskforce on Nature-related Financial Disclosures (TNFD) is also a useful reference point in understanding the role of natural capital in the double materiality assessment.  The TNFD builds on the model developed by the TCFD, developing a framework to help businesses to understand how nature impacts on the organisation’s immediate financial performance or on how longer-term financial risks may arise based on how the organisation impacts on nature (positively or negatively). ESRSs E2 to E5 draw on the framework being developed by the TNFD.


The Deloitte Risk Force tool for conducting an efficient and inclusive double materiality assessment

Despite all the advantages, double materiality assessment can be daunting. Deloitte can support your company in all phases of a double materiality assessment project, ranging from the identification of material sustainability topics to the evaluation of their priority. In the assessment, we utilise the Deloitte Risk Force tool which enables independent stakeholder participation in the assessment but also works as a supporting tool in workshops. It is a modern and easy-to-use browser-based system, and it works on all devices, making participation easy for all stakeholders.


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