Double materiality: ESG readiness for your business

A resilient and future-oriented company strategy nowadays must address the risks and opportunities stemming from sustainability-related challenges like climate change, deterioration of biodiversity or societal inequalities. Instead of only responding to these challenges, more and more companies see their chance to shape the pace, severity and direction of these developments. But where to start and which is the right direction to go? This is where the concept of materiality comes into play.

Materiality is about focus

Materiality is a core concept of corporate sustainability management to focus on meaningful action. The underlying promise is to detect those topics, that are relevant for the company to manage (pro)actively and hence pooling financial, human and intellectual resources to realize the best possible impact. But impact on whom or what? Currently, we see two major concepts of materiality:

1st the impact on the outside world

This perspective asks about the actual and potential positive or adverse impacts a company has along its entire value chain. How do the activities, products and business relationships of a company affect environment and society and hence, indirectly, the (international) setting it is currently operating in – or will be in the future?

It is aligned to normative agreements such as the global sustainability agenda defined in the 17 Sustainable Development Goals, the 10 Principles of the UN Global Compact, the Paris Agreement on Climate Change and promoted by organizations and legislators aiming to hold companies accountable to respect planetary and social boundaries.

Companies are expected to apply due diligence concerning environmental (E), societal (S) and governance (G) topics, to identify, prevent and mitigate adverse impacts and then to disclose this information with the same liability as their annual fillings.

We see this perspective currently rising in the European Union Legislation (CSRD – Corporate Sustainability Reporting Directive, CSDD – Directive on Corporate Sustainability Due Diligence, to a certain extent the EU Taxonomy) and the revised GRI Standards 2021.

2nd the impact on the ability of a company to create value / financial materiality

The second perspective asks about the actual and potential risks and opportunities stemming from ESG Topics for the long-term ability of a company to create value. Whilst the focus lies on the financial resilience is also considers reputational and transformation risks as well as business opportunities since they all contribute to the success of a company.

It is aligned to the rising awareness of investors trying to understand the robustness of a company in light of the global challenges. Also, legislators starting to integrate this perspective as they tend to promote a resilient economy while minimizing risks of negative disruptions.

Companies are expected to integrate ESG topics in their overall corporate risk management and risk landscape, applying the same thresholds for risk identification, management and monitoring as they do for other issues.

We see this perspective gaining importance in investor driven frameworks like SASB, the intended IFRS Sustainability Disclosure Standards, TCFD, stock exchange requirements (e.g. SGX, BURSA) and by the above-mentioned legal developments in the European Union, asking for the combination of both perspectives (double materiality).

Double materiality

It is important to note, that both perspectives are looking at two sides of the coin and therefore are not competing but complementary perspectives that could and should be combined.

Double materiality combines the financial view and the outwards-oriented impacts on sustainable development that are often insufficiently taken into account.

Do we need materiality in light of many global standardization developments?

SASB, CDP, GRI, GHG Protocol, SBTi, UNGC, Taxonomy, CSRD, IFRS, MSCI, DJSI, TCFD, Value Balancing Alliance – it seems the ESG world goes crazy with evolving ESG standards and legislation. If companies are required to react to all these standards and to manage and report their ESG topics accordingly, is there any leeway for individual focus at all?

The answer is a clear yes: first, the process of identifying material topics helps companies to get a clear understanding of their leverage. Second, all of these standards ask companies to be transparent about their individual performance regarding actual and potential impacts.

How can LRQA (formerly ELEVATE Ltd) support you?

With our Double Materiality Assessment, LRQA (formerly ELEVATE Ltd offers a systematic approach combining in depth qualitative information with quantitative data.

1. A) ESG landscape review: We identify potentially relevant ESG topics for your sector; optionally combined with a peer-analysis and your existing ESG management.
2. B) Outward impact assessment: Following current due-diligence best practice for the identification of scale, scope, irremediability and likelihood of your impacts/risks on environment and society, we combine qualitative expert knowledge of our consultants with proprietary data from our EiQ supply chain intelligence platform.
3. C) Inward impact assessment: Aligned with your existing risk management approach we support you in analyzing risks and opportunities resulting from ESG context.
4. D) ESG strategy and material topics: Combining both perspectives, LRQA (formerly ELEVATE Ltd supports you in selecting your material topics and building a sound ESG roadmap aligned to your overall business strategy. In close collaboration, we elaborate your ambitions, targets and KPIs to drive your further ESG management and due diligence.
5. E) Disclosure: Our communication experts work with you on a sound communication and reporting strategy, responding to your stakeholder’s expectations and legal requirements. We support all current standards, be it stand-alone or integrated reports.

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