12th July 2023
Despite the debate and confusion surrounding materiality in the sustainability landscape right now, what we like about double materiality is its potential to act as a catalyst for a new understanding of corporate value. One where the triple bottom line mantra: economic, environmental and social is better integrated.
Double materiality comes from a recognition that a company’s impact on the world can be material, and therefore worth disclosing, for reasons other than the effect on a firm’s bottom line. It finally brings together a more holistic view of impacts to consider.
This is a huge step forward because, for too long now, companies have struggled to monetise and prove the ROI of sustainability. This has often led to companies treating sustainability as an ivory tower, separated from the day-to-day business and profit-making activities.
As companies often only account for their direct costs, a major challenge in achieving the integration of sustainability within business is accounting for the avoided costs and intangible opportunities that it generates. For example, sustainability is known to be a key factor in talent attraction and retention, yet it is hard to measure the direct impact it has on turnover. With double materiality, companies and stakeholders are required to consider these more nuanced risks and opportunities, both from the perspective of how they might affect the company and how they might affect broader society. A better understanding of these risks and opportunities should drive greater accountability too.
Our learnings so far
We have worked with several companies to integrate double materiality principles and adopt an enhanced focus on impacts as the new GRI standards come into force and the starting date for CSRD reporting draws nearer. With a mixture of ‘work in progress’ guidelines to interpret, it has been, and continues to be, a learning curve. There are, however, a few key learnings which we thought beneficial to share:
1. It’s all about who and how you engage
The role of stakeholder engagement in materiality assessments has evolved from an exercise aimed at collecting opinions to one aimed at understanding impacts – whether actual or potential. The level of detail and knowledge required to assess the significance of these financial, environmental and social impacts is notably higher. Therefore stakeholder expertise and engagement are particularly important. What’s needed is greater collaboration to identify and engage the right stakeholders and to invest the time in fostering these relationships. We have found it rewarding to engage with stakeholders which were not previously on our lists, especially stakeholders on the finance side of the business who had not necessarily considered sustainability topics under this light.
2. Avoid losing touch with broader stakeholders
A hugely valuable output of a materiality process done well is understanding broader and non-expert stakeholder perceptions of and expectations on the company – for example employees or consumers. The updated standards seem to have done away with this part of materiality. We’ve had a few instances where transitioning to net zero has been identified as a key impact for a company (both from a financial and non-financial perspective), but consumers or employees do not deem it to be a high priority. This has led to interesting discussions with HR, community affairs and marketing around how to communicate to these audiences about these topics and whether up-skilling or education is required. Being aware of stakeholder perceptions is critical for focused sustainability communications that can drive real progress. So, we integrate the stakeholder perspective as a third lens to our materiality assessments.
3. Financial materiality needs clarifying
We welcome investors' increased interest in sustainability topics, and the growing integration. However, the current definition of financial materiality falls short and is scaring some businesses off from adopting the double materiality approach. With current flaws in most ESG data sets, and the lack of a finessed system for quantifying social and environmental costs means that seeing everything from a financial lens is problematic as comparisons becomes near impossible. Today, you can’t meaningfully compare the reputational impact of failing to have a diverse workforce to the costs of environmental remediation activities. Which often means that certain topics that have more advanced financial metrics behind them (like climate) rank more highly than others (like nature or social equity). Whilst this may change going forward, we prefer to think about financial impacts more holistically – as reputational, operational and business continuity impacts, rather than trying to attach a financial value to these topics.
4. Prioritisations may not change much but implications will
It’s likely that conducting a double materiality assessment will not radically change the material topics you have identified already. However, important nuances should arise, especially when it comes to differentiating and understanding the outside-in and inside-out topics and impacts. The level of detail collected for each topic, from in-depth desk research and expert engagement, enables us to differentiate between foundational and priority topics and risk areas vs opportunity areas. This brings more clarity on the reasons behind how topics are prioritised. Businesses need to integrate the insights gained through double materiality into the implications for the strategy, reporting and wider communications.
Conclusion
The double materiality approach does not come without its challenges – from having to interpret what is still a relatively abstract concept, to needing to align with multiple standards, to putting the impact and financial significance into practice without clear guidance. However, getting ahead of the curve on this better positions companies to adopt a more integrated approach to assessing corporate value, and has the potential to transform how organisations take responsibility and accountability for how their decisions affect the world, painting a full picture of impacts and getting closer to the triple bottom line state.