Double materiality analysis
Dual materiality analysis helps organisations determine which sustainability topics are most relevant for their sustainability reporting.It covers own and value chain impacts on people or the environment. These impacts are related to environmental, social and governance (ESG) issues. It also includes important sustainability impacts that externally affect an organisation's ability to generate and acquire financial capital. Dual relevance analysis effectively identifies impacts, risks and opportunities (IROs).
The concept of double materiality is based on two pillars:
Impact materiality
The first pillar is the impact materiality which focuses on the organisation's impact on the environment and society. This includes everything from the carbon footprint to the impact on local communities and working conditions.
Financial materiality
The second pillar is financial materiality, which looks at how different sustainability factors affect an organisation's business performance and development. This may include, for example, how climate change affects the cost of doing business or how social trends change the demand for products.
Double materiality analysis, why is it needed?
The importance of the Double materiality analysis, is reflected in the product of the assessment process. It reflects the relevance of the sustainability themes in the European Sustainability Reporting Standards (ESRS) and the associated data points. This means that all data points identified as relevant should be disclosed. Exceptions can only be made if the organisation provides an adequate justification for their omission.
The analysis also allows organisations to streamline sustainability reporting. This allows them to omit thematic areas that are not assessed as important.
How do we conduct the double materiality analysis?
The analysis is carried out systematically,ESG ON guides you through a multi-stage methodological process of the double materiality analysis. The process is adequately documented for audit purposes.
The process starts with understanding the context of the organisation, where the organisation identifies the relevant stakeholders in its value chain, e.g. employees and suppliers. An analysis is made ofthe organisation's value chain. and determine the method of stakeholder involvement. At least internal stakeholders (e.g. employees) should be involved in the double relevance analysis.ESG ON enables stakeholder involvement through a digital questionnaire.
This is followed by the identification of impacts, risks and opportunities (IROs) in the value chain. These are linked to a specific sustainability theme in ESRS Thematic ESRS 1, paragraph AR16.
Examples include air, water and soil pollution, among others. The aim is to draw up a final list of relevant thematic ESRS covering ESRS E1-5, S1-4 and G1.
Evaluation indicators
European Sustainability Reporting Standards (ESRS) define indicators for evaluation but do not set threshold values. ESG ON has a prepared methodology in accordance with the CSRD Directive that takes into account the indicators defined in ESRS:
- When assessing financial materiality, we consider multiple indicators. These include the type and state of impact and the likelihood of its occurrence. We also consider the impact on cash flows and organizational development. Important are the impacts on the organization's performance and position as well as on the cost of capital. We must not forget about access to financing and significant phases in the life cycle. We consider the opinion of external stakeholders as a "weight" in the assessment.
- When assessing impact materiality, we must consider the type, state, and likelihood of impact. The irreversibility of the impact is very important. We measure the scope of impact in geographical, demographic, and environmental terms. We consider the internal impact assessment as a "weight" in the evaluation. The opinion of external stakeholders also represents a "weight" in the final assessment of impact materiality.
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