Don’t Miss Out the Strategic Potential in Double Materiality Assessments

Conducting a Double Materiality Assessment (DMA) is necessary for reporting in line with the new Corporate Sustainability Reporting Directive (CSRD). Companies with prior experience in defining materiality from a sustainability perspective (e.g., based on guidance from the Global Reporting Initiative, GRI, or the Sustainability Accounting Standards Board, SASB) will benefit from already having established processes. With the CSRD, however, most companies will experience a significant shift in their approach as the DMA process now demands more rigorous analysis and strict requirements for referencing, verification and traceability. This new approach will ensure comparability in companies’ sustainability reporting and create a common language for both internal stakeholders (e.g., risk and compliance managers, CFOs, Board and Management) as well as external ones (customers, investors, shareholders regulators etc.). 

Illustration: The parts of the double materiality assessment. 

The DMA identifies a company’s sustainability-related Impacts, Risks, and Opportunities (IROs) through an evaluation of both impact and financial materiality (i.e., “double materiality”). See diagram above for an illustration of how these concepts tie together. Ultimately, companies end up with a list of company-specific topics and prepare their CSRD-compliant sustainability reports by applying the European Sustainability Reporting Standards (ESRS).  

The real challenge begins where the double materiality assessment ends, as companies take on the task of mapping gaps in data against the extensive ESRS reporting requirements, assigning responsibilities, and undertaking the comprehensive task of data collection and reporting. This phase demands significant oversight, diligence, and time. 

If you’re reading this article, chances are your company is currently somewhere in this double-materiality-datapoint-reporting-soup right now. And here’s my challenge to you: hit pause. Step back from the compliance checklist for a moment and consider the bigger picture. For at the heart of the DMA process lies the recipe for creating real, sustainable value. 

Strategic IROs 

Key throughout the process is keeping an eye out for the IROs that have high strategic value while simultaneously carrying out the required steps to determine the IROs that are necessary in terms of reporting. All too often, companies either rush the process of defining IROs (possibly recognizing that the CSRD reporting deadline is approaching faster than expected) or they hand over the entire exercise to external advisors or individual departments. And while stakeholders are engaged thoroughly and the assessment follows all the steps, companies may miss out on real value if the assessment is completed on the sidelines, e.g., if the company’s top-level strategists and decision makers are not engaged sufficiently – and results are left unanchored and undiscussed.  

What I’m saying is that, if the DMA (and subsequent CSRD-reporting) is treated solely as a reporting exercise, companies will not derive any additional value beyond compliance from it. Companies will miss out on discussions on value creation opportunities and overlook sustainability blind spots in the new landscape, where client preferences are changing, employees expect more, and the financial system increasingly favors greener revenue streams. Involvement of senior management (the earlier the better), moreover ensures that any initiatives following the assessment are accepted within the organization, correctly prioritized and sponsored by adequate resources.  

As a bonus, companies’ CSRD-reporting will benefit from high level discussions, for example under the strategy-related disclosure requirement, SMB3, in the standard on General Disclosures (ESRS 2), where institutions are required to explain how strategy, decision making and the company’s business model is interconnected with the identified material sustainability-related IROs, and how the company plans to respond¹. 

Working strategically with impacts  

To start working strategically with your double materiality assessment, fundamental questions relating to positive and negative impacts on people and the environment include: 

• As your company grows, where will your negative impacts increase?  

• On the other side, as your company grows, where will your positive impacts expand?  

Quite often, however, positive and negative impacts are interconnected, meaning that growth results in increased positive impacts as well as negative ones. A simple example is creating more jobs (positive) while simultaneously producing more GHG-emissions (negative). To kick-off this discussion, consider:  

• How do you ensure that you don’t cast a larger shadow while you are spreading more light?  

Going deeper into growth and what increasing revenue will mean for your identified impacts, here are some concrete examples of questions that can be discussed (insert any company relevant sustainability topic):  

• When comparing your energy and emissions management to that of your competitors, will your company’s growth increase or decrease the overall environmental footprint within your industry? 

• As you consider the social conditions in your value chain, will your company’s growth help improve social outcomes that otherwise might not have been improved? 

Working strategically with financial risks and opportunities  

Historically, defining a business case for sustainability has been challenging, particularly as voluntary reporting requirements, evolving market demands, and incomplete data have made it difficult to establish a clear direction. However, the introduction of regulations such as the CSRD with its structured process requirements for identifying IROs, facilitates clear cut decisions and development of meaningful targets and actions, setting the stage for a solid business case for sustainability. 

In the double materiality process, strategic questions relating to financial value creation and risk mitigation may resonate well with senior management and point toward sustainability topics that deserve consideration.  

On value creation:  

• Do changing customer expectations provide new or enhanced opportunities?  

• Which sustainability initiatives are most critical to your market position and competitive edge? 

• Which sustainability-related levers can you pull to attract the best people?  

• Which sustainability-related risks in your industry could be translated into new products or service offerings? 

On risk management: 

• Which sustainability topics/issues pose significant reputational risks if not managed effectively?  

• Are there issues that engage current and future employees that you are not adequately addressing?  

• What sustainability-related risks are not yet accounted for in your risk management systems? 

• Are there sustainability risks that may threaten your business model in a five/ten/fifteen-year perspective? 

• Lastly and importantly – are you positioned to capitalize on the sustainability-related opportunities you’ve identified in your DMA, or could you be constrained by your organizational structure and strategic blind spots, allowing valuable opportunities to slip by? 

 
Integrating perspectives on these questions into DMA processes will ensure that your final material IROs represent viable and effective levers for business development and that the following ESRS-datapoints to be monitored reflect meaningful progress. By doing so, the foundation for demonstrating how sustainability directly impacts financial performance is firmly established. 

The DMA could be a valuable driver in companies’ Strategy and Business Development process. Similarly to how Digital Business Models have been the modus operandi for the past decades, it is now time to integrate ESG into the strategic dimension and the DMA could be the gateway for it. 

A Company rig for strategic sustainability 

Thanks to their comprehensive insights into company’s IROs, sustainability professionals are increasingly being invited to participate in Board and management-level discussions. Where their previous responsibilities primarily lay on sustainability reporting and pushing specific environmental, social, and governance (ESG) initiatives, they now contribute valuable strategic input. 

The double materiality perspective offers both the Board and management compelling arguments for how the business should engage with its IROs. Ideally, the Board should play a central role in discussions, providing strategic advice and oversight regarding the company’s sustainability priorities. Management, being ultimately responsible for the operationalization of ESG, should exhibit a comprehensive understanding of how sustainability is interlinked with business units and functions.  

As organizations face increasing sustainability-related expectations and reporting requirements, particularly related to the CSRD, the need to refine and clarify internal responsibilities has grown significantly. Effective management includes managerial oversight of all areas affected by sustainability concerns and the assignment of ownership of material IROs to appropriate business areas.  

As sustainability responsibility is increasingly becoming a CFO responsibility, it’s vital that the CFO is included in processes and decision making and possesses the necessary expertise to manage this responsibility effectively.  

Summing up 

At Advisense, we often observe that companies prioritizing thorough double materiality assessments achieve two major goals: they effectively prepare for upcoming CSRD limited assurance-requirements, and they position themselves to turn material impacts, risks, and opportunities into real value drivers. 

Reaching this level of maturity requires a knowledgeable, engaged Board and management team that are actively involved in the strategic aspects of the double materiality process and engaged in discussions on impacts, risks, and opportunities. Organizational structures that facilitate high-level oversight and clear assignment of IRO responsibilities across the organization is moreover the best foundation for fruitful discussions. 

Companies viewing double materiality assessments as strategic tools rather than mere compliance exercises are better prepared to extract the value inherent in the “double materiality” concept. These companies will ensure that their sustainability efforts are founded on a deeper awareness of how the business model contributes to value creation, ultimately building a holistic, value-driven organization positioned for long-term resilience. 

Advisense’s Sustainability Integration team guides clients on the full path from conducting double materiality assessments through gap analyses on concrete reporting requirements to full CSRD aligned reporting. Our approach ensures that companies make informed, strategic decisions while meeting regulatory expectations and implementing tailored measures that drive long-term sustainable value. Through our services, our clients gain access to a network of advisors with expert knowledge in sustainability and related areas within Governance, Risk, and Compliance. 

Read more about our ESG & Sustainability offering here.

Annik Cecilie Saxegaard Falch

Head of Sustainability Integration team and Group Sustainability

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