Don't get caught in the Materiality Matrix

In the evolving landscape of corporate sustainability, conducting a double materiality assessment has become a crucial endeavor for businesses aiming to align their strategies with environmental, social, and governance (ESG) objectives. Especially for companies subject to CSRD reporting requirements this is crucial, with companies on one side trying to reduce the number of material matters in order to reduce the cost of reporting, and stakeholders on the other side, who are eager to see if the company really understand their own impacts, risks and opportunities.

ESRS does not prescribe a specific method to assess materiality but have provided guidance and process steps. Therefore, many companies together with their advisors and auditors are struggling with finding their way trough the materiality matrix, with a real risk for either oversimplifying or overcomplicating it.

So, what does it take to make a good materiality assessment?

This intricate process requires a robust understanding of three distinct types of knowledge: scientific knowledge, business acumen, and knowledge of stakeholder interests. Each of these domains provides unique insights that collectively form a comprehensive picture of a company's impacts, risks and opportunities.

1. Scientific Knowledge: Grasping the impact on people and the environment

The first pillar of a double materiality assessment is grounded in scientific knowledge. To accurately gauge your company's impact on both people and the environment, a solid foundation in scientific research is indispensable. This involves understanding the latest findings in environmental science, social sciences, and other relevant fields. By comprehending the scientific underpinnings of issues such as climate change, biodiversity loss, and social inequalities, businesses can better evaluate their direct and indirect impacts. For instance, knowing the effects of certain pollutants or the social implications of labor practices allows a company to make informed decisions that mitigate negative consequences and promote positive outcomes. Where no scientific research is available, the only way a company can gain an understanding of this, is trough engaging with affected stakeholders or their relevant proxies.

2. Business Acumen: Navigating risks and opportunities

The second domain, business acumen, is essential for deciphering how sustainability matters can affect a company's future. This requires a deep understanding of how your business operations rely on various resources, including natural ecosystems, human capital, and community goodwill. Recognizing the interdependencies between your company and its broader context enables you to foresee potential risks and opportunities. For example, a company that depends heavily on water resources must be aware of local water scarcity issues and regulatory changes. Similarly, understanding the socio-economic dynamics of the regions where you operate can help anticipate shifts that might impact your business model. This foresight is crucial for strategic planning and resilience in an uncertain future.

3. Stakeholder insights: Understanding what matters to your audience

The third type of knowledge involves understanding what the readers of your sustainability report find important. This means engaging with stakeholders to determine their priorities and concerns regarding your company's performance. Stakeholders can include investors, customers, employees, regulators, and local communities. Each group may have different expectations and interests, and recognizing these can guide your reporting to address their specific needs. For instance, investors might be concerned with financial risks associated with climate change, while local communities might prioritize social contributions and pollution which might affect them. By aligning your disclosures with stakeholder interests, you enhance the relevance and credibility of your sustainability reporting.

Integrating the Three Perspectives

These three knowledge domains—scientific knowledge, business acumen, and stakeholder insights—correspond to the three dimensions of double materiality: impact materiality, financial materiality, and the materiality of information. Impact materiality focuses on the effects a company has on the environment and society, while financial materiality examines how sustainability issues influence the company's economic performance. The materiality of information pertains to how relevant and useful the disclosed information is to stakeholders related to your company.

It is crucial to understand that these perspectives should not be mixed or weighted mathematically; rather, each must be appreciated on its own terms and judgement needs to be applied. Integrating these domains provides a holistic view of materiality, helping businesses make an informed decision on what to report and how to describe their impacts, risks and opportunities. By doing so, companies can not only enhance transparency and accountability but also build trust with their stakeholders and drive long-term value creation.

In conclusion, what is material is the outcome of an informed decision based on the three essential knowledge domains. This will enable businesses to navigate the complexities of sustainability reporting with confidence and clarity writing reports that are relevant to stakeholders while getting insights that increases the resilience of their business. By embracing scientific research, honing business acumen, and engaging with stakeholders, companies can create meaningful and impactful sustainability reports that reflect their true commitments and contributions to a sustainable future.