The hidden benefits of double materiality assessments
2023 brought many changes to the ESG disclosure space, with none more significant than the growing recognition of the impacts of the European Union (EU)’s new Corporate Sustainability Reporting Directive (CSRD). CSRD is a new law that requires in-depth sustainability-related disclosures for businesses with a large EU presence.
Much has been written about CSRD and its expected impacts, but most of the anxiety we hear from clients is related to the first step of CSRD compliance: conducting a double materiality assessment. Double materiality asks businesses to look at themselves and their impacts in new and, for some, uncomfortable ways. Under CSRD, double materiality requires that companies consider the effects that external events, like climate change, have on their bottom line, as well as the ways that a company and its value chain impact these issues in turn.
Nervous? Don’t be. We see opportunities — beyond compliance — in this new way of thinking about impact.
A well-executed double materiality process can benefit companies in a few important ways:
Identify unforeseen risks.
The double materiality process will help companies identify dependencies throughout their value chain and in their own operations. This process can surface previously unforeseen risk areas, such as facilities located in water-stressed locations. It will also help you assess the severity of these impacts and how your risk portfolio may change over time. Similarly, the process may uncover business opportunities, such as costs savings associated with better environmental management practices.
Leverage disclosure for sustainability-informed risk management.
Many companies haven’t seriously wrestled with the potential business effects of sustainability concerns, such as climate change or biodiversity loss. Identifying the key sustainability issues creating significant business risks will further integrate sustainability concerns into enterprise risk management and lead to a a more comprehensive understanding of true business risk. For example, as climate change creates more extreme weather conditions, impacts will be felt throughout your business, from the availability of raw materials to the security of facilities to the cost of insurance.
Enhance stakeholder engagement.
As a result of the value chain component of the CSRD’s double materiality assessment, you’ll now be engaging with a wider, more diverse set of stakeholders. The inclusion of these new stakeholders will help surface concerns from previously unengaged groups, as well as mitigate stakeholder pressures and help you build credibility.
Develop a holistic picture of impacts.
By looking at impacts from the inside-out, as well as the outside-in, you’ll be better able to understand the interconnectedness between impacts. This more holistic picture can help you identify the potential knock-on effects of business decisions and better map the impacts of external events on business outcomes. For example, choosing a new supplier may bring in new raw materials at a cheaper price, but it also may expose you to new human rights or regulatory risks upstream, as well as reputational concerns with customers. Mapping the impacts of a business will help you more easily identify these concerns throughout the value chain.
Foster internal collaboration.
CSRD compliance and double materiality demand cross-functional collaboration from responding companies. Your finance and accounting teams will have to work with internal supply chain and sustainability leaders, possibly for the first time. While this may be challenging at first, it also presents an opportunity to build relationships and share knowledge.
CRI is here to help.
Potential benefits aside, double materiality is still a significant undertaking. Download our latest white paper, which describes CRI’s approach to double materiality and how to adapt it to the unique needs of your organization.
If you have further questions, please reach out. We’d be happy to help you take the next step.