Introduction: Under the Corporate Sustainability Reporting Directive (CSRD), organisations are required to perform a double materiality assessment to identify what constitutes a material impact on their operations. This assessment helps organisations determine which impacts, risks, and opportunities (IROs) significantly affect their ability to create value over time and should therefore be reported. The process is essential for ensuring transparency and alignment with both stakeholders' interests and regulatory requirements.
What Is Double Materiality?
Double materiality is the process of assessing sustainability-related IROs through two lenses:
Impact Materiality: Focuses on the effects that the organisation’s activities have on the environment, society, and stakeholders. This could include social impacts like worker health and safety or environmental impacts like pollution levels.
Financial Materiality: Considers how sustainability issues might influence the organisation’s financial performance or position. For example, regulatory changes or climate risks could impact profitability or costs.
Both perspectives need to be addressed in order to comply with CSRD, ensuring that organisations fully understand and disclose the impacts they have on the world around them and the financial risks or opportunities those impacts pose to the business.
Using the IRO Matrix for Materiality Assessment
Determining the materiality of IROs involves evaluating their scale, scope, and irremediability (whether an impact can be undone or mitigated). Organisations can use a matrix like the one provided below to assess these factors:
Negative Impact | Scale | Scope | Irremediability | Conclusion on Materiality |
Example Impact 1 | High | Wide | Yes | Material |
Example Impact 2 | Moderate | Narrow | No | Not Material |
Example Impact 3 | High | Moderate | Yes | Material |
This matrix helps organisations visualise and assess the severity of an impact, thereby assisting in determining whether it is considered material. Remember, in the KEY ESG platform, there is no strict threshold for an IRO to be deemed material—organisations must use their judgment based on this evaluation.
Examples of Material Impacts in Different Sectors
1. Manufacturing Sector:
Health and Safety: In manufacturing, health and safety risks are often material due to the nature of the work environment. For example, exposure to hazardous substances or the use of heavy machinery can result in severe worker injuries. These impacts have a high scale (affecting many workers), broad scope (applying to multiple facilities), and can be irremediable in cases of long-term injuries, making them material.
Environmental Impacts: Manufacturing often involves processes that can lead to significant air and water pollution. These environmental impacts can be material due to regulatory fines, remediation costs, and reputational damage if they are not properly managed.
2. Technology Sector:
Data Privacy and Security: For technology companies, maintaining data privacy and security is crucial. A breach could result in substantial financial penalties and loss of customer trust, making this a material issue. The scale (potentially millions of users affected) and scope (cross-border implications) make it a high-risk area, requiring rigorous attention in reporting.
Employee Well-being: The tech sector also faces material impacts related to employee well-being, such as stress and burnout due to high workloads. Addressing these impacts is crucial as they can affect productivity and employee retention, which ultimately influences financial performance.
3. Consumer Goods Sector:
Supply Chain Labour Practices: The consumer goods sector often relies on complex global supply chains, making labour practices a critical focus area. Issues like forced labour or inadequate working conditions in the supply chain can have a material impact on both the organisation's reputation and its ability to maintain smooth operations. This impact is typically assessed as material due to its potential scale and the difficulty of remediation once issues have been identified.
Product Safety: Ensuring product safety is another material impact for this sector. A product recall due to safety issues can have significant financial implications, including costs of recall, litigation, and damage to brand reputation.
Conducting a Double Materiality Assessment
To begin a double materiality assessment, follow these key steps:
Identify Potential IROs: List all the potential impacts, risks, and opportunities relevant to your organisation. This could include health and safety issues, environmental impacts, or data security concerns.
Assess Materiality: Use the provided matrix to evaluate each IRO based on scale, scope, and irremediability. Consider stakeholder perspectives and financial implications during this process.
Document the Process: Clearly document the process and methodologies used in the assessment. This transparency is required under CSRD and helps provide clarity to stakeholders on how material issues were identified.
Report Material Topics: Include the identified material topics in your sustainability report, highlighting their significance to your organisation’s strategy and financial outcomes.
Conclusion: Moving Forward with Your Materiality Assessment
By conducting a thorough double materiality assessment, organisations can better understand the issues that are most critical to their business and stakeholders. Whether it’s addressing workplace safety in manufacturing, securing data in technology, or ensuring ethical supply chain practices in consumer goods, the insights from this process are essential for building a more sustainable and resilient organisation. If you need further assistance with determining material IROs or how to use the matrix effectively, feel free to reach out to the KEY ESG support team via in-platform chat or email at support@keyesg.com.