Companies are under scrutiny and demand for transparency and accountability. This is especially true for large and listed companies operating in Europe subject to the EU’s Corporate Sustainability Reporting Directive (CSRD). Implementing a repeatable double materiality assessment (DMA) process, combined with continuous monitoring of ESG topics, is now essential for companies aiming to meet sustainable business best practices, stakeholder demands, and regulatory requirements.
What is the Role of Double Materiality
Double materiality, formally introduced by the European Commission in 2019, expands corporate reporting to cover a company's impact on the environment and society and how external sustainability issues affect its financial performance. It is a key principle and requirement of the EU's Corporate Sustainability Reporting Directive (CSRD), which (currently) requires around 60,000 companies globally to disclose both financial and impact materiality annually.
But it's not just a reporting tool. Double materiality helps companies assess how sustainability issues influence their business and how their operations affect broader society. Double materiality therefore serves as an important strategic management framework, guiding leadership to prioritize significant ESG impacts, risks, and opportunities (IROs) and align business strategies and corporate governance practices accordingly.
Why a Repeatable DMA Process is Essential
- Evolving Evidence and Regulatory Requirements
One of the challenges companies face when performing a double materiality assessment is building a library of relevant IROs and then subsequently keeping that library up to date. Regulatory requirements, market conditions, and stakeholder expectations are constantly evolving which has a bearing on your business. For example, mergers, acquisitions, supply chain changes, or global crises like the pandemic can significantly alter a company’s material risks and opportunities. A repeatable DMA process allows companies to systematically reassess their material IROs in light of these changes, ensuring they base their decisions and actions on relevant, up-to-date, and complete data.
The European Sustainability Reporting Standards (ESRS) which form the framework and methodology for CSRD reporting, outline specific scenarios where materiality must be reassessed, such as significant changes in business operations, new market entries, or external shifts like evolving scientific knowledge or regulatory changes. Failing to incorporate these changes into your materiality assessment will lead to inaccurate reporting, unmitigated risks, and missed opportunities for your business.
- Strategic Alignment and Risk Management
A repeatable DMA process ensures that sustainability considerations are integrated into the company’s strategic planning and risk management processes. By regularly updating their materiality assessments, companies will ensure their business model and strategy align closely with their ESG priorities. This proactive approach allows companies to anticipate and mitigate potential risks while identifying new opportunities for sustainable growth.
As societal expectations shift toward greater environmental responsibility, companies that regularly reassess their material IROs are better positioned to respond to emerging trends, such as increased scrutiny over supply chain sustainability or the adoption of new climate regulations. This continuous alignment between ESG priorities and business strategy supports long-term resilience and competitiveness.
The Need for Continuous ESG Topics Monitoring
- Dynamic Nature of ESG Topics
Double materiality is a dynamic process influenced by internal and external factors. Without continuous monitoring, companies risk overlooking significant operational or regulatory developments. For example, changes in supplier practices, new environmental regulations, or shifts in societal values can all affect the materiality of specific ESG topics. A robust monitoring system allows companies to stay ahead of these changes and reassess their priorities accordingly as required.
Monitoring is crucial for identifying emerging risks and opportunities. Companies must be aware of not only their current material IROs but also those that may become material in the future. For instance, advances in climate science could reveal new environmental risks, while shifts in consumer behavior may present opportunities for innovation in sustainability practices. Ongoing monitoring helps companies stay ahead of these developments, making informed decisions that enhance their long-term performance.
- Compliance with Regulatory Requirements
ESG regulations and reporting requirements have become more stringent, particularly in the EU. Under the CSRD, companies are required to disclose not only their material impacts, risks, and opportunities but also the processes they use to identify and assess these factors on an ongoing basis. This includes disclosing how often their administrative, management, and supervisory bodies are informed about material IROs and whether they have considered trade-offs associated with these risks and opportunities.
Failure to continuously monitor and update materiality assessments can lead to non-compliance, potentially resulting in financial penalties and/or damage to a company’s reputation. It will also inevitably lead to a loss of stakeholder trust, as investors, consumers, and regulators expect companies to demonstrate accountability for their ESG impacts.
- Improving Corporate Governance and Executive Decision-Making
Continuous monitoring is an important tool for improving corporate governance and executive decision-making. By regularly assessing the effectiveness of sustainability policies, actions, and targets (PATs), companies can ensure that they are managing their ESG risks and opportunities effectively. For example, companies can use monitoring systems to track the success of their climate-related initiatives, adjust their strategies in response to new evidence, and ensure that their sustainability efforts are aligned with their broader business objectives.
Monitoring helps to build a culture of accountability within the organization. When administrative, management, and supervisory bodies are regularly informed about the company’s ESG performance, they are better equipped to make important strategic decisions that reflect both financial and non-financial considerations.
How Datamaran Can Support These Business Needs
Regularly updating your materiality assessment and continuously monitoring ESG topics enables you to stay ahead of the curve, and make informed decisions that support both financial performance and societal and environmental responsibilities. By embedding a repeatable DMA process with ongoing ESG monitoring, such as Datamaran, into your governance framework, you can remain responsive to emerging risks and opportunities, comply with regulatory requirements, and align your sustainability strategies with long-term business objectives.
Datamaran’s AI-powered platform provides businesses with a repeatable, robust, data-driven, and auditable materiality assessment solution with the ability to build and maintain a dynamic library of IROs and continuous ESG topic monitoring and management. Request a demo today to see the platform in action for yourself.
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