Double materiality, done in a practical way

Few sustainability terms have spread as fast as double materiality. For many companies it arrived as a reporting requirement, often with consultants, long spreadsheets and a workshop where everyone scored everything. The result was a matrix in the annual report and a feeling that the work was mostly for someone else.

That is a missed opportunity. Stripped of jargon, a double materiality assessment asks two very ordinary management questions. Where do we have a real effect on people and the environment? And which sustainability issues could seriously affect our business? A leadership team that can answer both clearly has a better basis for strategy, risk management and investment, whether or not it has to report.

This article describes a practical way to do the assessment, the most common mistakes, and how to turn the result into something the business actually works on. One note before we start: the European reporting rules that brought double materiality into focus have been changing, and their scope and timing are under revision. We do not go into legal requirements here. Check what currently applies to your company, with your auditor or legal advisers if needed. The method below is useful either way.

Two directions of materiality

Double materiality means looking at sustainability from two directions at once.

Impact materiality looks outwards. It asks how the company affects people and the environment, across its own operations and its value chain. This includes negative impacts, such as emissions, pollution, poor working conditions at suppliers or waste from products, and positive impacts, such as products that help customers cut energy use or jobs created in a local community. Impacts can be actual, happening now, or potential, things that could happen.

Financial materiality looks inwards. It asks how sustainability issues create risks and opportunities for the company itself: its costs, revenue, access to capital, assets and long-term value. A rising carbon price, a supplier region exposed to drought, customers who start demanding lower-emission products, or difficulty recruiting because the company is seen as a poor employer are all examples.

A topic is material if it is significant in either direction, or in both. Often the two are connected. Poor working conditions at a supplier are an impact on people, and can also become a financial risk if a customer drops you or the supply is disrupted. But they do not always line up, which is exactly why you look at both.

Impact materiality asks what we do to the world. Financial materiality asks what the world can do to us.

Why it is worth doing well, beyond reporting

It is tempting to treat the assessment as a compliance task and do the minimum. That misses most of the value.

Done properly, the assessment gives the leadership team:

• A shared picture of where sustainability really matters for the business. Not a long list of everything that could be relevant, but the handful of topics where the effect or the risk is large.
• Better risk management. Many sustainability risks are slow-moving and easy to miss in ordinary risk registers. The assessment brings them into view while there is still time to act.
• A basis for priorities. Limited money and attention should go where the impact is largest. The assessment helps you say no to initiatives that look good but matter little.
• Insight into the value chain. For many companies, the largest impacts sit with suppliers or in how customers use the products. The assessment forces you to look there.
• A more credible conversation with customers, employees, lenders and owners. It is easier to explain your priorities when you can show how you chose them.

None of this depends on a reporting obligation. A company that is not required to report can still benefit from asking the two questions in a structured way.

Step 1: Understand the business and its value chain

You cannot judge what is material without first understanding how the business works. Start by mapping the value chain in simple terms:

• Upstream: what you buy, from whom and from where. Raw materials, components, energy, services, transport.
• Own operations: what you do yourselves. Sites, processes, people, products.
• Downstream: what happens after you sell. How customers use the products, how long they last, and what happens at end of life.

For each part, note roughly where the money, the volumes and the people are. Say a company makes furniture. Upstream there is wood, metal, foam and textiles from several countries. Own operations include two factories and a warehouse. Downstream there are retailers, end customers and eventually disposal. This picture alone tells you that forestry practices, chemicals in foam and textiles, energy in the factories, transport and end-of-life handling are likely candidates.

Keep this step short and concrete. A one-page sketch is usually enough. The aim is to know where to look, not to describe everything.

Step 2: Build a long list of topics

Next, draw up a long list of sustainability topics that could be relevant. Good sources include:

• Established topic lists used in sustainability reporting standards, which give a useful checklist of environmental, social and governance topics.
• Sector-specific guidance and what peers in your industry focus on.
• Your own risk register, customer requirements, supplier audits and employee surveys.
• Incidents, complaints and media coverage involving your company or your sector.

Group the topics at a sensible level. Climate change can be one topic, or it can be split into emissions from own operations, emissions in the value chain and physical climate risk. Too broad and you cannot act on it. Too detailed and the list becomes unmanageable. For most mid-sized companies, a long list of 20 to 40 topics is a workable starting point.

Step 3: Engage stakeholders

Stakeholders help you see impacts and risks you would otherwise miss. They also make the assessment more credible. The key is to engage them in a way that gives real information, not just a survey nobody reads.

Identify the stakeholders who are affected by the business or who can affect it: employees, customers, suppliers, owners, lenders, local communities, and sometimes authorities or interest groups. For those who cannot speak for themselves, such as nature, find people who can represent their interests, for example internal experts or relevant organisations.

Practical methods include:

• A handful of interviews with key customers, suppliers and lenders.
• Short workshops or group discussions with employees from different parts of the business.
• Reviewing what stakeholders already tell you: customer requirements, tender criteria, questions from banks and investors, complaints.

Ask open questions first. Where do you see us having the biggest effect? What worries you about our industry? Then test specific topics from the long list. Write down what you hear, and keep the notes. They are part of your evidence.

Step 4: Assess and score with clear criteria

This is the heart of the assessment, and the step where many go wrong. Scoring without clear criteria turns into an exercise in gut feeling.

For impact materiality, assess each topic on a few clear dimensions. Common ones are:

1. Scale: how serious is the impact?
2. Scope: how widespread is it, in terms of people, area or volume?
3. Irremediability: how hard would it be to reverse, for negative impacts?
4. Likelihood: for potential impacts, how likely is it to happen?

For financial materiality, assess:

1. Size of the financial effect: how much could it affect costs, revenue, assets or financing?
2. Likelihood: how likely is it to happen?
3. Time horizon: short, medium or long term.

Define what each score means before you start. A simple scale from one to five works well, but only if everyone knows what a three and a five mean. For financial effects, link the scale to something concrete, such as a share of operating profit. Say a company decides that a score of five means a possible effect of more than ten percent of annual operating profit, and a score of one means less than one percent. Now people are discussing the same thing.

Then set a threshold: the level at which a topic counts as material. There is no universal answer. The threshold is a judgement, and it should be written down along with the reasoning.

Most important of all: base each score on evidence. For every material topic, you should be able to say why it scored as it did: emissions data, supplier audits, stakeholder interviews, incident records, market analysis. Where evidence is thin, say so, and note it as something to improve next time.

Step 5: Validate with leadership

The draft result should be reviewed and challenged by the leadership team, and ideally discussed with the board. This is not a formality. Leaders often know things that do not show up in data, and they are the ones who will have to act on the result.

Good questions for the validation session include:

• Does the list of material topics match our understanding of the business? Is anything obvious missing?
• Are there topics we have scored high mainly because they are fashionable, or low because they are uncomfortable?
• Do we agree with the thresholds and the reasoning behind them?
• Which of these topics are already part of our strategy and risk management, and which are not?

The last question is the most important. It is the bridge from assessment to action.

Step 6: Document the process and the result

Write down what you did, so that others can follow the reasoning and you can repeat the process next year. The documentation should cover:

• The value chain sketch and the long list of topics.
• Who was engaged and how, with a summary of what came out.
• The scoring criteria, scales and thresholds.
• The scores for each topic, with the evidence and reasoning.
• The final list of material topics and the leadership decisions.

This does not need to be a long report. It needs to be clear, traceable and stored somewhere people can find it.

Common mistakes

A few mistakes come up again and again.

Too many material topics. If 25 of 30 topics end up material, the assessment has not done its job. It is a sign that thresholds are too low, criteria are vague, or nobody dared to deprioritise anything. A short list of truly material topics is far more useful than a long list of everything.

Scoring without evidence. A workshop where people vote on importance based on gut feeling produces numbers that look precise but are not. It also makes the result hard to defend. Every score should rest on something you can point to.

No link to strategy. The assessment is done by a sustainability function on the side, while the leadership team works on strategy somewhere else. The material topics never show up in plans, budgets or risk discussions. Then the work has little value beyond the report.

A one-off exercise. The business, the value chain and the world change. An assessment that is done once and then copied year after year slowly drifts out of date. It does not need to be redone from scratch every year, but it should be reviewed regularly, and updated properly when something significant changes, such as an acquisition, a new market or a major shift in the supply chain.

Turning material topics into targets and actions

The assessment is only the start. Its value comes from what you do with it. For each material topic:

1. Assign an owner in the leadership team. Someone who is responsible for the topic, not just for reporting on it.
2. Describe where you are today. What do you know, what do you measure, and what is already being done?
3. Set a direction and a target. Be specific and realistic. A target the business can actually influence, with a time frame, is better than an ambitious one nobody believes in.
4. Agree on a few actions. What will you do in the next year to move towards the target? Who will do it, and what will it cost?
5. Choose a small number of indicators to follow progress, and review them in the same forums where you follow up other business results.

Bring the material topics into the normal management system: strategy work, budgets, risk management and investment decisions. When a major investment is proposed, ask how it affects the material topics. When the risk register is updated, check that the material sustainability risks are there.

Where to start

You do not need a large project to get started. A practical first round can be done in a few weeks, with a small working group and regular contact with the leadership team.

1. Sketch the value chain on one page.
2. Draw up a long list of topics from standard topic lists, peers and your own sources.
3. Talk to a handful of stakeholders in each key group, and review what they already tell you.
4. Agree on clear scoring criteria and thresholds before anyone scores anything.
5. Score the topics with the evidence you have, and note where evidence is missing.
6. Validate the result with the leadership team, and give each material topic an owner.
7. Check which reporting rules currently apply to your company, and adjust the documentation accordingly.

The test of a good assessment is not how polished the matrix looks. It is whether the leadership team, a year later, can point to decisions it made differently because of it.