Double Materiality Assessment (DMA)

To elevate sustainability strategy and compliance, the approach to materiality assessment is evolving rapidly. Traditionally, companies have focused on identifying which sustainability issues are most financially critical to their operations, through frameworks like SASB, or how their business impacts sustainability issues, using frameworks like GRI. However, recent regulatory shifts, such as the mandatory requirements of the CSRD in the EU, have combined those approaches into the double materiality assessment.

Double materiality encompasses both the financial impacts of environmental and societal factors on a company (financial materiality), and the impacts that the company has on the environment and society (impact materiality).

This dual perspective mandates a deeper analysis tailored to each company's circumstances. Companies must delve into the details of their sustainability-related impacts, risks, and opportunities; assess the scale, scope, likelihood, and irremediability of each one of these; and set thresholds to determine what is material for the specific company. This upgrade in analysis makes the exercise a dynamic, complex, and context-specific process. It also makes the outcomes useful for business strategy beyond compliance, helping companies strengthen their value proposition.

The upcoming Corporate Sustainability Reporting Directive (CSRD) framework provides a structured yet flexible foundation for conducting Double Materiality assessments. Unlike traditional approaches that prescribe specific metrics, this framework encourages companies to define their own impact metrics, aligned with their industry dynamics, business models, supply chains, geographic locations, and size. As a result, each assessment is unique to the company. As part of the assessment, companies should:

• Set the scope of analysis: From inception, companies determine whether the scope is enterprise-wide, product-specific, asset-centric, or regionally focused. They also must set time horizons for assessing impacts across short-, medium-, and long-term periods.
• Perform in-depth and ongoing stakeholder engagement: Key to this tailored approach is in-depth and ongoing stakeholder engagement, moving beyond surveys to interactive workshops to foster informed dialogue with internal and external stakeholders. Continuous engagement with stakeholders is essential throughout the Double Materiality process to ensure that stakeholder insights are consistently integrated into the assessment, enhancing the accuracy and relevance of the findings. Effective communication of sustainability goals and progress further strengthens stakeholder trust and support. This approach ensures that assessments are rooted in factual, evidence-based insights rather than perceptions or beliefs.
• Leverage objective evidence: Central to the Double Materiality approach is a commitment to data-driven decision-making. Companies leverage primary data where available, supplemented by scientific research and publicly available databases to substantiate their findings. In instances where data gaps exist, engagement with experts and stakeholders fills critical knowledge voids, ensuring a comprehensive analysis of material impacts.
• Examine value chain considerations: Analyzing the value chain (upstream, downstream, and internal) is essential in Double Materiality assessments. Companies need not gather data from all suppliers but should focus on areas where potential issues are known. Identifying hotspots in impact materiality and dependencies on suppliers in financial materiality provides targeted insights for informed decision-making.
• Move beyond the traditional materiality matrix: The complexity of sustainability issues cannot be fully captured by the traditional materiality matrix, which plots issues on a graph with one axis representing “importance to stakeholders” and the other axis representing “impact on the business.” There is no one-size-fits-all solution and CSRD recognizes this by not requiring a specific format to express the double materiality assessment results. Companies should report the topics that are material in both financial and impact terms, considering the sum of these aspects rather than their intersection. This approach enables a more comprehensive understanding of material issues, enabling the development of robust sustainability strategies and targeted initiatives to address the most urgent issues.

To maximize the benefits of double materiality, it is crucial to align material issues with enterprise risk management (ERM) processes. This ensures that sustainability considerations are integrated with the overall corporate risk management strategy. The double materiality assessment can also help to articulate clear ESG strategies supported by robust goals, KPIs, policies, and organizational structures. Companies can use the resulting strategic framework to allocate appropriate budgets and resources to meet those goals.

Double materiality represents a paradigm shift towards a more holistic and integrated approach to sustainability strategy and compliance. By embracing this nuanced methodology, companies not only mitigate risks and seize opportunities, but also strengthen their resilience and relevance in an increasingly complex global landscape. As regulatory frameworks evolve and stakeholder expectations heighten, double materiality is a transformative force driving sustainable business practices into the future.

Sia Partners offers comprehensive sustainability strategy services. These include tailored materiality assessments, stakeholder engagement, and integration of sustainability metrics into business processes. With our expertise in aligning sustainability efforts with enterprise risk management (ERM) frameworks, Sia Partners ensures that businesses are well-positioned for both compliance and long-term strategic growth.