George Markezinis
By the end of this year, the EU Corporate Sustainability Reporting Standards Directive is expected to oblige approximately 50,000 companies to comply with it and include the vital concept of double materiality in how they operate. The European Commission first recommended this framework in 2019 for businesses to identify and manage ESG risks, including climate risks. In the past, investors who were primarily concerned with profitability risks may have found success with traditional ESG reporting methods and single materiality work. However, this approach often resulted in inconsistent and voluntary reporting, raising concerns about greenwashing.
Double materiality assessment offers a complete dual-lens approach, definitely more transparent, that measures both sustainability issues’ financial effects and their influence on society and the environment. Companies need to assess each sustainability matter’s effects, risks, and opportunities and understand how their activities affect people and the environment, as well as how sustainability issues can affect them financially. Climate-conscious investors have embraced this approach to learn about their portfolio companies’ exposure to climate risks and opportunities.
The European Financial Reporting Advisory Group (EFRAG) requires sustainability statements that include material information about effects, risks, and opportunities in environmental, social, and governance matters. The fact that the scope of affected companies has expanded from 12,000 to nearly 50,000 is a significant development.
To sum up what most of the directly involved companies already know, the CSRD sets specific criteria for the ones that are ready to comply, and they should meet two of these conditions:
Next to follow, non-EU companies with EU subsidiaries and a turnover of over EUR 150 million need to also address compliance. The UK Financial Conduct Authority has also put Sustainability Disclosure Regulations in place, and while the US Securities and Exchange Commission’s climate disclosure rules are currently stayed and not in effect, some states like California have implemented their own climate disclosure mandates. Companies operating in these regions should ensure compliance with applicable local regulations.
However, implementing materiality assessments has proven to be a significant struggle, as the KPMG sustainability report reveals that an impressive 75% of organizations are still in the process of learning about ESG assurance. The issues are located in the lack of internal experts (44%) as well as the inefficiency of IT systems (39%).
The main challenges are internal expertise shortages (44%) and inadequate IT systems (39%). Materiality assessment requires a holistic evaluation of the supply chain and a close look at both primary effects and downstream impacts. The level of complication is rising for the large multinational corporations as they operate in multiple countries, where there is an unsimilarity in supply chains as well as customer databases. Although each industry has its ESG issues that matter the most, most of them focus on human capital, business ethics, product governance, and direct carbon emissions. Environmental issues affect operating and non-operating expenses, while social capital and breakthroughs drive revenue generation.
The major usefulness of double materiality assessment is that it supports organizations in creating real value instead of just meeting regulatory requirements. Insights from KPMG’s 2024 Survey of Sustainability Reporting reveal that 42% of the 5,800 companies analyzed have implemented double materiality assessments when 79% of these conduct some form of materiality assessment.
During this process, and to ensure that a double materiality assessment is successful, working with stakeholders is key. It is not about arbitrarily choosing metrics; this process allows organizations to identify how they affect and depend on their value chain. Internal teams provide input to validate assessment outcomes, which are further scrutinized by executive management. All external partners, from suppliers to NGOs and customers, can bring unique points of view and detect risks internal teams might not bring up.
Some of the clear benefits the companies using double materiality assessments have access to are :
Double materiality assessments let companies explore ways to stand out in the market. Research shows that companies with refined ESG skills see sustainability as a key way to boost value.
These companies signify enhanced financial performance. They efficiently manage resources and implement intelligent environmental initiatives. Companies with robust ESG policies incur 25% lower capital costs, hence enhancing investor interest.
The process enables firms to ascertain their requirements for maintaining resilience and generating enduring value. Teams can prioritize essential things by engaging with stakeholders. This results in tangible, quantifiable objectives that enhance operational efficiency.
Technology couldn’t stay impassive in this revolution, as platforms now have reshaped how organizations conduct their double materiality assessments. There are advanced software solutions that facilitate companies in streamlining their assessment processes through automated data collection and analysis.
Automated survey tools and features that involve stakeholders have revolutionized the traditional materiality assessment landscape. These platforms process an enormous set of data from multiple sources. They analyze regulatory filings, sustainability disclosures, and social media inputs effectively. Organizations can generate dynamic materiality matrices that arrange leadership around focused ESG goals through integrated software.
Advanced platforms come with several key features:
Artificial Intelligence drives the latest generation of analytics tools and processes millions of data points to spot emerging trends and risks. These tools learn about regulatory changes, peer activities, and market developments that give organizations immediate insights.
Machine learning algorithms enable pattern recognition and identify correlations that human analysts might miss. Advanced analytics platforms evaluate stakeholder feedback and social media sentiment to understand public priorities. These tools send immediate alerts about potential compliance issues or deviations from reporting standards through continuous monitoring systems.
Organizations can make informed decisions about their sustainability strategies with quantitative analysis capabilities. Peer analysis and industry standards comparison support companies in identifying and prioritizing key sustainability issues. Assessments usually require manual intensive effort, and such technological solutions can reduce it and automate processes.
AI-powered solutions enable organizations to streamline the assessment process through automated data collection and analysis capabilities, thereby boosting their ESG performance.
Companies like Cisco and Microsoft have already shown great results using AI tools to optimize energy efficiency and ecosystem monitoring efforts.
The International Sustainability Standards Board (ISSB) guides the movement toward standardized data collection and its coverage. The European Union’s plan introduces minimum standards for ESG measurement to promote standardization and transparency across regions. These developments point to a radical alteration toward more consistent and comparable sustainability reporting frameworks.
Technology has become essential rather than optional as these advances rely on maintaining data quality and accuracy. More companies trust and implement software solutions to meet the growing need for detailed and verifiable ESG information.
Today’s business sustainability focuses on double materiality assessment. This means companies are changing how they examine and report their environmental and social impacts to better manage risks and improve relationships with stakeholders.
Advanced digital platforms and AI-powered analytics tools are essentially important to organizations in order to make informed decisions and optimize the assessment process for global operations. When there is a huge amount of data to process, software platforms work exceptionally well to process them and provide live insights while offering automation.
AI and standard frameworks will transform materiality assessments, providing consistency across industries. Businesses that already adopt these technologies notice the benefits that have set them up for long-term success.
A successful double materiality program needs the right mix of technology and effective stakeholder involvement. Tracking both financial effects and broader social impacts while building a detailed assessment framework helps organizations stay competitive and meet new regulations and stakeholder needs.
