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Head of ESG Administration Services
Published
17 May 2024
Read time
6 minutes

How to address ESG double materiality

This article was originally published via Board Agenda

Obtaining ESG double materiality assessments is an important – and increasingly mandatory – first step for companies aiming to measure and manage their impacts on society and the environment, while recognising the external risks and opportunities for their own business. A structured, step-by-step approach can help companies build on the assessment, and navigate the complex task of sustainability reporting.

A growing number of companies headquartered, or with significant business, in the EU must now complete double materiality assessments (DMAs) as part of the environmental, social and governance (ESG) reporting obligations set out in Europe’s Corporate Sustainability Reporting Directive.

But getting the DMA done is just the first step in a long and complex journey, leaving many businesses wondering how and where to start meeting their sustainability reporting requirements based on this assessment.

The task may seem daunting, but by adopting a step-by-step, structured approach, organisations can get the ball rolling. The key is not to let perfection be the enemy of good, and to get started on the journey as soon as possible.

What is a DMA?

First, let’s recap what an ESG DMA is exactly. In essence, a DMA captures both internal and external perspectives when determining the ESG issues that are material to the organisation.

The internal perspective captures the ESG issues that are material to the organisation’s own operations, strategy, and stakeholders. These might include operational risks, resource management, employee well-being, and alignment with corporate values and goals.

The external perspective captures the concerns and expectations of external stakeholders such as investors, customers, regulators, and communities. These might include societal trends, regulatory changes, stakeholder engagement feedback, and industry standards.
Conducting a DMA helps organisations ensure that they are not only addressing their own operational impacts but also meeting the expectations and demands of external stakeholders – enhancing transparency, accountability, and overall ESG performance.

The DMA helps organisations focus their sustainability reporting in the right areas. However, it is just the first step on a long journey, and there are a number of factors to consider before moving on to the real work of gathering, analysing, reporting on – and ultimately improving on – sustainability KPIs.

Sustainability reporting challenges

After conducting an ESG double materiality assessment, companies need to consider and address a number of challenges in order to integrate sustainability reporting successfully into everyday operations:

  • Data collection complexity – this is perhaps the biggest post-DMA challenge cited by companies right now. There’s no getting around the enormity and complexity of collecting relevant, high-quality ESG-related data from both within the organisation and from external partners and suppliers.
    ESG encompasses a wide range of issues, from environmental impact to social equity, each requiring different data types and sources (there are 1000 plus data points listed in the European Sustainability Reporting Standards (ESRS)). The diversity and complexity of this data can make collection and analysis cumbersome. Additionally, companies may struggle with inconsistent data formats, incomplete datasets, and ensuring the accuracy and reliability of the information gathered.
  • Integrating all stakeholder perspectives – any comprehensive ESG strategy must incorporate the perspectives of a diverse variety of stakeholders, including customers, employees, suppliers, and local communities. Aligning these varying interests and concerns with business objectives is challenging: companies need to balance stakeholder expectations with maintaining operational viability and profitability. Transparent communication, active engagement, and often complex negotiation will be needed to reconcile different viewpoints.
  • Resource constraints – companies typically underestimate the significant human and financial resources required to implement organisation-wide ESG reporting. Today, there are millions of employees engaged in financial reporting; the number engaged in sustainability reporting is in thousands. Companies will need to allocate adequate budgets and personnel with the right expertise to sustain long-term ESG strategies. Larger corporates will need to build non-financial reporting teams at least as large as their financial reporting teams. Small and medium-sized enterprises may struggle to attract sufficient expertise affordably, and may do better to call on external help to develop and implement an ESG reporting program.
  • Measurement and verification – measuring the impact of ESG initiatives and verifying the outcomes is complex, especially given the lack of standardised metrics or benchmarking across industries. Nonetheless, companies need develop clear, measurable indicators of success, which will require third-party audits or certifications, adding to complexity and cost.
  • Changing regulatory landscape – the regulatory environment around ESG is rapidly evolving, with new laws and standards being introduced regularly. Keeping abreast of these changes and ensuring compliance is a moving target for businesses. Companies need to stay agile and adapt their strategies accordingly.
  • Integration into business strategy – once material topics are identified, integrating them into the overall business strategy presents a new set of challenges. It requires a shift from treating ESG issues as peripheral concerns to embedding them into core business operations, decision-making processes, and corporate culture.
  • Engagement and transparency – maintaining high levels of stakeholder engagement and transparency throughout the ESG reporting process is demanding. Stakeholders will come to expect regular updates, clear communication, and tangible evidence of progress. Building and sustaining trust requires continuous effort, openness, and a commitment to honest reporting, including disclosing setbacks and challenges.

Seven steps to get the ball rolling

The enormity of the post-DMA sustainability reporting task can seem rather daunting. But by breaking it down into well-defined, manageable ‘subtasks’, companies can get the ball rolling. Even if it means limiting the scope of a sustainability report initially, it is preferable for companies to report on what they can sooner (while highlighting any areas that need more work) rather than miss the boat completely.

Step 1. Decide on responsibility

Deciding who is responsible for non-financial sustainability reporting should be board agenda item number one. Should it be the chief financial officer (CFO) or the chief sustainability officer (CSO) who takes the lead? Financial reporting across large corporates is itself a relatively complex and burdensome task, but it has the benefit of many decades of precedent and tackles only a handful of data points. Ultimately, the CSO/Sustainability Lead should be responsible for the ESG strategy and governance within the company but as the ESG reporting/non financial reporting is part of the annual report, it then should fall under the CFO.

Step 2. Prioritise material topics and scope

The next step is to identify and prioritise material  topics that are most relevant to the business and its stakeholders – including which ones are being handled well already and which need attention – as well as the scope of the reporting process (which geographies, subsidiaries, partners and suppliers are to be included). This involves understanding which issues are most significant from both the impact and financial perspectives. Prioritization helps focus efforts on the most material issues, ensuring that resources are allocated efficiently.

Step 3. Begin data collection and analysis

Once the priority topics are identified, the next step is data collection. Companies need to gather information related to their chosen ESG topics, which can come from internal records, industry benchmarks, stakeholder interviews, and other relevant sources. The collected data should then be analysed to understand the current impact and performance levels. This phase is critical to establishing a baseline, and identifying gaps between the current state and desired outcomes.

Step 4. Set goals

Based on the analysis, companies should set clear, measurable, and time-bound goals for each priority ESG issue. Goals should be ambitious yet achievable, and aligned with broader industry standards or global frameworks.

Step 5. Implement an action plan

With goals in place, companies should develop and implement action plans to address identified gaps and move towards the set targets. Action plans should outline specific steps, assign responsibilities, allocate resources, and set timelines.

Step 6. Monitor and report

Regular monitoring is crucial to track progress against goals and to understand the effectiveness of the implemented actions. Companies should establish key performance indicators (KPIs) and use them to measure progress. Results should be reported transparently to stakeholders through sustainability reporting and other channels.

Step 7. Ensure continuous stakeholder engagement

Internal and external stakeholder engagement – with shareholders, employees, customers, suppliers, among others – provides valuable insights, fosters collaboration, and builds trust. Internally, this can involve educating and involving employees in ESG initiatives. Externally, it can mean regularly updating investors and other stakeholders on progress and challenges, and seeking their feedback.

Navigating the post-DMA landscape is fraught with challenges, but it pays to remember it’s a marathon not a sprint. By following a measured, stepwise approach – starting small if necessary – companies can effectively build on their DMA and integrate sustainability into core operations for the long term.

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