Why every organization should do a materiality analysis
The European Union had adopted new regulations, such as the Sustainable Finance Disclose Regulation in 2019 and Corporate Sustainability Reporting Directive (CSRD) in 2021. These new initiatives force organization to be more transparent about their impact on both the planet and society. To discover what is the impact on people and planet, a materiality analysis is conducted.
One of the concepts that corporates are required to implement with the CSRD is double materiality. Double materiality recognizes the fact that risks and opportunities can be material, from both a financial and non-financial point of view.
An organization does a materiality analysis to explore what is the double materiality impact of their organization. A materiality analysis helps organizations focus on the most strategic environmental, social and ethical issues. This helps to drive transformation and meet stakeholder expectations.
What is Double Materiality?
Double materiality is the basis for comprehensive non-financial information disclosure. The financial materiality & impact materiality are two different things. However there is a strong dynamic relationship between the two.
Double materiality covers:
Financial materiality – responsibility for managing the financial risk socio-environmental factors generate for the bottom line of the organization. This means that the company should identify which social and ecological factors cause changes on the financial situation of the organization. For example: a high amount of CO2 may lead towards higher costs as soon as CO2 emission needs to paid for.
Impact materiality – managing and taking responsibility for the actual and potential adverse impacts of their decisions on people, society and the environment. This means that the company should identify what impact they have on people and planet. For example: buying goods from a factory that is known for their lack of attention for human rights. The company is also responsible for the human rights of the employees in the supply chain since it is paying for the activities.
Benefits of conducting a materiality analysis
Better understanding of business performance
The focus on sustainability improves with help of a materiality analysis. Decision-makers will see the impact of the sustainability issues on the organization. The materiality analysis shows which issues should be solved to increase business performances.
Alignment on business priorities and stakeholder expectations
The financial and impact materiality determines the organization’s value. A materiality analysis shows why improving certain sustainability issues is good for business. Because of this, decision-makers start taking sustainability seriously as part of fulfilling the goals of their overarching plans.
Better stakeholder engagement
A materiality analysis helps organizations to understand issues other stakeholders may perceive. Recognizing these issues will stimulate focus on putting resources and time to engage stakeholders. This will created a shared agenda, which increases the feeling of commitment and engagement. These stakeholders can be internal (employees) or external (suppliers, customers etc.)
Higher financial valuation of the organization
An organization is financially more valuable when it is in control of the organizational risks. The business valuation of the organization increases if it is recognizing and mitigating the financial and non-financial issues.
Efficient use of resources
Companies tend to consider they lack the resources necessary to lead sustainability programs. Before acquiring or hiring additional resources, a materiality analysis may help in allocating existing resources to the most material issues. These existing resources can be taken from programs that fail to contribute positively to material issues.
Why a materiality analysis?
Double materiality encourages a change in point of view. It helps organizations to adopt an holistic approach, exploring the actual impact of their daily operations. A double materiality analysis is therefore key to a broader organizational understanding. Double materiality challenges an organization to better understand how to tackle certain issues, to stimulate disruptive transformations. It helps organizations what to do in order to take its responsibility to generate a positive impact.
