New Perspectives on Materiality

Building a future-proof materiality matrix that captures emerging ESG risks
New Perspectives on Materiality
Publ. date 24 Mar 2021
Today’s world is obviously dominated by the COVID-19 pandemic, but if we look at the landscape of materiality, new perspectives are arising as well. The EU Commission talks about the concept of “Double Materiality” in its Non-Financial Reporting Directive and companies are concerned with capturing emerging risks successfully in their ESG approach. One of the main questions that therefore arises is: how do you ensure your materiality assessment covers these new perspectives on materiality?

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The concept of double materiality: outside-in and inside-out view

A materiality assessment is considered as a major building block of a company’s sustainability strategy and execution. If executed well, a materiality assessment helps a company focus its sustainability efforts on the topics that matter most in terms of stakeholder relevance and business impact. A topic introduced by the EU Commission as part of the Non-Financial Reporting Update (NFRD) is double materiality. This concept expects companies not only to look at the impact on their organization, in other words the contribution to the bottom line, but also expects organizations to look at their impact on issues that are deemed material. Once combined, these outside-in and inside-out views guarantee that companies describe and act on material issues that matter most from both a financial, as well as a societal point of view.

Let’s take an example of a global chemical company that has selected the topic of “Innovation” as one of their material issues. From an outside-in view, this material issue may have a high impact on the organization as the company’s capabilities to innovate is likely to result in a higher revenue or a reduction of costs due to process improvements. On the other hand, the impact according to the inside-out view could also be considered as high as the company may have a high impact on the topic. This is due to the new innovative products it is bringing to the market and the accompanying benefits that this provides to the broader society in terms of i.e. enhanced consumer health or local community development.

Capturing Emerging Risks by being forward-looking

Next to applying the concept of double materiality, it is also essential to capture upcoming and emerging risks that might become strategically relevant in your materiality assessment. 

The capturing of emerging risks is important to already take place in the first stages of the materiality assessment, namely when defining your list of material topics. An important driver to do so is your company’s overall business strategy as this shows the horizon of the company and what changes are foreseen in the upcoming years. This may have a major impact on your materiality assessment. Two examples to highlight the link with the overall business strategy:

•    The example is taken from the French retailer Carrefour that decided to move into online retail. With this move, the material ESG topics that become relevant for the organization also changes as topics related to digital innovation and protection of customers’ data become much more relevant.

•    A second example is related to Ocean Plastics which was, and is still today, a hot topic. Including this in your focus for your business strategy, will also mean that this becomes an important material issue for your organization.

Additionally, another source to look into is the Global Risk Report which published yearly by the World Economic Forum. This helps you to identify emerging risks by looking at the potential impact this risk may cause and the likelihood that the risk will actually occur. Identifying this in your list of material topics, will result in your organization having a forward-looking perspective, in other words, being better prepared for what may arise in the future. 

To further pinpoint the importance of emerging risks, this is also an increased focus area in the Corporate Sustainability Assessment (DJSI-questionnaire) as companies are asked to provide examples of relevant emerging risks and explain how this has an impact on their business. A forward-looking materiality assessment, that captures these emerging risks, will therefore also contribute to your preparedness for the challenges raised by investors and ESG raters such as the Dow Jones Sustainability Index. 
 

3 ESG Acceleration tips for your materiality matrix 

  1. Include double materiality. Construct your list of material topics in a way that it includes material issues that contribute to the bottom-line of your organization. This ensures that the outside-in perspective of the “double materiality coin” is captured in an early stage of the process.

  2. Liase with the business strategy cycle. The business strategy of your organization has connections with a risk perspective, in the form of your Enterprise Risk Management (ERM). Therefore, coupling materiality to your overall business strategy ensures that the risk perspective is sufficiently covered. 

  3. Sign-up for Finch & Beak’s upcoming ESG Acceleration Webinar which will be held on Tuesday 20th of April 2020. The online session will deep-dive into the dynamic topic of materiality, integration of emerging risks, and the application of the double materiality concept. Interested in attending the session? More information can be found here.

Ready to update your materiality assessment?

More information on Finch & Beak’s design principles for materiality can be found in our article on “Updating your Materiality Matrix Post COVID-19”.

Are you considering updating your materiality assessment into a forward-looking matrix, that covers double materiality, as well as emerging risks? Get in touch with Josée van der Hoek, Director, at josee@finchandbeak.com or +34 6 82 04 83 01 how Finch & Beak can support you to accelerate the contribution to your sustainability strategy.

About Bas Nuijten

Sustainability professional aiming to help organizations to continuously improve their sustainability strategies. | 
bas@finchandbeak.com

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