How to deal with dual ESG materiality

Obtaining an ESG Double Materiality Assessment (DMA) is important and increasingly mandatory for companies aiming to measure and manage their social and environmental impact while being aware of external risks and opportunities to their business. has been made into

A growing number of companies headquartered or with significant operations in the EU are required to complete a DMA as part of their reporting obligations under the European Corporate Sustainability Reporting Directive. However, completing a DMA is only the first step, and many companies are wondering where and how to start to meet sustainability reporting requirements based on this assessment.

This task may seem daunting, but a structured, step-by-step approach can help your organization stay on track. The key is to not let the perfect be the enemy of the good and start that journey as soon as possible.

What is DMA?

In essence, a dual materiality assessment captures both internal and external perspectives when determining which ESG issues are material to an organization.

The key is to not let the perfect be the enemy of the good and start that journey as soon as possible.

An internal perspective captures issues that are important to the organization's own operations, strategy, and stakeholders. These may include operational risk, resource management, employee health, alignment with company values ​​and goals, and more.

The external perspective captures the concerns and expectations of external stakeholders such as investors, customers, regulators, and the community. These may include societal trends, regulatory changes, stakeholder engagement feedback, and industry standards.

Implementing a DMA can help organizations increase transparency, accountability, and overall ESG performance. It also helps focus sustainability reporting on the right areas.

However, this is just the first step in a long journey, and there are many factors to consider before you move on to the actual work of collecting, analyzing, reporting, and ultimately improving your sustainability key performance indicators.

Sustainability reporting challenges

Companies must clear many hurdles to successfully integrate sustainability reporting into their daily operations.

Data collection complexity. This is perhaps the biggest post-DMA challenge that companies are currently citing. There is no getting around the sheer volume and complexity of collecting relevant, high-quality ESG-related data, both within the organization 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 (the European Sustainability Reporting Standard lists more than 1,000 data points). (The diversity and complexity of this data can make it difficult to collect and analyze) Additionally, companies are faced with inconsistent data formats, incomplete datasets, and the reliability of the information they collect. It may be difficult to secure.

Reconciling different perspectives requires transparent communication, active engagement, and often complex negotiation.

Integrating all stakeholder perspectives. A comprehensive ESG strategy must incorporate the perspectives of diverse stakeholders, including customers, employees, suppliers, and local communities. Aligning these different interests and concerns with business goals can be difficult. Businesses must balance stakeholder expectations with maintaining operational viability and profitability. Reconciling different perspectives requires transparent communication, active engagement, and often complex negotiation.

resource constraints. Companies typically underestimate the significant human and financial resources required to implement ESG reporting across the organization. Today, millions of employees are involved in financial reporting. The number of people involved in sustainability reporting is probably only a few thousand people.

Companies need to allocate the right budget and talent with the right expertise to sustain a long-term ESG strategy. Large companies should build a non-financial reporting team that is at least as large as their financial reporting team. Small businesses may struggle to gather sufficient expertise at an affordable price, so they may be better off seeking outside help to develop and implement an ESG reporting program.

Measurement and verification. Measuring the impact of ESG initiatives and validating their results is complex, especially given the lack of standardized metrics and benchmarks across industries. Nevertheless, companies need to develop clear and measurable indicators of success, which requires third-party auditing and certification, increasing complexity and cost.

Building and maintaining trust requires continued effort, openness, and a commitment to honest reporting.

Changing regulatory landscape. The regulatory environment surrounding ESG is rapidly evolving, with new laws and standards being introduced regularly. Staying on top of these changes and ensuring compliance is an immediate goal for businesses. Businesses need to remain agile and adapt their strategies accordingly.

Integration into business strategy. Once key topics are identified, integrating them into the overall business strategy presents new challenges. There is a need to move from treating ESG issues as a peripheral concern to embedding them into core business operations, decision-making processes and corporate culture.

Engagement and transparency. Stakeholders will come to expect regular updates, clear communication, and tangible evidence of progress. Building and maintaining trust requires continued effort, openness, and a commitment to honest reporting, including disclosure of setbacks and challenges.

7 steps to get the ball rolling

The enormity of the post-DMA sustainability reporting task can seem quite daunting. By breaking things down into clearly defined and manageable “sub-tasks”, companies can keep things running smoothly. Even if it means initially limiting the scope of a sustainability report, it is better for companies to do as much as possible (while highlighting areas where more work is needed) than to miss the boat completely. It is desirable to report the matter as soon as possible.

1. Determine responsibility

Since ESG and non-financial reports are part of the annual report, reporting on sustainability should fall under the purview of the CFO.

Who is responsible for non-financial sustainability reporting? Will the chief financial officer take the lead or the chief sustainability officer? Financial reporting itself in large companies can be relatively complex and burdensome. It's a lot of work, but it benefits from decades of precedent and only deals with a handful of data points. Ultimately, the CSO/sustainability leader should be responsible for her ESG strategy and governance within the company, but since the ESG report/non-financial report is part of the annual report, the sustainability report is her responsibility. Must be under the CFO's authority.

2. Prioritize important themes and scope

The next step is to determine what is most relevant to the business and its stakeholders (including what is already well addressed and what needs attention) and the scope of the reporting process (which regions, subsidiaries, Identifying partners, suppliers, etc.) It contains). This includes understanding which issues are most important from both an impact and financial perspective. Prioritization helps you focus your efforts on the most important issues and allows you to allocate resources more efficiently.

3. Start collecting and analyzing data

Information related to a company's selected ESG topics can be obtained from internal records, industry benchmarks, stakeholder interviews, and other relevant sources. The data collected must then be analyzed to understand the current impact and performance level. This phase is important for establishing a baseline and identifying gaps between the current state and the desired outcome.

4. Set goals

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

5. Implementation of action plan

The action plan should outline specific steps, assign responsibilities, allocate resources, and establish a schedule.

6. Monitoring and reporting

Measure your progress using key performance indicators. Results should be transparently reported to stakeholders through sustainability reports and other channels.

7. Ensure continued stakeholder engagement

Involving internal and external stakeholders provides valuable insights, fosters collaboration, and builds trust. Internally, this includes educating and involving employees in ESG initiatives. Externally, this means providing regular updates to investors and other stakeholders on progress and challenges, and soliciting feedback.

Navigating the post-DMA situation is full of challenges, but it helps to remember that this is a marathon, not a sprint. By following a careful, step-by-step approach, starting small if necessary, companies can effectively build their DMA and embed sustainability into their core business over the long term.

Pierre Lechat is Head of ESG Services at TMF Group, a global provider of critical management services.