U.S. companies are increasingly looking to environmental, social, and governance (ESG) initiatives to shape their strategies. ESG considerations can range from supporting diversity and inclusion practices in the workplace to reducing carbon emissions or investing in sustainability efforts. Corporate reporting on ESG initiatives and metrics has remained primarily a voluntary effort to date, resulting in many claims of companies' greenwashing (intentional or by mistake) their environmental impact and sustainability practices. The lack of confidence by consumers and investors in corporate ESG disclosures has led to global organizational bodies like the Securities and Exchange Commission (SEC) in the United States and European Sustainability Reporting Standards (ESRS) developing guidelines and reporting criteria that organizations must attest to in their non-financial disclosures.
As U.S. companies become more aware of the impact of upcoming ESG regulations, they must begin considering double materiality. Double materiality requires disclosing how a company impacts the world (outside-in materiality) and how the world affects the company (inside-out materiality).
The Importance of Materiality
Materiality plays a crucial role in the disclosure of information by companies. In the U.S., an omitted fact is considered "material" if a reasonable shareholder would deem it important in deciding how to vote or if its disclosure would significantly alter the total mix of information made available. The E.U.'s CSRD, on the other hand, requires double materiality. It entails disclosing how a company impacts the world (outside-in materiality) and how the world affects the company (inside-out materiality).
However, gathering such a broad spectrum of data poses a significant challenge. Materiality reporting is estimated to impact nearly 30% of U.S. companies and over 50,000 EU companies. Both groups must programmatically identify any negative or positive impact the company has or might have on people and the environment, assess severity, identify stakeholders affected, and assess the financial triggers and effects.
What is Double Materiality
Double materiality refers to the idea that both a company's actions and the actions of external factors can have a material impact on the environment and society. Double materiality may sound like a complicated concept, but it's actually quite simple. At its core, double materiality means that companies can have a material impact on the environment and society, and vice versa, environmental and social issues can have a material impact on the business operations of a company. So, when companies report on their environmental and social impact, they must consider not only their direct impact but also their indirect impact on society and the environment.
Why U.S. Companies Need to Understand Double Materiality:
While the concept of double materiality may be new to most U.S. companies, it is becoming increasingly important for companies to understand, especially as global ESG reporting standards evolve. The Securities and Exchange Commission (SEC) is considering incorporating ESG disclosure requirements into its reporting regulations. This means that companies' ESG reports will become increasingly important to stakeholders, including investors, employees, and customers. Companies that do not understand the importance of double materiality may not accurately or effectively report their indirect impact, which can lead to adverse consequences, loss of credibility, and potential legal issues.
Materiality and Sustainability are Top Concerns for CEOs
More and more CEOs cite sustainability and materiality as part of their top initiatives and critical to corporate strategy. In several recent Gartner* reports and surveys, they found:
9% of CEOs put environmental sustainability among their top 3 business priorities
70% of CEOs surveyed plan to invest in new sustainable products
74% of supply chain leaders expect sustainability to impact profitability between now and 2025
Materiality concerns are not solely driven by regulation. On the contrary, many executives consider sustainability and materiality essential to attaining corporate strategy and revenue goals.
* Sources::2022 Gartner CEO and Senior Business Executive Survey, 2022 Gartner Emerging Priorities in Supply Chain Survey, 2022 Gartner Circular Economy Survey
ESG Reporting Timelines for U.S. Companies
There are a few important dates that companies should be aware of when it comes to ESG reporting:
The SEC's proposed roadmap was released in August 2020 and requires publicly traded companies to begin disclosing information on ESG metrics. The final rule is expected to be announced fall of 2023.
The ESRS brought in by the CSRD will go into effect in 2024, and will impose mandatory double-materiality sustainability reporting for nearly 50,000 entities operating in the E.U.
The ESRS requirement will also impact U.S. companies doing business in the E.U.
The Challenges of Calculating Double Materiality in Sustainability Reporting
Now that we have defined Double Materiality, the next challenge for organizations is calculating, assessing, and reporting on their double materiality metrics and status.
Gathering Data
One of the most significant challenges companies face in calculating double materiality is gathering the necessary data. Double materiality requires organizations to consider both the impacts of their operations on the environment and society and how global economic, social, and environmental trends will impact their operations. The challenge here is that data on global trends can be hard to find or unreliable. Additionally, organizations need to add context to this data to understand how it will impact their operations. Without sufficient data, organizations can misunderstand their double materiality risks, resulting in incomplete reporting.
Analyzing Data
Gathering data is just the first step toward double materiality reporting. After collecting the data, organizations must analyze it to make informed decisions about their materiality. However, analyzing data can be a complex exercise requiring high data literacy and specialized knowledge. Moreover, data sources and quality can vary widely and may require cleaning and processing. Organizations may face reputational or regulatory risks related to incomplete reporting or poorly informed decision-making without accurate analysis.
Reporting Results
Finally, communicating double materiality data is crucial but challenging. Stakeholders expect organizations to present meaningful and transparent information. Still, with double materiality, it can be challenging to balance internal and external impacts to demonstrate how trends may impact an organization. Additionally, communicating double materiality information requires specialized reporting done in a manner that satisfies the expectations of regulators, investors, and other stakeholders. Reporting results is vital not only to meet stakeholders' expectations but also to help drive meaningful improvements in corporate sustainability practices.
The Benefits of Reporting on Double Materiality
Improved Corporate Governance:
Double materiality can significantly improve corporate governance by requiring companies to consider non-financial factors affecting their stakeholders. This approach enables companies to identify potential risks and opportunities early, mitigating negative impacts and taking advantage of opportunities. Additionally, it encourages companies to consider the impact of their decisions on the environment, society, and governance, which can lead to improved stakeholder relations and long-term sustainability.
Enhanced Financial Reporting and Auditing Standards:
Double materiality also enhances financial reporting and auditing standards by requiring companies to disclose their non-financial impacts. This information is essential for investors and other stakeholders to assess a company's performance and potential risks. Additionally, with increased transparency, regulators and auditors can better monitor and detect non-financial risks that could affect a company's financial performance.
Greater Accountability in the Financial System:
Double materiality encourages greater accountability in the financial system by requiring companies to consider the impact of their decisions on the environment, society, and governance. This approach promotes more sustainable business practices and protects stakeholders from negative impacts. Furthermore, with increased transparency and disclosure, companies are more accountable to their stakeholders, leading to improved stakeholder relations and long-term sustainability.
Improved Investor Confidence:
Finally, double materiality improves investor confidence by providing more complete and accurate information about a company's overall performance and potential risks. This information helps investors make informed decisions about investing in a company, increasing market stability. Moreover, with increased transparency, companies can attract socially responsible investors who prioritize sustainability.
How Archer ESG Solutions Can Help Companies Calculate Double Materiality
The Archer ESG Double Materiality Calculator helps you quickly and easily assess, calculate, and report on double materiality impacts. Pre-configured assessments based on the E.U.'s ESRS framework allow for evaluating individual impact and performing financial assessments. The Archer Double Materiality Calculator provides a simple and intuitive environment that enables users to quickly and efficiently input the required data by simply responding to questions and prompts in alignment with the ESRS framework.
Integrated with the Archer ESG Management & IRM platform, financial and impact assessments can be incorporated into the organization's overall ESG risk analysis and provides financial teams with the critical information required to determine what ESG information needs to be disclosed.
As with all Archer solutions, real-time, integrated graphical dashboards, reports, heatmaps, and quantifiable risk data help inform executives and senior leadership with decision-useful information to help achieve corporate strategic ESG goals and milestones.
Features
Perform double materiality assessments and calculations to identify critical ESG risks.
Pre-configured impact and financial materiality assessments aligned to the ESRS framework
User-selected option to report on impact materiality to Affected Stakeholders and/or Users of Sustainability Statements
Pre-configured reports and dashboards providing decision-useful information to decision-makers.
Benefits
Quickly collect, assess, and report on double materiality impacts.
Simple, intuitive, and easy-to-use interface.
Materiality assessment can be completed quickly and efficiently.
Equip financial leadership with knowledge of what ESG factors need to be disclosed in financial reports
Integrated with Archer ESG Management and IRM platform
If you want to learn more about how Archer can help your organization assess double materiality, download our short whitepaper, ESG Reporting: From Data to Action, for additional information on best practices and steps you can take to address your ESG reporting challenges.
Better yet, join us for Archer Summit 2023 in San Diego and learn more about Archer ESG Solutions.
Contact us to speak with an Archer expert.
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