Double Materiality as the Foundation for Sustainability Strategy

Integrating ESG into your organization’s business strategy
Double Materiality as the Foundation for Sustainability Strategy
Publ. date 30 Nov 2022
For organizations to remain competitive, embedding ESG in their business strategies is imperative. As a first step in strategy-making usually entails analyzing and understanding the organization’s inside and outside contexts, a double materiality assessment is a great tool to help organizations consider the impacts of both of these. On top of the assessment being foundational for integrating ESG in organizational strategies, it will be required as part of the EU approved Corporate Sustainability Reporting Directive (CSRD). In this article, we discuss the importance of considering materiality as a starting point for your strategy, elaborate on other strategy building blocks, and provide tips and practical guidance for a successful double materiality assessment.

Managing Environmental, Social, and Governance (ESG) topics is slowly but surely becoming as important as managing financial topics and especially as it becomes mandatory for major companies. The European Parliament recently adopted the CSRD and the SEC ESG Disclosure proposal in the US is an upcoming requirement that will require major corporations to disclose non-financial information in an orderly manner. Beyond regulations, there is a vital competitive need for organizations to integrate ESG into their business strategies.

Key ingredients for your ESG Strategy

Strategy frameworks are built around companies' objectives to develop their own competitive advantages from the immaterial and material assets they possess. But to identify these potential advantages, it is important to first analyze the organization’s context and consider the internal and external forces that influence the company’s trajectory. The implementation of a materiality assessment follows a similar pattern and allows your organization to answer key strategic questions:

What are the industry’s (ESG) mega-trends and the organization’s business focus?

A first step in the materiality assessment is to draft a list of ESG topics that are most material to your organization. This can be done using for instance Porter’s five forces model, to identify and analyze competitive forces, as you would do when developing a business strategy when identifying social and economic forward-looking mega-trends which also have an impact on the selection of material topics. This assessment of external forces should complement a clear vision of the organization’s own focus, considering its assets, and resources and aligning with the strategy set by the board and executive levels. As part of its materiality assessment, the Belgian telecom company Telenet has identified 11 material topics based on the forward-looking internal and external megatrends that were identified around the organization.

What are the key stakeholders’ expectations on ESG topics?

Once the list of material topics is finalized and tailored according to the company’s specific situation, the next step is prioritizing these ESG topics based on the stakeholders’ own expectations. As part of the business strategy development, this would entail assessing customers’ demands and determining product and service development for instance. This step goes beyond the traditional financial performance metrics to assess how ESG topics can also impact the wider expectation of the organization’s stakeholders such as the customer's and investors' expectations for value creation and product development.

Engaging with your key internal and external stakeholders will help highlight the three or four topics that are the most strategic to the organization, but also identify the partners or suppliers that will best support your organization on its sustainable journey. Similar to how companies assess which unique products and services they could offer to customers through a differentiation strategy, the materiality assessment guides organizations in identifying the topics that will also create new value compared to peers. French company Bureau Veritas conducted an extended assessment of stakeholders' expectations to ensure it had the relevant knowledge to best engage with them and provide solutions to their challenges.

What are the main ESG risks and opportunities for the organization?

The double materiality process prescribes that companies should consider the materiality of an ESG issue if it has:

  • An inside-out impact (impact-perspective) which is related to the significant impacts that the organization can have on people or the environment,
  • An outside-in impact (financial-perspective) which is related to the financial risks and opportunities that sustainability matters can have on the organization.

By identifying the existing or future financial impact of risks and opportunities related to ESG materiality topics, the ranking of these topics will further evolve. Risks that are more likely to have an important impact on revenues, assets, or brand image should enjoy close monitoring. This approach to risk management is not specific to ESG risk identification and mitigation and should be aligned with global enterprise risk management, as shown by Telenet in its annual financial report.

Topics related to opportunities where the positive financial and societal impact is substantial and can support the development of the company by generating sustainable competitive advantages should be recognized and treated as strategic priorities. The strategic material ESG opportunities should then be leveraged and embedded into the company’s business strategy, to ideally achieve product or service innovation, expand the existing offering or differentiate through new and more sustainable offers.

The downloadable document at the top of the article provides additional tips and practical guidance for conducting a successful double materiality assessment.

From Materiality to Integrated ESG Strategy

Once these strategic material topics are identified, the company will be able to build its ESG strategy framework, focusing primarily on the strategic material topics identified. This focused approach relies on the concept of ‘Vectoring’ which is about a stronger sense of focus in an ESG strategy for a more effective design and implementation.

Building on this, the organization can work on the other ingredients of a winning sustainable strategy: setting your sustainability vision, having a multi-year roadmap and objectives to execute changes, implementing performance reporting, and emphasizing your success through lighthouse projects.

1) Define your sustainability vision

Setting a clear sustainability vision is key to anchoring the company’s strategy and defining its direction. The vision should reflect the purpose of the company – why it exists; the long-term picture of the organization – what is it aiming for; and the values that will support the organization through these changes – how is it going to change.

To ensure an integrated approach to sustainability and business strategy, the company’s vision should reflect the organization’s purpose toward generating sustainable value for its stakeholders within a single statement. Chemical company Arkema has defined its vision for a more sustainable world by this vision: ‘Through our commitment to specialty materials and our technological know-how, we want to make our world a better place.’

2) Set long-term goals

To monitor and drive progress, long-term goals and intermediate objectives are crucial. These objectives should be S.M.A.R.T. and set with support from executives and board members. Progresses should be monitored and supported at operational and strategic levels with clear ownership of responsibilities and reporting lines for each ESG topic and commitment. This level of detailed governance will help fast-track changes. To ensure commitment at executive level, it is advisable to connect the success of these ESG goals to the executive’s remuneration. DSM illustrates this with its executive's remuneration plan which integrates ESG metrics in both short-term and long-term variable remuneration.

3) Work towards value creation

Companies that are considered mature with regards to integrating ESG into their strategies have developed integrated value creation models, following the model of Inputs > Outputs > Outcomes. The inputs equally acknowledge financial and non-financial contributions used toward larger societal outcomes for the organization’s stakeholders. The objective of this exercise is also to give a measurable view of the company’s overall impact on society. Swiss company Firmenich has defined its own sustainable value creation model, also connecting its larger impact to the support of the UN’s Sustainable Development Goals.

To assess your organization’s maturity with regard to the different aspects of your ESG strategy, our ESG acceleration Scan offers a self-assessment tool to assess the Direction, Speed, and Value Creation of a company’s strategy.

Interested in knowing more about double materiality assessments and ESG strategy development?

If you would like to know more about double materiality assessments or require assistance with your materiality assessment and ESG strategy development, get in touch with Johana Schlotter, at johana@finchandbeak.com or call +31 6 28 02 18 80 to discuss how Finch & Beak can support you. 

Photo by Patrick Robert Doyle on Unsplash

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