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Social ImpactA materiality assessment is a process to determine which sustainability matters are the most relevant and important to an organization. Identifying material sustainability matters helps companies guide their corporate strategy, create a sustainability roadmap, and inform environmental, social, and governance (ESG) reporting efforts.
A good materiality assessment also helps prioritize material sustainability issues so that the company can focus on where they have the greatest impacts and make informed decisions.
A best practice materiality process should consider two perspectives – often termed a ‘double materiality assessment’:
Traditionally, a materiality assessment often focused on one of these two perspectives. However, we’ve seen a rapid shift over the last years toward double materiality. Today, driven by the EU’s Corporate Sustainability Reporting Directive (CSRD), double materiality is not only becoming standard operating practice but the new gold standard for materiality assessments.
A double materiality assessment (DMA) should be the first step in your sustainability journey. By starting with identifying your material topics, you can feed sustainability priorities directly into the corporate strategy, set ESG goals and targets, implement operational excellence initiatives, and disclose relevant ESG metrics. For example, if carbon emissions are identified as a material, you can include climate change in your strategy, set reduction and net zero targets, implement reduction initiatives (eg. replace diesel generators with solar arrays and battery storage), prepare for climate-related financial disclosure regulation, and of course, start carbon accounting to disclose your GHG emissions.
While a double materiality assessment is not a brand new concept, it’s really been put on the map by the European Union’s CSRD legislation. The EU now mandates an annual DMA as part of its CSRD reporting requirements, affecting over 50,000 companies in the EU alone. CSRD reporting is conducted through the European Sustainability Reporting Standards (ESRS), which has broadened, deepened and made the concept of double materiality more robust – but also added a level of complexity and resource intensity.
A key component of a DMA is stakeholder engagement, which should be deeply embedded throughout the entire assessment. While ESRS requires disclosure on the materiality assessment and its outcomes, there is no mandated specific behavior on stakeholder engagement. Hence, a framework and guidance on how to conduct (effective) stakeholder engagement is not provided. As a result, the stakeholder engagement process can take many shapes and forms, and sustainability professionals can have different views on engagement strategies, mechanisms, tools, and their effectiveness.
At a minimum, CSRD and sustainability practitioners agree that it's essential to engage stakeholders throughout the entire DMA process.
Value chain mapping is an important first step in the double materiality process. Organizations need to map their business model to understand how their business activities affect people and planet along their entire value chain (ie. upstream, own operations, and downstream). Then consider how each activity is linked to (direct and indirect) business relationships. Who are the actors in your value chain, and who are your (affected) stakeholders?
Engage the relevant people within the organization to help you map your value chain, which is a first step of internal stakeholder engagement. They can help you identify the key components in your value chain, comprehensively list your business activities, identify the actors and business relationships, and provide insights into the impacts, risks, and opportunities.
Rather than the useful way of thinking about stakeholders as internal and external to the organization, CSRD identifies two main groups of stakeholders:
Keep in mind, though, that when identifying and engaging with stakeholders it’s important to consider credible proxies (eg. people with lived experience, subject-matter experts) and silent stakeholders (those who cannot speak out: nature, future generations, and people that would be put at risk when engaged) for all your business activities and relationships across the full value chain.
Take note that you can supplement in-person engagement with credible research to get missing information, additional insights, a deeper level of diversity, and depth of perspective.
First, let’s start with the most important part: engaging with your stakeholders is not a single point of outreach. Stakeholder engagement runs through your entire materiality assessment process. It starts early with internal discussions on mapping your value chain, listing business activities, capturing actors and relationships, and identifying IROs and affected stakeholders. Even in the early preparation and due diligence phase, you may reach out selectively to external stakeholders.
Once you have an understanding of your IROs and affected stakeholders, you can create a plan to reach out in a targeted way to your stakeholders (internal and external) to ask their views on your identified IROs; ie. have you captured an impact correctly, how are they really affected, and what might you have missed? Equally, ask relevant stakeholders about the identified risks and opportunities; ie. is this a real risk (prior to mitigation measure), what would be the gross magnitude of impact on the business, and the likelihood of eventuation?
It’s important to ask questions that are specific to the IROs and stakeholders you’re reaching out to. Generally, you get low-quality results if you just send a single survey to all of your stakeholders; it’s not one size fits all. Try to be really targeted with engagement. So instead, consider conducting a dozen or more small, targeted surveys that really engage the relevant affected stakeholders with a couple of key questions that directly relate to their lived experiences around the impact of a sustainability matter.
While surveys have traditionally been a popular tool – because they are quick and easy to send, the insights they offer can vary significantly (and mass survey results are often of low quality). Consider other engagement strategies to supplement surveys, such as existing channels of communication, interview, focus groups, workshops, roundtable discussions, and scientific research reports and analyses.
Direct engagement with stakeholders – through surveys, interviews, focus groups, workshops, and roundtables – is crucial to gather and uncover insights, but can be a challenging process without sufficient stakeholder education.
When stakeholders don’t understand the purpose or content of the exercise, they are often less motivated to engage. This could lead to low survey engagement rates and poor survey insights, but also to higher apologies rates for in-person sessions – or turn a data gathering exercise rapidly into an educational session.
Make sure that stakeholders clearly understand why you are asking for their insights and feedback. Explain in clear and simple terms what a materiality assessment is, why it’s important to your business, and what their role is in the process. Also, don’t forget to share the outcome of the materiality assessment with your stakeholders – most people love to see how their contributions have been used, which will set you up well for next year’s outreach.
Pro-tip: Plan your engagement strategy from the start to ensure a thoughtful, ongoing, and strategic approach to reach out in targeted manner and gather quality insights.
Effective stakeholder engagement is vital for a comprehensive double materiality assessment that will help you achieve meaningful outcomes in your sustainability journey. By following these best practices, you will be engaging stakeholders effectively and with their insights be better positioned to drive positive change.
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