Mastering Double Materiality Assessments with GRI & IFRS
In recent years, businesses and organizations have been under increasing pressure to address their environmental, social, and governance (ESG) impacts. Stakeholders—from investors to customers to regulatory bodies—are demanding greater transparency regarding how companies affect the planet and society, as well as how sustainability issues affect their financial health. As a result, sustainability reporting has evolved from being a voluntary initiative to an essential business practice. In particular, Double Materiality Assessments (DMA) have become a central tool for companies to navigate the growing complexity of sustainability disclosures.
This post explores what DMA is, how companies can master it, and why frameworks like the Global Reporting Initiative (GRI) and International Financial Reporting Standards (IFRS) are indispensable to the process.
The Evolving Landscape of Sustainability Reporting
The need for robust sustainability reporting has never been more urgent. Growing environmental concerns, shifting consumer expectations, and stricter regulations are all driving companies to adopt more comprehensive reporting frameworks.
Traditionally, companies focused on financial materiality—how environmental and social issues might impact their bottom line. However, double materiality calls for a broader perspective, encouraging companies to also assess how their impact materiality—how operations impact the environment and society. This dual approach, known as double materiality, adds a new dimension to sustainability reporting by focusing on both risks and opportunities that can affect a company financially and socially.
The Double Materiality Assessment (DMA) Process
A Double Materiality Assessment (DMA) is a dynamic, ongoing process. It's not something that companies can check off once a year—rather, it's a continuous cycle that requires regular review and updating. Ideally, organizations should undertake this process annually. The DMA helps organizations understand how their business activities influence the environment and society (impact materiality) and how sustainability issues affect their financial performance (financial materiality).
Key Steps in the DMA Process:
Contextual Understanding: DMA starts by gaining a deep understanding of the company’s business model, governance, strategy, and supply chains.
Value Chain Mapping: Identifying the dependencies and impacts across the value chain is crucial. This includes understanding relationships with resources such as human, financial, natural, and social capital.
Impact Identification and Assessment: Companies must assess the scope and severity of their impacts—both positive and negative—on people, communities, and the environment.
Root Cause Analysis: To identify risks and opportunities, companies need to analyse the root causes of sustainability challenges and understand how impacts and dependencies intersect across their operations.
Stakeholder Engagement: Engaging with stakeholders—whether they are employees, customers, or communities—is a critical step in the DMA process. This ensures that the most relevant sustainability impacts and risks are identified and validated.
The two main standards guiding DMA are the Global Reporting Initiative (GRI) and the International Financial Reporting Standards (IFRS). Both frameworks help businesses assess and disclose sustainability-related risks, opportunities, and impacts, but they focus on different aspects.
The GRI Standards
The GRI provides a comprehensive and widely adopted framework for sustainability reporting. The standards are modular and include:
Universal Standards: These outline the basic principles for using the GRI framework.
Sector Standards: These focus on specific industries, ensuring consistency in reporting within sectors like oil and gas, mining, and agriculture.
Topic Standards: These provide detailed guidance on reporting specific material topics, like water usage, human rights, and emissions.
The GRI emphasizes impact materiality, asking companies to disclose both the positive and negative effects of their operations on society and the environment. 14,000 organizations globally use the GRI framework, making it the most widely adopted standard for sustainability reporting.
The IFRS Sustainability Disclosure Standards
In contrast to the GRI’s focus on impact materiality, the IFRS Sustainability Disclosure Standards are designed to help companies disclose financially material sustainability information. The standards, particularly IFRS S1 and IFRS S2, focus on identifying and reporting risks and opportunities that could affect a company’s financial performance. For example, IFRS S2 focuses specifically on climate-related disclosures, urging businesses to assess and disclose the financial impacts of climate-related risks, including physical risks (like extreme weather) and transition risks (such as regulatory changes).
The IFRS standards are designed to provide a global baseline for sustainability disclosures, ensuring consistency across regions and industries. Unlike the GRI, which focuses on broader impacts, the IFRS standards are primarily concerned with financial implications of sustainability issues.
Aligning GRI, IFRS, and SASB
One of the significant trends in sustainability reporting is the growing alignment between different standards. GRI, IFRS, and the Sustainability Accounting Standards Board (SASB) all share similar goals but address different aspects of sustainability.
GRI focuses on impact materiality, helping companies disclose their environmental and social impacts.
IFRS targets financially material risks and opportunities that affect financial performance.
SASB provides industry-specific guidance on material topics, offering companies the metrics they need to evaluate and disclose sustainability issues that could influence their financial results.
The alignment between these frameworks allows companies to produce more comprehensive reports that meet various stakeholder expectations, from regulatory authorities to investors to the public.
The Role of Software Solutions in DMA
As DMA becomes an annual, dynamic process, software solutions like Socialsuite are becoming essential tools. These platforms help businesses manage the vast amounts of data generated during the assessment process. For instance, software tools can streamline stakeholder engagement, track value chain impacts, and store data for auditing purposes. They also assist with ongoing updates, allowing companies to adjust their assessments as new risks and opportunities arise.
For more information on Double Materiality and how Socialsuite can help, get in touch with a team member today.
Challenges and Benefits of DMA
Despite its many benefits, DMA does come with challenges. Mapping the value chain, engaging stakeholders, and regularly updating assessments can be time-consuming and complex. However, the benefits of a well-executed DMA are clear:
Transparency and Accountability: DMA enhances an organization’s ability to communicate its sustainability efforts clearly to stakeholders.
Strategic Advantage: By understanding both financial and impact materiality, businesses can identify risks and opportunities that lead to long-term value creation.
Better Performance: Companies that integrate DMA into their strategy and operations are better positioned to meet regulatory requirements, win customer trust, and manage sustainability risks effectively.
Conclusion
Mastering Double Materiality Assessments is an essential step towards better sustainability practices and more transparent, comprehensive reporting. By understanding and integrating both impact materiality (social and environmental impacts) and financial materiality (financial risks and opportunities), companies can navigate the complexities of the modern business landscape. The GRI and IFRS frameworks offer complementary approaches that provide businesses with the tools they need to report on their sustainability performance effectively.
As regulations evolve and stakeholder expectations rise, businesses that embrace the DMA process and integrate it into their operations will be better positioned to lead the way in sustainable business practices, mitigate risks, and create long-term value for all stakeholders.
