Capgemini on Double Materiality: Shaping Corporate Reporting

In the world of publicly-traded entities, the tradition of financial performance disclosure is being expanded to include sustainability credentials.

This evolution, known as double materiality, comes in the wake of worldwide legislative changes, necessitating non-financial disclosures on environmental, social and governance (ESG) aspects.

In a recent LinkedIn blog, Capgemini’s Global Executive VP Sol Salinas shed light on double materiality, highlighting how AI can streamline this emerging responsibility.

Sol says: “A double materiality assessment evaluates the opportunities and risks that organisations are exposed to or that they can benefit from and there’s no sign of it slowing down.

“With this fast-paced movement, it’s becoming challenging for companies’ clear business case for leaders.”

The concept of double materiality

Double materiality signifies a contemporary approach for firms, compelling them to evaluate and disclose metrics from two angles: financial materialityand environmental and social materiality.

This mandate is propelled by a surge in demand from regulators, investors and other key stakeholders for enhanced corporate transparency.

Financial materiality

• Refers to the impact that environmental, social and governance factors may have on a company's financial performance. For example, how climate change, regulations or social issues could affect profits, costs or revenue.
• This is the traditional approach to materiality, where companies disclose ESG issues only if they are financially significant to the business.

Environmental and social materiality

• Considers how a company’s activities impact the broader environment and society, regardless of whether those impacts affect the company’s financial performance.
• This focuses on external impacts, including carbon emissions, labour practices or supply chain ethics, which not not have immediate financial repercussions but are critical for customers.

The role of AI

According to Sol, the surge in environmental regulations intensifies the need for more in-depth, data-backed strategic decisions.

“Specifically, as it relates to double materiality, organisations will be required to identify, assess and manage impacts, risks and opportunities by monitoring different situations," he says.

"As you can imagine, gathering this information manually can be demanding, error-prone and time-consuming.

"Introducing AI to double materiality will “help ease the challenges that companies face, such as collecting and analysing data more easily and reliably for all dimensions of ESG”.

“The power of AI is critical and creates a pathway for ESG reporting, which includes double materiality, to achieve compliance, understand the environmental, social and governance impact of operations and align with stakeholder expectations.

“The successful adoption of AI tools for sustainable development moves the needle in optimised supply chain, energy usage and manufacturing, as well as reporting and compliance.”

Who is at the forefront of this AI revolution?

Tapping AI for double materiality is not breaking news.

Sol mentions how tech giants Cisco and Microsoft are already deploying AI to enhance energy efficiency and support reforestation initiatives respectively.

He outlines critical steps for leaders aiming to grasp the entire sustainability narrative:

• Build a basic understanding of the company's operational model, value chain, and strategy
• Identify and assess the sustainability impact, risks and opportunities
• Define results and reporting by validating the double materiality assessment process.

Implications of double materiality for companies

1. Broader scope of reporting: Companies must evaluate how external factors impact their business and how their business impacts the environment and society. This expands the traditional financial reporting frameworks to include comprehensive sustainability data

2. Regulatory compliance: Alongside other new regulations and directives, the EU’s Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose information in both areas. It encourages businesses to look beyond financial gains and consider long-term sustainability

3. Increased stakeholder expectations: Beyond the boardroom and the legislatures, investors and consumers are putting pressure on companies, demanding information and data on their role in addressing global challenges including climate change and inequality

4. Risk management: Companies are required to monitor and manage both financial risks (like regulatory fines or supply chain disruptions due to climate change) and societal risks (such as reputational damage from environmental harm or poor labour practices)

5. Strategic decisions: Double materiality prompts companies to align their business strategies with long-term sustainability goals

6. Competitive advantage: Embracing double materiality can provide forward-thinking companies with a competitive edge. By being transparent and acting responsibly, they can attract socially conscious investors, customers and partners.

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