Translation: Original published in Finnish on 1/21/2025 at 7:13 am EET.

Double materiality assessment is a tricky term, but in practice it is the point in sustainability reporting where the most relevant issues for the stock picker should be identified.

What is double materiality assessment?

Double materiality assessment is the management’s evaluation of which issues related to the environment, human rights, labor rights, product safety, corruption risks, etc. are "material" to the company. If the matter is material, it must be reported in more detail in accordance with a separate standard on that matter.

Materiality must be assessed from an economic and sustainability impact perspective. It is also necessary to assess whether the sustainability issue in question is one that stakeholders would like to know more about and therefore should be reported on. Stakeholders may include customers or investors who require reporting on certain issues.

When conducting a double materiality assessment, a company needs to look at issues from the perspective of the entire value chain, for example, whether there is a risk of human rights violations in the supply chain.

So, in common sense, the double materiality assessment is a fairly straightforward thing. In practice, reporting practices (structure, interpretation and auditor's view) can lead to a situation where the final result seems difficult to understand in the eyes of a stock picker.

Sustainability issues identified as essential in the double materiality assessment reflect management's best view

The double materiality assessment should reflect those aspects of sustainability that are relevant and give a faithful picture of the company's operations. It should also show the reasons why a topic is relevant. The definition is based on the framework provided by the standard. The social and multidisciplinary nature of the data makes it very difficult to define a reporting standard through strict interpretation.

Let's take the sustainability issue of climate change as a first example (at the risk of social media uproar). Climate change is one of the most significant threats of our time, with far-reaching implications for the Earth's ecosystem, society and the global economy. Does that make it relevant to all companies in terms of sustainability reporting right now?

One way to think about this is to consider whether a company’s business is climate sensitive. Does the company generate large emissions or solve a problem relevant to climate change? Could extreme weather events caused by climate change  affect the company's operations in any way? Do investors or customers require the company to report its emissions, among other things, to ensure continued cooperation?

For many companies, climate change is clearly a material issue, and emissions reductions, new innovations, and investments in low-carbon technologies are essential both to the company's future cash flows and to solving the global problem.

As you move to smaller, locally operating service businesses, the impact of opinion and branding needs becomes more pronounced. Actual impacts and risks are often reduced (e.g. emissions from electricity and heat used in offices in an era of zero emission electricity generation).

The stock picker is therefore advised to assess why something has been raised as material: Does the sustainability issue have a real and significant economic or social impact, and is the magnitude of that impact significant to the company?

A double materiality assessment is most useful for stock pickers who already have some knowledge of the company's industry, business model and the fundamentals of its key sustainability risks.

Returning to the climate change example, the conclusion is that a stock picker gets the most out of a double materiality assessment if they know the company's business, products and market. Similarly, reporting has reached the point where the reader should know the logic of the reporting standard and the basic pillars of science and social science in order to make their own fact-based judgments.

For the stock picker, a double materiality assessment leaves a list of key risks, opportunities and impacts. However, it is worth examining the list with a grain of sand and digging into the reasoning yourself before making any broader decisions based on it.