Capgemini: What is AI’s Double Materiality Assessment Role?

For publicly-traded companies, reporting on financial performance is nothing new. But reporting on their sustainability credentials is.

The change – known together as double materiality – has come because of new laws and regulations coming into effect worldwide, making it a requirement to share non-financial disclosures relating to environmental, social and governance (ESG).

Sol Salinas, Capgemini’s Global Executive VP, has written a LinkedIn blog explaining double materiality – and revealing how artificial intelligence can help businesses to make the process smoother.

Sol sets the scene by explaining: “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.”

What is double materiality?

Double Materiality is a relatively new concept for businesses. It requires them to evaluate and disclose information from two perspectives: financial materiality and environmental and social materiality.

The requirement has come to the fore amid growing demands from regulators, investors and other stakeholders for more comprehensive 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.

Does AI have a role to play?

Sol explains that the rise of environmental regulatory compliances will require firms to share more – “backed by data to make more strategic and informed decisions”.

He goes on: “Specifically, as it relates to double materiality, organisations will be required to identify, assess and manage impacts, risks and opportunities by monitoring different situations.

"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”.

He adds: “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.”

Firms at the forefront

The concept of leveraging AI for double materiality assessments is not new.

Sol explains how global digital communications company Cisco has used AI to advance its energy networking and improve energy efficiency, while Microsoft used its AI tools to focus on reforestation efforts while monitoring and safeguarding ecosystems.

He goes on to outline several steps for leaders to take in order to “understand the full picture and be successful in their sustainability journey”. They are:

• 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.

How double materiality affects 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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