In this context, the concept of dual materiality stands out as a key element for ESG (environmental, social and governance) reporting, allowing companies to identify the most relevant issues by considering two interconnected perspectives: on the one hand, the impact of activities on the environment and society, and on the other hand, the risks and opportunities related to ESG factors on economic performance. This approach is at the heart of the European Sustainability Reporting Standards ( ESRS ) framework and is a pillar of the Corporate Sustainability Reporting Directive ( CSRD ).



WHAT IS DUAL MATERIALITY?

Dual materiality implies an assessment on two fronts:

1) Impact Materiality (Inside-Out):: Analyses how business activities affect the environment and society. It involves assessing the direct and indirect impacts of company operations, from production to consumption, considering different aspects such as greenhouse gas emissions, consumption of natural resources, working conditions and human rights. This includes, for example, the impact of production on biodiversity or working conditions in its supply chains.

2) Financial materiality (Outside-In):: Considers how environmental, social and governance factors influence a company's financial performance. It involves assessing the risks and opportunities related to these factors, such as climate change, new regulations, investor expectations and consumer preferences. For example, increased regulation on greenhouse gas emissions may lead to additional costs or reputational risks.
This dual perspective ensures a comprehensive understanding of impacts and invites companies to consider the interconnections between economic, social and environmental dimensions, ensuring transparent and complete reporting.



A FUNDAMENTAL ASSESSMENT PROCESS

To comply with the ESRS standards, companies must follow a structured process consisting of the following steps:

1) Context mapping and stakeholder identification: Identify all stakeholders (investors, employees, customers, suppliers, local communities) in order to understand their expectations and concerns. It is also important to consider local communities, NGOs, governments and other interest groups that may be affected by the company's activities or that may influence the company itself.

2) Preliminary identification of issues: Create a list of potentially relevant ESG topics based on regulatory guidelines, industry benchmarks and internal feedback. This list can include topics such as climate change, diversity and inclusion, sustainable innovation and sourcing risks.

3) Stakeholder engagement: Consult all stakeholders to understand their priorities, through tools such as: interviews, surveys, focus groups, workshops and social media analysis. The objective is to understand the expectations, concerns and priorities of each stakeholder group. This step is crucial to ensure that the assessment reflects a plurality of perspectives and that the issues selected are relevant to those who interact with the company.

4) Final selection of themes: Refine the initial list based on collected feedback and internal consensus. At this stage, topics considered to be marginal are excluded, while those considered to be priorities are supplemented with additional information to support the decision-making process. This step requires internal coordination to reach a consensus on the relevance of the topics.

5) Impact, Risk and Opportunity Analysis (IRO): Examine the severity, magnitude and likelihood of the risks and opportunities associated with each theme. To assess the importance of an issue, several criteria can be considered, such as the likelihood and severity of the impact, urgency, irreversibility, importance to stakeholders and alignment with corporate strategy.

6) Dual materiality matrix: The dual materiality matrix is an essential tool to identify and represent the most relevant ESG issues for a company, integrating two fundamental perspectives: on the one hand, the impact of the company's activities on the environment and society (impact materiality), and on the other hand, the influence of ESG factors on the company's financial performance (financial materiality). The matrix is constructed by positioning the issues along two axes:
- thevertical axis measures the level of impact the company's activities have on the external environment (Inside-Out perspective);
- thehorizontal axis assesses the extent to which ESG factors influence the company's economic and operational results (Outside-In perspective).
The issues on the upper right-hand side of the matrix, characterised by high relevance both in terms of impact and financial value, become priorities for corporate strategy and reporting. The construction of the matrix requires structured analysis and the use of reliable data. This tool not only enables clear communication with stakeholders, but also supports the setting of strategic priorities, focusing resources on risks and opportunities that are truly significant for sustainability and business success.

7) KPI selection: The selection of key performance indicators (KPIs) represents a crucial step in the dual materiality assessment process and is the foundation for effective and transparent sustainability reporting; therefore, it is crucial that the choice of KPIs is carefully considered and aligned with regulatory requirements. The selected KPIs must be able to accurately reflect the identified material issues and provide an objective measure of progress towards the organisation's sustainability goals. Careful selection of KPIs allows not only for fulfilling reporting obligations, but also for integrating sustainability into the corporate strategy, fostering a process of continuous improvement. It is therefore essential that KPIs are specific, measurable, relevant, current and verifiable, and consistent with international sustainability reporting standards.

8) Data collection and alignment with ESRS metrics: This step is crucial to ensure compliance with the European Sustainability Reporting Standards (ESRS) and to prepare a complete, regulatory-aligned Sustainability Report. This activity consists of organising a structured system for collecting and verifying information for each indicator required by the ESRS, covering all material issues identified. Each indicator, which may cover greenhouse gas emissions, natural resource consumption, human rights or diversity, requires quantitative and qualitative data that is consistent, accurate and up-to-date.


THE CHALLENGES OF DUAL MATERIALITY

Despite its importance, the dual materiality process presents significant challenges:
- Complex data collection: Mapping the value chain and obtaining reliable data requires advanced resources and tools.
- Effective stakeholder engagement: Managing a wide range of interests and priorities can be challenging.
- Defining materiality thresholds: Establishing objective criteria for determining what is material is not easy.
- Continuous adaptation: Regulations, such as CSRD, are constantly evolving, making it necessary to constantly update business practices.


WHY IS DUAL MATERIALITY IMPORTANT?

Dual materiality is not only a regulatory requirement, but also an opportunity to strengthen corporate value. Identifying ESG impacts and risks enables companies to:
- Improve transparency towards stakeholders.
- Mitigate reputational and operational risks.
- Align corporate strategies with global sustainability goals.
- Uncover opportunities for innovation, such as new markets or more efficient operating practices.

Above all, the process is indispensable for the preparation of a Sustainability Report that accurately reflects both financial and social, environmental and governance impacts. Therefore, this document not only demonstrates regulatory compliance, but also strengthens stakeholder confidence and the company's market positioning.


A GLIMPSE INTO THE FUTURE

With the introduction of CSRD, ESG reporting based on dual materiality will become a standard requirement for European companies. Adopting a structured and transparent approach is essential to ensure compliance, but above all to position oneself as a leader in the transition to a more sustainable economy.
In a global context that is increasingly sensitive to sustainability issues, dual materiality represents a crucial step towards building a future in which economic, social and environmental needs find a virtuous balance, enhanced and made visible through a well-articulated Sustainability Report that is integrated into corporate strategies.
For years, MOVESION has specialised in designing innovative solutions for corporate sustainability. Thanks to our state-of-the-art technology, we support companies in collecting data in a simple, precise and timely manner, offering concrete tools to achieve sustainability and environmental responsibility goals. Contact us to find out how together we can turn sustainability in your company into a competitive advantage.