Double materiality "the on & of switch"

It's not just about "doing the right thing"

There has been a shift in thinking from just considering the impacts 'of' the environment and society and how they impact a business, to also considering the impact of the business 'on' the environment and society as a whole.

The impact on aspect of double materiality is often portrayed as being about “reflecting our values in our investing decisions”. But we think this partly misses the real benefit of this approach. While for some investors a focus on values is a must have, it’s also important to understand that what this new thinking is really saying is we need to start thinking about organisations and businesses as part of a broader ecosystem that includes people and planet.

This is a complex topic, as all major changes in thinking are, and so we cannot do this topic justice in just a few hundred words.  Sandy Jayaraj lays the groundwork for a better understanding of how the concept might be applied by companies, by IR professionals and other advisors, by asset managers, and by asset owners in a long blog for The Sustainable Investor. 

Double materiality contrasts with the traditional EV led model

Historically there has been an Enterprise Value (EV) approach, that one could describe as a unidirectional materiality view: what are the risks 'of' X to the business? Can the business manage these material risks and opportunities?

Even as the world has become increasingly aware of the significance of environmental and social factors and the governance required to manage those risks, ESG investing emerged with, in effect, that same EV approach, relying on data and scoring to assess how exposed a company is to ESG risks.  

However, with that increasing awareness, a broader group of stakeholder interests have come to the fore including employees, customers and the community at large.

It’s still about value creation - but thinking differently about what this means

Rather than 'EV' we should be thinking about the bigger picture, the whole pie.  As Professor Alex Edmans espouses in his seminal book 'Grow the Pie', the primary goal of a company should be to serve society rather than generate profits. This approach "enables investments to be made that end up delivering substantial, long-term pay-offs."

It's not to say that profits don't matter, its more that by focusing on meeting the wider needs of society, profits are a result, not an objective.  In other words, it is not just worthy, it is good business. Thinking about that bigger picture is good business. And it suggests a difference approach to ESG rated data - thinking about it as an input to our analysis, rather than an end in itself.