Capgemini’s Global Executive VP Sol Salinas shares thoughts on how AI can help companies like manufacturers add ESG disclosures to their financial reports.
For publicly-traded companies like manufacturers, reporting financial performance is routine.
But disclosing sustainability credentials is relatively new.
This shift, called double materiality, stems from new laws and regulations worldwide that require non-financial disclosures on environmental, social, and governance (ESG) matters.
Sol Salinas, Global Executive VP at Capgemini, has explained double materiality in a LinkedIn blog and highlighted how artificial intelligence can assist businesses in streamlining this process.
What is double materiality?
Double materiality has emerged due to increasing demands from regulators, investors, and other stakeholders for greater corporate transparency.
“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,” says Sol.
“With this fast-paced movement, it’s becoming challenging for companies’ clear business case for leaders.”
Manufacturers must assess and disclose information from two angles: financial materiality and environmental and social materiality.
Financial materiality
This refers to how environmental, social, and governance factors can impact a company’s financial performance, such as how climate change, regulations, or social issues might influence profits, costs, or revenue.
It is the traditional view of materiality, where companies disclose ESG factors only if financially relevant.
Environmental and social materiality
This looks at how a company’s actions affect the wider environment and society, regardless of their financial impact.
It focuses on external factors like carbon emissions, labor practices, or supply chain ethics, which may not immediately impact finances but are important to customers.
Will AI play a role in this?
Sol explains that the rise of environmental regulatory compliances will require firms to share more data:
“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 says AI will create a pathway for comprehensive ESG reporting (which includes double materiality) in order to:
” 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.”
Manufacturers leading the way
The idea of using AI for double materiality assessments is not entirely new.
Sol highlights how global digital communications giant Cisco has employed AI to enhance its energy networking and boost energy efficiency, while Microsoft leveraged its AI tools to drive reforestation efforts and protect ecosystems.
He further outlines key steps leaders should follow to “grasp the full picture and succeed in their sustainability journey.” These steps include:
- Develop a fundamental understanding of the company’s operational model, value chain, and strategy
- Identify and evaluate sustainability impacts, risks, and opportunities
- Establish outcomes and reporting by validating the double materiality assessment process
How double materiality impacts manufacturers
1 – Broader scope of reporting: Companies must assess both how external factors affect their business and how their operations impact the environment and society. This broadens traditional financial reporting to encompass detailed sustainability data.
2 – Regulatory compliance: The EU’s Corporate Sustainability Reporting Directive (CSRD) and other regulations require companies to disclose information in both areas. These rules push businesses to consider long-term sustainability, beyond short-term financial gains.
3 – Increased stakeholder expectations: Investors and consumers, alongside legislators, are pressuring companies to provide data on how they address global challenges such as climate change and inequality.
4 – Risk management: Companies must monitor and manage both financial risks (like regulatory fines or supply chain disruptions from climate change) and societal risks (such as reputational damage from environmental harm or poor labor practices).
5 – Strategic decisions: Double materiality encourages businesses to align their strategies with long-term sustainability objectives.
6 – Competitive advantage: Embracing double materiality can give companies an edge by attracting socially conscious investors, customers, and partners through transparency and responsible actions.
