Sustainable AI – Solving the “Double Materiality” Challenge

Leveraging the Power of AI to Solve Material Risks

From 2025, companies will not only have to demonstrate that they are well prepared for "material" risks with a large financial impact, but also that they are preparing to mitigate the negative impacts their actions may have on the environment and society at large. While reporting for such "Double Materiality" challenges could be seen as part of a growing regulatory overreach, they also represent an opportunity for companies that want to prepare their operations and business models for a more sustainable future.

In our Whitepaper “Sustainable AI for Enterprise Transformation, Innovation and Growth”, we show how the development and implementation of Sustainable AI platforms can become a driving force for enterprise transformation and fostering sustainable growth. It shows how AI, especially generative AI, can integrate with existing management systems to improve prediction, optimization, and planning across multiple business functions. It enables data-driven decision-making and streamlines complex sustainability initiatives across departments and value chains. This integration is critical to solving the "Double Materiality" challenges of financial and environmental reporting and implementing effective environmental, social, and governance (ESG) strategies.

Sustainable Materiality has become an Established Goal

A key driver of business transformation is regulatory and customer demand for improved sustainability. In our Whitepaper “Green Deals Go Digital – How can Companies Gain from Sustainable Digitalization,” for example, we have discussed how green regulation is changing the business environment.

These changes are now being implemented on a reporting level in all major economies. The International Sustainability Standards Board (ISSB) guidelines for global climate and sustainability-related disclosures in capital markets have been endorsed by the International Organization of Securities Commissions (IOSCO) and guide financial reporting across the globe. They require companies to report sustainability-related risks and opportunities that could reasonably be expected to affect the company's prospects.

In the EU, the Corporate Sustainability Reporting Directive (CSRD) has introduced stringent Product Carbon Footprint (PCF) reporting across the life cycle of products and services. Starting in 2025, about 49,000 companies will be affected. A Carbon Border Adjustment Mechanism (BAM) adds global taxation, and a Supply Chain Act requires verification of human rights standards. In the United States, the Securities and Exchange Commission (SEC) has introduced mandatory disclosure of climate-related risks and Green House Gas (GHG) emissions. In Japan, the Financial Services Agency (FSA) has begun requiring audited emissions data and climate-related risk assessments in financial reports.

Double Materiality Changes Reporting and Perspectives

The result is a "Double Materiality," which requires companies to fundamentally change their reporting and strategic thinking beyond financial performance and economic risks. They must now also identify and prioritize solutions for the second materiality of social and environmental risks that an organization faces and causes by its own actions. This fundamentally changes what operational data a company needs to collect, how it is analyzed, and how operational decisions become aligned with sustainability goals.

The Two Sides of “Double Materiality” Management

Double Materiality will have an increasing impact, but it is not yet clear whether the main channels will be through enhanced financial reporting or the additional non-financial reporting requirements. As shown in the figure, Double Materiality has not only become an additional objective on the right side. It has also become part of financial reporting on the left because climate change and government regulation, such as carbon taxes, are increasingly impacting operations, and because improving environmental performance can have a significant positive impact on a company's long-term valuation.

On the right side, evolving social standards and the need to limit negative human impact on future generations’ environment require companies to improve their footprint and provide long-term value beyond financial accounting. Setting net-zero emission goals, or even becoming “net-positive,” as our Fujitsu Technology and Service Vision explains, might seem mostly inspirational at first, but pays real benefits when the company emerges as a more efficient, future-ready organization.

Double Materiality Matrix – Sorting relevant Targets

After identifying relevant materiality objectives, many companies are sorting them into a two-dimensional Double Materiality Matrix. One of the early adopters has been Telefonica in 2021. Their Double Materiality Matrix clearly differentiates strategic objectives in two dimensions. In the figure, traditional financial reporting risks that impact shareholder value are close to the x-axis. Managing the risks of critical incidents or the physical impacts of climate change, for example, are part of financial reporting. Corporate challenges with a large impact on society are closer to the y-axis. For example, waste (water) management has a large impact on society, but little direct impact on the company's valuation (if done properly). Customer privacy and cybersecurity, on the other hand, are almost equally important to corporate and societal risks.

Telefonica’s Double Materiality Matrix

Source: Double materiality: its importance and how we apply it at Telefónica - Telefónica

On this basis, the company has formulated new goals and actions that are published in Telefonica’s Responsible Business Plan, affecting a growing range of operations. How Double Materiality planning can be implemented in detail, Fujitsu explains in its approach to materiality assessment.

Systems Modernization for Double Materiality Innovation

As we explain in our Whitepaper “Sustainable AI for Enterprise Transformation, Innovation and Growth”, accessing and managing relevant data for the expanded range of Double Materiality objectives requires that most data have moved to the cloud and can be managed with a high level of automation.

Based on such system modernization, optimization for environmental impact becomes possible. However, when aligned with business objectives, the practice of double materiality exponentially increases the complexity of analysis, forecasting, and implementation strategies. Scenario planning, for example, must consider supply chain costs and potential disruptions, as well as their sustainability challenges. As a result, enterprise ESG platforms, often implemented as mere information and reporting tools, must become core elements of corporate accounting and governance, connecting all parts of the production and supply processes to manage the new targets.

For effective business transformation, these new platforms require broad access to many business systems and processes, and full commitment of senior management to use their results beyond environmental reporting for decision making. ESG initiatives need to be at the heart of corporate strategies and become a critical part of the business model. As a start, they need to become part of a comprehensive systems modernization, with an increasing number of AI services to manage growing complexity, and a clear purpose to drive the transformation.

Sustainable AI solves Complexity Challenges

As we explain in our Whitepaper, adopting effective AI solutions is becoming a vital solution to the sustainability challenges that companies are facing.

Already more than 70% of business leaders believe that AI will help solve environmental and social challenges, improve products, security and ecosystems (Fujitsu 2024 SX Survey "Accelerating Sustainability Transformation with AI"). A full 63% of executives believe AI can contribute to the success of a sustainability transformation, while 65% believe it will contribute to their digital transformation. Gartner's 2024 CEO and Senior Business Executive Survey found similar results, with 69% of executives seeing environmental sustainability as an opportunity for their business growth strategy, while most executives believe that AI and Generative AI are key to their growth strategy.

The opportunity is that Sustainable AI can integrate traditional and emerging AI technologies to discover, plan, monitor, and manage sustainable Double Materiality solutions. Flexible quantification of objectives and diverse data can be done as well as results can be automatically visualized in dashboards and reported to stakeholders and authorities. For enterprises, it can become an indispensable technology for managing complex business environments with ever-increasing regulatory and societal demands. It enables innovation across business functions, and future-proof operations for emerging sustainable ecosystems and business models.

For most organizations, optimizing and improving operations and pursuing sustainable development goals can go hand in hand if AI helps orchestrate their goals.

A prime example is the reporting of greenhouse gas emissions, which is already required for financial and environmental reporting. In particular, supply chain (Scope 3) emissions, which can account for more than 70% of emissions for most organizations, are becoming a major challenge for unprepared companies. PwC reports that more than 50% of companies cannot accurately measure emissions, in part due to a lack of effective ESG reporting systems.

As our Whitepaper shows, improving the supply chain management with Sustainable AI has become a game changer for companies such as Amazon, Ikea, and Target. Open alliances for the development of AI in sustainable supply chains, such as the Virtual Watch Tower (VWT) and Open Platform for Joint Transportation and Delivery, are now helping other, less advanced companies to optimize delivery routes, reduce the environmental impact of warehouses, and orchestrate automation across organizations. Solving the challenge of Double Materiality becomes almost an added benefit in such an efficiency-driven scenario.

Fujitsu Aligns AI Development with Sustainable Materiality

Aligning AI technologies with sustainability goals can be empowering and beneficial on many levels. Implementation based on a Generative AI platform core enables seamless access and integration of existing information silos, unstructured corporate documents, and human communications. As more data and information flows become available, Generative AI platforms can help integrate existing management systems for forecasting, optimization, and planning for sustainable solutions.

Generative AI can also help deliver this information to management in the language and level of detail they need to quickly develop actionable solutions. Without such platform integration, management would remain blind to the potential of most sustainability opportunities. Fujitsu, for example, shows how its five key-technologies work together to solve complex “materiality” challenges for a more sustainable future.

Fujitsu Uvance AI for a Sustainable Society

Source: Creating new values by fusing technological areas around AI | Fujitsu

As a result, the introduction of Generative AI platforms provides the opportunity to align existing initiatives for data monitoring, aggregation, and reporting in an effective ESG strategy that cannot only report on Double Materiality but advance management decisions. This requires, however, that Generative AI capabilities become part of a Sustainable AI platform that gains access to all business functions of product and service lifecycles across the organization and value chains.

Conclusion

Implementing AI as part of a business transformation not only offers technological and operational opportunities; by integrating it into enterprise platforms with sustainability in mind, Sustainable AI becomes a powerful tool for building a more sustainable future. However, developing and implementing Sustainable AI is not a one-time effort. It is a journey toward managing a much more complex world, where “Double Materiality” business and environmental challenges must be addressed simultaneously.