From ESG Topics to Business Strategy: Why Double Materiality Matters for Indonesian Companies
For years, sustainability reporting in Indonesia has followed a predictable formula: select a list of ESG topics, ask stakeholders to rank them, and plot the results onto a 2×2 materiality matrix.
While this approach helped companies establish their reporting practices, it often stopped short of answering the questions that matter most to executives: What does this issue mean for our operations, our risks, our capital allocation, and our long-term value?
That question is becoming increasingly important as Indonesia moves toward internationally aligned sustainability reporting standards. PSPK 1 and PSPK 2, based on IFRS S1 and IFRS S2, will take effect on 1 January 2027. For boards and management teams, this creates an opportunity to move beyond sustainability reporting as a disclosure exercise and use it as an input into business decisions.
This is where double materiality comes in.
Rather than simply asking which ESG topics stakeholders consider important, double materiality looks at sustainability through two complementary lenses: impact materiality—how a company affects people and the environment—and financial materiality—how sustainability-related developments can affect the company's financial position, performance, cash flows, access to finance, or cost of capital.
The result is a more complete picture of what sustainability actually means for the business.
Moving from Generic Topics to Operational Reality
Traditional materiality assessments often begin with high-level topics such as water, climate change, biodiversity, or governance. These topics are useful starting points, but they are too broad on their own to guide management decisions.
The more important question is: What specifically is happening in our business and value chain?
This means moving from topics to specific Impacts, Risks, and Opportunities (IROs).
Take water usage as a concrete example.
Impact: A manufacturing plant drawing heavily on groundwater may put direct pressure on local aquifers and potentially affect surrounding communities or ecosystems.
Financial Risk: If regional water availability declines, the company could face tighter regulations, higher water costs, or production restrictions—ultimately affecting operating continuity and revenue.
Opportunity: Investing in closed-loop water recycling can reduce water consumption and operating costs while making the facility more resilient to future shortages.
All three may sit under the broad topic of "water management." But treating them simply as one topic can obscure the actual strategic choices facing management.
A good double materiality assessment therefore goes deeper. It connects sustainability issues to specific activities, locations, business relationships, and value-chain dependencies. This makes the assessment much more useful for identifying where action, investment, or risk mitigation is actually required.
The Indonesian Operating Context
International ESG frameworks provide useful reference points, but applying a generic international checklist to an Indonesian enterprise can easily produce the wrong priorities.
Materiality is inherently contextual. The issues that matter most depend on the company's sector, business model, geography, value chain, and regulatory environment.
For example:
Palm Oil: Material issues may include land rights, deforestation, biodiversity, community impacts, and supply-chain traceability.
Mining: Key exposures may include concession management, water quality and availability, tailings, rehabilitation liabilities, community impacts, and worker safety.
Real Estate: Energy efficiency, climate resilience, flooding, building performance, and changing tenant expectations can become important sources of both risk and opportunity.
Financial Services: The most significant sustainability exposures may sit within lending and investment portfolios rather than the company's own offices, making financed emissions, sector exposure, and climate-related credit risk particularly relevant.
Geography matters too. A water-related issue in an industrial area facing increasing scarcity may have very different implications from the same issue in a region with abundant water resources. Similarly, community impacts, climate hazards, and regulatory expectations can vary significantly between locations.
In our work across more than 90 projects in 8 countries, we have seen that the most valuable materiality assessments are grounded in the actual business model, value chain, geography, and operating context—rather than copied from an off-the-shelf template.
We often see companies adopt international ESG frameworks without first asking a simple question: Which of these issues actually matter in our context?
The result can be misaligned priorities, resources spent on low-value initiatives, and assessments that do not meaningfully influence business decisions.
The Role of Stakeholders
Stakeholder engagement remains an important part of understanding materiality. Communities can provide insight into impacts that may not be visible in corporate data. Employees can highlight health, safety, or workplace concerns. Investors can identify emerging expectations around climate transition, governance, or long-term financial resilience.
Consider a mining company, for example. Downstream communities may raise concerns about water quality, while investors may focus on transition risks and future capital requirements. Employees may highlight health and safety issues that management data does not fully capture.
All of these are valid concerns.
But stakeholder feedback should inform management's analysis, not replace it.
A ranking exercise can tell us what stakeholders perceive as important. It does not, by itself, tell us which issue has the greatest actual impact, financial exposure, or potential consequence for the business.
Leadership therefore needs to bring stakeholder perspectives together with operational data, scientific evidence, regulatory developments, financial information, and value-chain analysis.
In other words, stakeholders provide important evidence; management must still determine materiality.
Integrating Materiality into Strategy
A double materiality assessment should be more than the final page of an annual sustainability report. It should become an input into business strategy.
The logic should be straightforward:
Business Model → Value Chain → Sustainability Matters → IROs → Impact & Financial Materiality → Material IROs → Strategic Priorities → Targets & Actions → Disclosure
For example, if a plantation company identifies land use and deforestation as highly material, the process should not end with reporting the issue.
Management should be able to ask:
Where are the highest deforestation risks across our operations and supply chain?
What potential regulatory, market, or financial consequences could arise?
What liabilities could emerge from land degradation or restoration?
What additional traceability or supplier controls are required?
How much capital and management capacity should be allocated to address the issue?
This is where materiality becomes strategic. It helps translate sustainability concerns into risk management, operational priorities, investment decisions, and measurable actions.
And materiality should not be treated as static. Climate patterns change, regulations evolve, technologies become more competitive, customer expectations shift, and new risks emerge across supply chains. An issue that is not material today may become financially significant in a few years.
For that reason, double materiality is better understood as an ongoing management process, rather than a one-time exercise conducted every few years for reporting purposes.
Looking Ahead to 2027
Preparing for PSPK 1 and PSPK 2 should not become a last-minute exercise to satisfy auditors or produce another disclosure.
It is an opportunity to ask a more fundamental question: Do we really understand which sustainability issues can affect our business—and which impacts our business is creating?
Done well, double materiality can give Indonesian companies a clearer view of emerging risks, stronger insight into opportunities, better alignment between sustainability and business strategy, and a more credible foundation for future disclosures.
The goal is not to produce a longer list of ESG topics.
The goal is to identify what truly matters—and use that understanding to make better business decisions.
At Sustainahaus, we see double materiality as a practical bridge between sustainability, risk, and long-term business value.
