Materiality can be defined as the quality of being relevant or significant. Originating from a fundamental accounting concept, materiality was initially centred on addressing the needs and interests of investors. In recent times, business leaders have adopted a more expansive perspective on materiality, using the same principles to inform high-level strategy and decision-making, considering the needs of all company stakeholders, not just investors.
In the evolving landscape of ESG, double materiality is becoming a key framework for corporate sustainability. Unlike the traditional concept of materiality, which focuses solely on financial impacts, double materiality considers both the effects of ESG factors on a company as well that company’s impact on the environment and society. This approach highlights the interconnectedness of corporate success with societal and environmental well-being, promoting comprehensive risk assessment and sustainable development.
This article explores the significance of double materiality and its potential to enhance corporate accountability and transparency.
What is Double Materiality?
Recently, the IFRS’ International Sustainability Standards Board (ISSB) has extended the concept of materiality beyond financial information to include environmental, social and governance factors. Under the concept of double materiality, organisations are required to report on how sustainability issues affect their organisation, this is known as the outside-in perspective or financial materiality. They are also required to report on how their operations impact society and the environment, known as the inside-out perspective or impact materiality. As organisations take into account their own actions, they are also urged to assess how their actions impact the resources and individuals crucial for their operations, thus aiding in gaining a comprehensive understanding of the organisation, its operations, and broader significance.
An example of double materiality would be a fashion retailer evaluating how climate change impacts cotton availability and prices, potentially increasing their production costs and affecting profitability (outside-in/financial materiality). Simultaneously, they assess how their manufacturing practices contribute to environmental pollution and labour issues, which can harm their brand reputation and lead to regulatory fines (inside-out/impact materiality). This dual focus ensures they manage both external risks and their own environmental and social responsibilities comprehensively.
Standards and Guidelines that Incorporate Double Materiality
The European Commission was the first official body to establish a definition of double materiality in their 2019 guidelines on non-financial reporting. A number of prominent sustainability reporting standards such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB) standards, which initially focused solely on the outside-in approach also known as financial materiality have now shifted towards double materiality by integrating the inside-out/impact-materiality perspective into their frameworks. Most notably, the European Sustainability Reporting Standards (ESRS) introduced by the Corporate Sustainability Reporting Directive (CSRD) which will come into effect in 2024, will introduce double materiality in sustainability reporting for approximately 50,000 companies in the European Union (EU).
Using Double Materiality as a Strategic Tool
For boards, corporate executives, and ESG and sustainability practitioners, materiality is a crucial concept to grasp and implement. Conducting a materiality assessment is vital as it helps identify the most significant environmental, social and governance issues impacting the organisation and its stakeholders. A materiality assessment is a research project that is conducted to pinpoint the most pertinent and impactful issues, aiding in comprehending double materiality, prioritising key concerns, and determining how to allocate resources effectively to address them.
How Can We Help
At ZD our services include conducting comprehensive materiality assessments that help you identify and prioritise the most significant environmental, social and governance issues impacting your business. We also plot detailed materiality matrices to provide a clear visual representation of these priorities, ensuring that your business focuses on the areas that matter the most. Partner with us to gain deep insight into your ESG landscape and drive meaningful, sustainable change.
Mark Wirth
Partner
