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double materiality

What is double materiality?

Double materiality extends the traditional accounting principle of materiality beyond financial information to include environmental, social and governance factors.

Materiality -- in accounting and auditing -- weighs whether the significance of an erroneous or omitted entry in a financial statement affects a reasonable person trying to make an informed decision. Materiality is a generally accepted accounting principle.

Double materiality recognizes and understands a company's impact on the environment and society is material to its financial performance. Double materiality acknowledges risks and opportunities from both financial and nonfinancial perspectives. This concept requires companies to disclose not only how sustainability issues affect them, but also how their operations and activities affect the environment and society at large.

Materiality vs. double materiality

Scope and focus separate traditional materiality from double materiality.

Traditional materiality -- also referred to as single materiality -- views environmental, social and governance (ESG) issues strictly from their effect on an organization's financial performance and position. Double materiality also considers how the company's actions affect broader sustainability issues. This chart outlines the primary differences.

Aspect Materiality (single materiality) Double materiality
Focus Financial effect of factors on the company Financial effect of sustainability issues on the company, as well as the company's effect on environmental and social issues
Scope Significance of financial information -- especially incorrect or missing items -- on stakeholders' decision-making Includes both the traditional financial focus and the broader ESG effects
Key principles Determines what financial information is important to disclose Considers how sustainability issues affect the company and how the company affects sustainability issues
Reporting frameworks Traditional financial reporting standards EU's Sustainable Finance Disclosure Regulation and Corporate Sustainability Reporting Directive
Importance Essential for informed investor decision-making Required for comprehensive sustainability-related financial disclosures
Regulatory emphasis Primarily on a company's financial performance and position On both financial materiality and impact materiality, as per EU regulations and global sustainability reporting standards

Which standards and guidelines incorporate double materiality?

For companies operating in Western Europe, including some larger American businesses, there is a growing body of standards and guidelines incorporating double materiality, such as the following.

European Union Non-Financial Reporting Directive (NFRD)

NFRD -- in effect for EU member states since 2017 -- includes requirements for large public-interest entities to disclose ESG information, including a report with the effect of environmental issues on the value of the organization.

European Union Corporate Sustainability Reporting Directive (CSRD)

CSRD intensifies ESG regulatory efforts and emphasizes double materiality, requiring companies to detail both their financial materiality and their impact materiality. In effect, it's the successor to NFRD. The European Sustainability Reporting Standards gives CSRD its teeth, tightening rules on not just a company's double materiality assessments, but its reporting practices, too. CSRD came into effect in the EU on Jan. 1, 2024.

European Union Sustainable Finance Disclosure Regulation (SFDR)

Adopted in 2019, SFDR requires investors to disclose not only risks to themselves, but also their adverse affects on both the planet and society, acknowledging the concept of double materiality.

Global Reporting Initiative (GRI) Standards

GRI Standards are among the most widely used for ESG reporting, and the application of double materiality is a central concept.

Sustainability Accounting Standards Board (SASB) and International Sustainability Standards Board (ISSB)

SASB Standards integrate double materiality as a way of measuring sustainability. SASB Standards are being coordinated with ISSB efforts to incorporate double materiality.

Double materiality in practice

The following examples illustrate double materiality -- each company evaluates and discloses the financial effect of sustainability issues on its operations and its own impact on ESG issues in turn:

  • Healthcare. The emergence of digital health offerings has financial considerations, as well as an environmental impact through decreased need for physical resources and travel.
  • Consumer goods. Sustainable sourcing practices for raw materials increase many aspects for a consumer goods company, including costs, consumer loyalty and brand reputation, with an accompanying decrease in environmental impact.
  • Financial services. A bank adjusts its lending practices to divest from fossil fuel investments. That divestment has a positive environmental effect but unsettles its financial performance due to changing risk profiles and investment opportunities.

Meanwhile, an insurance company underwriting policies in regions increasingly affected by storms must consider the material risk to its business and the broader societal impact of climate change to its business forecast.

Why should companies embrace double materiality?

Double materiality improves operations and lets companies better understand and communicate their performance in the following areas:

  • Enhanced corporate transparency. Double materiality helps companies respond to stakeholder demands for greater transparency about the effects of the organization's decisions on the environment, society and company.
  • Risk management. Assessing double materiality connects sustainability effects and risks to enterprise risk management, affording a more comprehensive understanding of risks and opportunities.
  • Sustainability strategy alignment. As sustainability commitments become increasingly important, double materiality is crucial for strategic sustainability work, helping companies ensure growth and business continuity by embedding double materiality into the company's accounting and reporting procedures.
  • Regulatory compliance. CSRD mandates double materiality assessments for reporting entities, making it a legal requirement for compliance.
  • Investor relations. Reporting on double materiality influences the capital a company attracts. More investors consider sustainability implications in their decisions.
  • Market access and partnerships. Companies may be excluded from markets or lose business partnerships if they do not meet sustainability requirements, which double materiality assessments address.

Ingredients in a double materiality assessment

A double materiality assessment includes the following components:

  • Impact on people and environment (inside-out view). Consider what is sometimes referred to as the inside-out view, assessing the company's effect on society and the environment, such as any damage to nature.
  • Risks and opportunities (outside-in view). The outside-in view evaluates how sustainability-related developments and events create risks and opportunities for the organization, such as reputation risk or the introduction of new sustainable products.
  • Stakeholder engagement. Identify stakeholders affected by the organization and those who can affect the organization. Use stakeholder mapping to determine which groups to involve in the materiality assessment.
  • Materiality determination. Determine whether the identified sustainability issues are, in fact, material, involving internal and external experts on various sustainability matters. It's also important to establish a threshold for reporting on financial materiality based on the likelihood and scale of the financial impact.
  • Dynamic materiality. Consider the concept of dynamic materiality, acknowledging that the materiality of an issue can shift over time based on societal expectations or regulatory changes.
  • Visualization of outcome. Use a materiality matrix or a detailed table to preview the outcomes of the assessment, prioritizing material matters in terms of impact.
  • Action plans. An action plan addresses most material sustainability issues, including specific targets, timelines and responsibilities.
  • Monitoring and reporting. The assessment features ongoing monitoring and reporting as part of the process.
  • Transparent communication. Communicate the results of the double materiality assessment transparently to stakeholders. Include sustainability reporting verified by an accredited third party.
This was last updated in April 2024

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