What is double materiality?

What is double materiality? It’s a reporting term that can have multiple meanings, but it is becoming crucial in the context of ESG. 

Double materiality is often hard to grasp at a glance; it refers to the interdependent relationship of two concepts, each with its sub-parts reporting requirements, so the terminology alone can mess with your head. 

However, double materiality is required as part of the EU’s Corporate Sustainability and Reporting Directive (CSRD). Many companies—both European and non-European—may be subject to this new directive, so it makes sense to at least understand double materiality in this arena. 

In ESG reporting terms, double materiality is a concept that analyses the symbiotic relationship between companies and sustainability. 

In double materiality reporting, a company will analyse two things listed below in the simplest possible terms. 

1. The company’s impact on sustainability issues
2. The impact of sustainability issues on the company

The first point centres on how the company’s activities affect the planet and its people. It can be as straightforward as measuring emissions or as complex as how gauging relationships with local communities develop over time. 

The second point centres on how external sustainability issues – such as environmental change or labour law reform – affect the company’s performance.

In a nutshell: It lets you analyse a crucial issue in modern governance through two essential lenses for complete awareness. 

The lens of point 1 above matters to stakeholders such as consumers, regulators and local communities, while the lens of point 2 matters to investors, who want clarity on how your company can be sustainable and successful at the same time. 

This union of viewpoints helps you determine what impacts – in both directions – stakeholders will care about. In this way, you identify the most crucial risks and address them.

It has become part of the latest European legislation aimed at enhancing ESG reporting standards as the bloc pursues a sustainability agenda. 

As is the case with many high-profile EU rules, this one – CSRD – reaches beyond the EU’s borders and also applies to any company in the world that does a significant amount of business within the EU, so you would be wise to check if the rules apply to your company. 

Experts have quickly come to regard a double materiality assessment as an essential first step to complying with CSRD reporting requirements, as it gives a broad overview of both ESG-related risk and ESG-related opportunity.

The details can get specific, but in general, a good assessment will be guided by the following principles:

• You need to identify the ESG topics that most apply to you and your organisation.
• You need to carefully choose who you’ll talk to to arrive at the above conclusions. Often, the more stakeholder groups, the better. 
• You need to be clear on what you want to communicate in your assessment and how to get the data. 
• You need to have enough resources to complete the assessment in full.

Double materiality represents a shift in how businesses approach their reporting and governance, highlighting the importance of considering both financial impacts and the wider effects on society and the environment. 

As stakeholders become more focused on sustainability, companies that adopt double materiality not only stay ahead of regulatory requirements but also position themselves as responsible, future-focused organisations.