Corporate sustainability has been undergoing a shift, and at the core of this change has been the growing influence of ‘double materiality’. Organisations, now more than ever, are focusing on both financial and non-financial data in their ESG reports.
Double materiality has been gaining traction through the European Sustainability Reporting Standards (ESRS), introduced through the CSRD regulations. These standards require ‘double materiality’ assessments, and under regulations like this companies will have to navigate both the impact of sustainability on their business and their impact on sustainability.
But what exactly is double materiality, and how will its introduction affect ESG reporting processes?
What is Double Materiality?
Materiality refers to the process of identifying and evaluating the issues that have the largest impact on an organisation’s operations and their stakeholders. This enables companies to focus only on the most critical topics when making decisions and reporting their data.
The concept of double materiality, therefore, looks at more than just the impact issues can have on an organisation, but also at the way an organisation impacts the world around them.
Double materiality argues that materiality should not merely focus on how financial performance affects companies, but also on the impact businesses have on the environment and society.
In simpler terms, companies should consider both what is material to them, and what is material to the environment around them.
Companies are urged to not only focus on their own interests, but also to consider the impact of their actions on the resources and individuals that support their operations. This will enable them to have a better understanding of their organisation, its operations, and its place within the broader context.
Double materiality encourages organisations to view impacts from two perspectives: financial and environmental. With the growing connection between financial performance and ESG, stakeholders are calling for organisations to be transparent and accountable regarding the impact of their business activities.
Environmental Materiality: Environmental materiality or impact materiality assesses the negative and positive effects of a companies’ operations on the environment, society, and the economy. It covers issues such as climate change, pollution, biodiversity, resource use, workforce, communities, consumers, and business conduct.
Financial Materiality: Financial materiality identifies and assesses sustainability issues that could significantly impact the financial performance of an organisation. This involves evaluating how specific environmental and social issues might influence cash flow and enterprise value.
Double materiality emerged due to increasing pressure from investors, governments and the general public for companies to acknowledge and address the role they play in environmental and social matters. The demand for more detailed disclosures on ESG and its impact has grown, fuelling the need for stricter reporting guidelines that incorporate double materiality.
Standards that are incorporating Double Materiality
There have been several regulations, frameworks and standards that have incorporated double materiality into their legislation, as well as directives that were introduced with double materiality already embedded.
In 2021, GRI adopted double materiality in support of the European Union’s proposal. The updated GRI Universal Standards emphasise that analysing the impacts of business activities on the environment, society, and economy is key to identifying financial risks and opportunities.
The Sustainability Accounting Standards Boards (SASB) was created to help businesses and investors develop a common language to document the financial impacts of sustainability. This global framework focuses on the ‘inward impacts’ or financial materiality. Many organisations use SASB along with GRI to holistically cover both internal and external impacts, therefore, achieving double materiality.
Many popular sustainability reporting guidelines, like the GRI or the SASB, that started off only looking at the “outside-in” approach have now begun to move towards double materiality by incorporating the “inside-out” perspective into their frameworks.
The concept of double materiality is at the core of the Corporate Sustainability Reporting Directive (CSRD), which came into force this year. The CSRD mandates EU companies to report their financial and non-financial impacts, and its double materiality requires reports to undergo third-party assurance before being disclosed to the public.
The guidelines of the CSRD, the European Sustainability Reporting Standards (ESRS) are the first to introduce mandatory double materiality sustainability reporting, applying to around 50,000 companies operating in the EU at its initial introduction.
The ESRS breaks double materiality into two categories, impact materiality (the “inside-out” perspective) and financial materiality (the “outside-in” perspective), and is quite literally defining double materiality as a standard.
How does Double Materiality affect your ESG reporting?
The introduction of double materiality as a concept into the regulatory landscape may not change your reporting process immediately, but it should be something you consider. Especially with the CSRD and the ESRS becoming mandatory, it’s more important than ever to be considering how you can bring double materiality into your reporting.
One way double materiality is definitely going to impact your reporting process is you will begin needing to perform double materiality assessments. The CSRD was the first EU legislation to mandate double materiality assessment.
A double materiality assessment is a framework for organisations to determine what material topics should be included in their sustainability reporting. This assessment plays a key role in developing an organisation’s ESG strategy and deciding which initiatives to focus on. It includes a detailed review of the organisation’s operations, as well as those of its value chain.
The two perspectives of a double materiality assessment, financial and impact materiality, offer an expanded view of how business activities affect the bottom lines and the wider society. This can help to empower decision-makers to make informed decisions and aid organisations in developing strategic initiatives and making investments that align with their sustainability goals.
By getting on top of this change to the reporting process early, companies can engage multiple departments, such as legal, audit, risk, and finance, on the requirements of CSRD and the double-materiality assessment. This can help to build a shared understanding of an issue’s strategic implications throughout an organisation.
One thing to keep in consideration when approaching double materiality in your reporting process is what you may need to implement, as it requires a lot of focus and detail.
Technology can help streamline and optimise the double materiality assessment process – from data collection to report writing. Through maximising business strategies, it can examine extensive data and uncover underlying correlations between sustainability challenges and business operations, exposing potential risks and opportunities.
How does Double Materiality help your ESG reporting?
Introducing double materiality assessment into your ESG reporting process can be helpful in a multitude of ways. The wide scope of the assessments means that organisations can develop valuable insights into multiple key business aspects like financial performance, human resources, and environmental impact.
Using this comprehensive approach gives companies the chance to strengthen their resilience and ensure long-term success. It gives businesses a competitive advantage, potentially drawing in new investments and customers.
By evaluating their material issues through the lens of double materiality, organisations can better understand potential risks and how they connect. This can help in plotting how these risks might evolve over time, making it easier to develop future-proof mitigation strategies for both financial and non-financial issues.
Double materiality assessments address issues that are both material to the organisation and to stakeholders. This relays a clear message to stakeholders that a company is dedicated to reaching their expectations, and not just focusing on profit. Double materiality helps to establish shared objectives and develop active engagement in the reporting process with investors, boosting both reputation and trustworthiness.
With the introduction of frameworks like CSRD that require double materiality assessments, conducting one now can be a strategic and cost-effective decision, preparing your organisation for the evolving regulatory landscape. Double materiality and undertaking double materiality assessments can help secure your ESG reporting process for the future, making sure that your organisation’s ESG practices are ready to face whatever is to come.
The concept of double materiality has been introduced as a corrective measure against some of the significant criticism levelled against ESG initiatives. It seeks to ensure an organisations’ environmental efforts are not overstated or misrepresented, leading to greenwashing, by implementing far more rigorous reporting standards than have been seen before.
Having a double materiality assessment as part of your reporting process can help protect your organisation from greenwashing accusations, by having a comprehensive and detailed report of your sustainable practices.
However, double materiality is not without potential risks and criticisms. Double materiality can be seen to invite varied interpretations of its standards, as what is deemed material for one organisation might not hold that significance for another, leading to reporting inconsistencies. However, there are actions being put in place to prevent this.
Expected to be approved by the European Commission by June 2026, the ESRS will also develop sector-specific standards to address the unique reporting requirements of each industry. These standards will be designed to make reporting more relevant and informative, by taking into account the specific sustainability challenges and opportunities faced by different sectors.
There is also currently a debate in clearly defining what qualifies as a significant material impact on ESG issues. The discussion revolves around whether impact should be focused solely on investors or if it should also include the broader public’s concerns.
As all new legislation does, the ESRS and its double materiality approach has some challenges to overcome. Despite this, the benefits of introducing double materiality assessments to your reporting process are too great to ignore. Making sure your ESG practices as well as your ESG reports are as effective, detailed and sustainable as possible has never been more important.
Incorporating double materiality means being able to highlight the issues that impact your organisation, as well as the environment and people around it, the most, and making strides to improve them. With the introduction of the CSRD, double materiality and its assessments can not be ignored in your ESG reporting.
How Convene ESG can help
Whether your organisation is in the scope of the CSRD or not, now is the time to begin preparing for double materiality. Within the ESG regulatory landscape, the same trends are emerging; we need transparent, reliable and accurate reporting practices.
Adopting double materiality means organisations need to deal with the many issues that occur when creating reports. This can make double materiality reports a more tedious, complex and costly process.
Creating accurate ESG reports poses a significant hurdle for numerous organisations, this is why it’s important to have the right ESG reporting software for your company.
Convene ESG allows you to do just this by providing an end-to-end platform to collect data, track progress, compare with peers, align with frameworks and produce ESG reports.
With Convene ESG, you can collect your data for all the necessary metrics in the upcoming CSRD legislation, ensuring that you are compliant with regulations. This will allow you to further explore your company’s sustainability strategies. With various global and regional frameworks also built in to Convene ESG, you will easily comply and report against any other standards without the need to repeat the reporting process.
Convene ESG is designed to make the reporting process as easy as possible, meaning that you can anticipate changes in current ESG legislation, be ready to face the challenges of future regulations and fully integrate double materiality into your reporting process.
