Having become comfortable with the sustainability context of materiality over the last few years, you may be confused about the emerging concept of ‘double materiality’. It’s an approach gaining more traction and will become increasingly important to businesses and organisations which are serious about sustainability.
While it may take some time to get to grips with this new way of thinking, it will likely benefit your business, creating greater corporate responsibility while increasing transparency and adding value. Here we explain what double materiality is and why it is of growing importance.
What is materiality?
Material is defined as ‘having real importance or great consequences’. The traditional concept of materiality involves identifying and assessing sustainability issues that have an influence on and which impact your organisation. Sustainability consultancies like Grain can help you conduct a materiality assessment to identify and prioritise topics and key impact areas, setting out a baseline for your sustainability strategy for the future. This process involves incorporating your stakeholders’ views to create a materiality matrix, mapping topics against two axes: significance of the company’s impacts, and influence on stakeholder assessments and decisions.
As the name implies, there are two parts to this concept. Double materiality involves looking at a company’s impact on sustainability matters (impact outwards perspective) and how sustainability matters affect business performance and development (impact inwards perspective) to get a broader sense of all issues.
‘Impact outwards’ is the traditional notion of materiality — working out how your company is impacting the environment, economy and society. ‘Impact inwards’ is a newer addition which examines how environmental factors affect your company. This focus has intensified in line with the rise of environmental, social and governance (ESG) reporting in finance.
An example material topic would be climate change. From an impact outwards perspective, your company should be measuring and reporting your greenhouse gas emissions to consider its impact on the environment. With the added dimension of double materiality, it is vital to look at the physical risks (e.g. severe weather events) and financial risks (e.g. loss of value and investment in specific sectors due to the shift to the green economy) to acknowledge the longer-term issues that could be a threat to the value of an enterprise. Digging a little deeper, you may find that flood risks prevent the building of new factories in areas prone to water level changes, or that increasing temperatures mean fewer people living in hotter climates, which could affect access to the workforce.
Why is double materiality important?
The concept of double materiality is increasingly being used in sustainability legislation and frameworks. As of 2023, it will be mandatory for European companies that fall under its scope to apply the concept as part of the Corporate Sustainability Reporting Directive (CSRD). In addition, the Global Reporting Initiative (GRI) has updated its standards to incorporate double materiality as a guiding principle. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) has adapted requirements for companies, making it clear that climate-related impacts on a company can be material and therefore require disclosure.
New concepts and legislation serve as a reminder that materiality and sustainability reporting is an ever-evolving process that will always require focus. The introduction of double materiality into reporting will involve companies analysing themselves in a new light, addressing both the opportunities and risks presented by climate change, alongside the impact they have on the environment. While this may require a shift in perspective, it also offers the opportunity for fresh thinking and innovation for a long-term and sustainable future.