What is double materiality and why does it matter?

In today’s evolving regulatory landscape, businesses are expected to report not only on how sustainability issues impact their financial performance but also on how their operations affect the world around them. This is where double materiality comes in.

Understanding double materiality

Double materiality is a concept in ESG (Environmental, Social, and Governance) reporting that requires companies to assess sustainability from two perspectives:

• Financial materiality: How ESG factors affect a company’s financial position, performance, and long-term value.
• Impact materiality: How a company’s operations impact the environment, society, and broader economy, regardless of financial consequences.

For example, rising carbon prices and climate regulations may present financial risks to a company (financial materiality), while its own emissions may contribute to global climate change (impact materiality). Both perspectives must be considered to provide a complete and transparent sustainability report.

Why is double materiality important?

• Regulatory compliance: The EU’s Corporate Sustainability Reporting Directive (CSRD) requires large companies to apply double materiality when disclosing sustainability-related risks and impacts.
• Investor confidence: Investors are increasingly seeking companies that assess both financial risks and broader sustainability impacts, ensuring long-term resilience.
• Stakeholder trust: Customers, employees, and communities expect businesses to act responsibly and be transparent about their social and environmental footprint.

How can businesses apply double materiality?

• Identify key ESG risks and impacts: Assess which sustainability issues are financially material and which have broader environmental or social significance.
• Engage stakeholders: Consult investors, regulators, employees, and communities to understand their concerns and priorities.
• Integrate into strategy and reporting: Align ESG risks and opportunities with business strategy and disclose findings transparently.

The future of ESG reporting

Double materiality is reshaping how businesses approach sustainability, ensuring they recognise both the risks to their bottom line and their wider responsibilities to society. As regulations tighten and stakeholder expectations rise, companies that embrace double materiality will be better positioned for long-term success.