Double materiality recognizes that risks and opportunities can have financial and non-financial dimensions. We dive in on the topic here.
Double Materiality: What is it and what does it mean?

Double Materiality: What is it and what does it mean?

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To contribute to sustainable development, companies must understand and manage their positive and negative impacts, ensuring transparency, objectivity, and reliability in their management.

The concept of 'double materiality' within the ESG reporting embodies the idea that companies possess the capacity to influence the environment and society while also being affected to the effects of environmental and social concerns themselves.

The Corporate Sustainability Reporting Directive (CSRD) mandates companies to incorporate the double materiality principle into their reporting. According to the CSRD, companies must publish information concerning their environmental and social impacts, risks, and opportunities, considering both the effects of their activities on the environment and society and the influence of environmental and social issues on their business.

ALSO READ: ESRS – understand the European Sustainability Reporting Standards

Diving into the concept of double materiality: What is it?

The CSRD represents a significant shift in organizations' reporting requirements, methods, and safeguards. So, if your organization falls under the Directive's reporting obligations or will be obligated to do so in the future, double materiality will be a key concept.

Double Materiality means that companies need to understand their impact on their value chain from a sustainability perspective and evaluate the corresponding risks and opportunities, considering financial and non-financial aspects. Essentially, this can be boiled down to the organization's societal and environmental impact (Impact Materiality) and the sustainability risks the organization is experiencing (Financial Materiality) because of climate changes or resource scarcity.

In essence, this implies that companies have to be exhibit transparency in their reports regarding the financial and non-financial impacts of their activities in their value chain, along with their vulnerability to sustainability risks and opportunities.

For example, climate change can impact a company's insurance premium if it operates in regions exposed to droughts, floods, tornadoes, and similar events. Additionally, the availability of a skilled workforce may be impeded if individuals relocate due to conflicts, water scarcity, and other related factors. These factors can be considered financial risks for the company, highlighting the need to include them in its analysis and report them transparently.

An additional example could involve a company that reports information on its greenhouse gas emissions and its efforts to reduce them. In such instances, the company is also obliged to disclose information concerning the potential economic impact climate change has or may have on the company.

From a business standpoint, the concept of "double materiality" necessitates companies adopt a more comprehensive view of their impact on the environment and society. It also requires them to emphasize the potential risks and opportunities linked to their operations. Within the applicable reporting standards (ESRS) mandated for reporting under CSRD, companies can locate the relevant disclosures about the implementation of the ESRS. CSRD provides the necessary information regarding applying the "double materiality" principle.

What meanings will double materiality hold for you?

In recent years, it has become evident that an organization's environmental, social, and governance aspects are no longer optional. Sustainability significantly focuses on the European public agenda, making double materiality relevant for your organization.

In 2024, the reporting requirement and direct impact of double materiality will apply only to large and listed organizations. However, it is important to recognize that the growing sustainability reporting obligations will also affect most subcontractors. Legislation like CSRD tends to extend its reach and encompass companies not directly subject to it, creating a ripple effect. Consequently, smaller companies will also face a rising demand for ESG data.

By 2025, the directive will encompass EU companies with over 250 employees, along with a certain turnover or balance sheet total, for reporting purposes. Furthermore, by 2028, additional standards aimed at specific sectors and the SME segment will be gradually phased in.

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