Double materiality
Double materiality is a concept used in the context of corporate sustainability reporting. A double materiality assessment is a comprehensive evaluation that enables organizations to identify the sustainability matters that are significant both to their operations and their stakeholders. A matter is material if it is reasonably likely to influence the decision-maker. Such information is critical and must be disclosed, as omitting it could hinder stakeholder's decision-making capacity. Only material matters should be disclosed in sustainability reports.
Key Aspects of Double Materiality
Impact Materiality
"inside-out" view
This aspect considers how the organization’s operations affect the environment and society and should be considered first. It goes beyond just the financial implications and looks at the broader consequences of a company's actions.
It involves impacts caused by the organization but also impacts that they are contributing to with their own operations, products, and services through its business relationships. Impact materiality assessment looks at both positive and negative impacts, as well as actual and potential impacts on people or the environment over the short-, medium- or long term.
Financial Materiality
"outside-out" view
This refers to the traditional perspective where materiality is concerned with how various factors (e.g., climate change, environmental regulations, social trends) might affect a organization’s financial performance, cash flow, or financial position.
Sustainability matters are significant when it generates or may generate risks or opportunities that significantly influence its future cash flow, business model, strategy, access to finance, and cost of capital. Material risks and opportunities are generally derived from the impacts and dependencies on natural, human, and social resources. Financial materiality is also considered in short, medium, and long-term time frames.
Examples
A sustainability matter needs to be material from only one of the two perspectives to require disclosure.
Impact materiality issues include
Pollution - The impact of chemical spills in the production facilities.
Poverty - The impact of below-average salaries of its employees.
Financial materiality issues include
Climate - Risks associated with high levels of rain, hail, or other precipitations on company assets
Workforce - Risks associated with not attracting experienced employees due to values or operating sector of the organization Why is it Important?
Double materiality recognizes that organizations have a dual responsibility
To account for their broader impact on society and the environment, which is increasingly relevant for stakeholders like regulators, customers, and the public.
To understand and manage the risks and opportunities that sustainability issues pose to their financial performance.
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