Demystifying Materiality in Sustainability Reporting

Double materiality refers to the dual consideration of how environmental, social, and governance (ESG) factors impact a company's financial performance and how a company's activities influence these ESG factors in the broader world.

The Two Aspects of Double Materiality

At its core, double materiality encompasses two intertwined dimensions:

1. Financial Materiality
2. Impact Materiality

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Financial Materiality

Financial materiality focuses on determining the information relevant and significant for investors and stakeholders to make informed decisions about an organization’s financial health. This assessment is quantitative, considering factors like monetary value and the magnitude of available information.

Impact Materiality

This aspect considers the broader societal and environmental impacts of a company's operations. Impact materiality pertains to the assessment of ESG factors that influence an organization’s sustainability performance. It's not just about how ESG factors affect the company, but how the company affects ESG factors in the world.

For example, a corporation might produce goods efficiently and profitably, but if its manufacturing process pollutes local water sources, it has a negative environmental impact that needs to be addressed.

Double materiality, therefore, expands the scope of traditional materiality. While the conventional approach was primarily concerned with financial data and its relevance to stakeholders, double materiality emphasizes that businesses operate within a broader ecosystem.

It underscores the idea that companies have responsibilities beyond just financial performance, and their actions can have wide-ranging consequences on society and the environment. This expanded perspective pushes businesses to be more transparent, accountable, and proactive in addressing both their financial and non-financial impacts.

The Emergence of Double Materiality

Traditionally, the concept of materiality in the business world was primarily focused on financial information that could influence the decisions of investors, lenders, and other stakeholders. It revolved around the idea that companies should disclose information that would be deemed significant to the financial decision-making processes of these stakeholders.

However, as global challenges like climate change, social inequalities, and governance issues became more pronounced, there was a growing realization that businesses played a pivotal role in either exacerbating or mitigating these issues. This led to the evolution of sustainability reporting, where companies began to disclose non-financial information related to their environmental, social, and governance (ESG) impacts.

With this shift, the concept of "double materiality" emerged. It recognized that while ESG factors could influence a company's financial performance, the company's operations could also have broader societal and environmental impacts. This dual perspective reshaped the landscape of business reporting, emphasizing the interconnectedness of financial and non-financial factors.

Why is Double Materiality Important for Organizations

Double materiality acknowledges the interconnectedness of financial and non-financial impacts in sustainability reporting. Once optional, now mandatory reporting.

Regulatory Landscape

The EU has been at the forefront of integrating double materiality into its regulatory framework.

• The Non-Financial Reporting Directive (NFRD) requires large companies to disclose non-financial and diversity information, emphasizing both the impact of ESG factors on the company and the company's impact on these factors.
• The CSRD legislation mandates organizations to assess sustainability impacts both financially and in a broader ESG context, covering the entire value chain from upstream to downstream.
• The ESRS standards Double materiality is a concept which provides criteria for determination of whether a sustainability topic or information has to be included in the undertaking’s sustainability report.
• SFDR EU regulation on how financial market participants have to disclose sustainability information, it helps those investors who seek to put their money into companies and projects supporting sustainability objectives to make informed choices.
• CSDDD On 23 February 2022, the Commission adopted a proposal for a Directive on corporate sustainability due diligence. The aim of this Directive is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe.

How Can Organizations get Ahead of Sustainability Reporting

With the rise of double materiality, sustainability reporting has taken on a new dimension, requiring organizations to be more comprehensive and forward-thinking in their disclosures. Klappir’s Sustainability Platform can help businesses stay compliant by:

• Comprehensive Data Collection: Sustainability reporting tools like Klappir enable organizations to gather comprehensive data on environmental, social, and governance (ESG) factors. This data collection allows them to meet regulatory requirements for transparency and disclosure.
• Real-time Monitoring: Klappir's sustainability reporting offers real-time monitoring of ESG metrics, helping businesses stay ahead of the curve by continuously tracking their environmental and social performance. This proactive approach ensures timely compliance with evolving regulations.
• Sustainability Reporting: These tools allow organizations to generate sustainability statements/reports that align with specific regulatory requirements.
• Data Assurance: Klappir's Sustainability Platform includes data assurance services, which provide third-party verification of reported data. This adds credibility to sustainability disclosures and ensures compliance with regulatory demands for accurate reporting.
• Stakeholder Engagement: Sustainability statements fosters better stakeholder engagement. Stakeholder communication is important, demonstrating transparency and responsiveness to the concerns of regulatory bodies and other stakeholders.
• Risk Mitigation: By proactively addressing ESG issues through sustainability reporting, organizations can mitigate legal and reputational risks associated with non-compliance. This forward-thinking approach aligns with the trend of stricter regulations in the sustainability space.
• Strategic Planning: Klappir's reporting capabilities help organizations integrate sustainability into their long-term strategic planning. This enables them to anticipate regulatory shifts and align their business strategies accordingly, staying compliant while fostering sustainability.

Our Sustainability Platform and its sustainability reporting capabilities offers a proactive and comprehensive approach to managing ESG data and compliance. By leveraging these tools, organizations can adapt to new and upcoming sustainability regulations while enhancing their overall sustainability performance and reputation.

Further information: Download our e-book "Understanding materiality in sustainability reporting"