What is Double Materiality

As the [draft] European Sustainability Reporting Standards (ESRS) are set to reshape reporting requirements, understanding materiality is essential. In this article we try to break down the complexities of materiality, covering its two dimensions: financial materiality and impact materiality.

The ESRS Challenge

The ESRS, a comprehensive framework for sustainability reporting, comes with a wealth of information and a lot of data points. This can be overwhelming for organizations preparing for their 2024 reports. It's clear that the biggest stakeholders have the most work ahead. They must draft or revise plans and policies, gather and organize data, accumulate knowledge, and delegate responsibilities throughout their organizations.

Double Materiality revealed

Materiality, as we know it in accounting, is the process of determining which information should be included in financial statements. In the context of sustainability reporting, this concept has evolved to encompass a double materiality framework. Double materiality means assessing both financial materiality and impact materiality.

Financial Materiality: This dimension is quantitative and focuses on what information is relevant and important for investors and stakeholders to make informed decisions about an organization's financial health. It considers factors like monetary value and data magnitude.

Impact Materiality: This dimension assesses ESG factors that affect an organization's sustainability performance. Here, qualitative factors such as the scope and severity of impacts take center stage.

By evaluating both impact and financial materiality, companies can paint a comprehensive picture of their performance, sustainability risks, and opportunities.

Materiality: A Matrix of Relevance

Double materiality can be visualized as a matrix where all matters are considered material from either a financial or impact materiality perspective.

How to Get Started

Now that we've deciphered the concept of materiality, let's break down the steps for beginners to initiate their materiality assessment:

1. Identify Your Stakeholders: Understand that stakeholders are not just limited to financial investors. Stakeholders include those who are affected or could be affected by the organization's activities. Engage with stakeholders and gather their feedback on how they perceive they are affected.

2. Identify, List, and Rank ESG Matters: Assemble a diverse task force from various departments to brainstorm and rank sustainability matters relevant to your organization. You can refer to the ESRS's sustainability topics and sub-topics for guidance. Consider your values, goals, and stakeholder perceptions when ranking these matters.

3. Assess Impact Materiality: Follow these four steps to assess impact materiality: understand context, engage with stakeholders and experts, assess materiality, and set thresholds. These steps help you identify and prioritize ESG matters that require reporting.

4. Assess Financial Materiality: For financial materiality, list dependencies on natural and social resources, analyze their significance, and categorize them as risks or opportunities. Consider short-term, medium-term, and long-term effects. This process helps you gauge the financial significance of sustainability matters.

5. Document the Materiality Process: Remember that the CSRD will require limited assurance of your sustainability statements. Your materiality assessment process must be well-documented for third-party assurance providers.

The expansion of the materiality concept in the CSRD and ESRS reflects a growing recognition of the broad impact of ESG matters. While the journey ahead may be challenging, embracing the materiality assessment process is an opportunity for growth and positive change. Materiality is not a static concept; it evolves over time. The key to success lies in getting started.

We have prepared a guide that can equip organizations with the knowledge and tools they need to navigate the world of materiality in sustainability reporting. Embrace the journey, and you'll uncover valuable insights into your operations, impact, and stakeholder relationships, driving sustainable growth for your organization.