Materiality and double materiality are two critical concepts in business sustainability reporting, and they play a vital role in ensuring the effectiveness and credibility of sustainability reporting. These concepts determine which sustainability topics are relevant to a business and its stakeholders and the level of detail that should be reported about them.
Materiality refers to the importance of a sustainability issue in relation to a business’s operations and its impact on stakeholders. It is the process of determining which sustainability topics are significant enough to be reported on and included in sustainability reporting. Material topics should be relevant to a business’s operations and have a significant impact on stakeholders.
It is crucial for businesses to maintain control of their decision-making processes. Those that do not initiate a materiality assessment run the risk of having individuals who are unfamiliar with their company dictate what is relevant. It is more advantageous for the company to take charge of the process and conduct an evaluation that identifies the unique risks and opportunities for the business and positions it for success.
Organizational leaders often make the decision to pursue particular ESG objectives, often influenced by a choice of ESG reporting framework, without determining if these goals are the most significant for their business and operations. This can result in several negative outcomes, such as over-reporting or disregarding the risks and opportunities that could have the greatest effect on the company’s ESG performance.
Double materiality refers to the importance of a sustainability issue both to the business and its stakeholders. The double materiality concept emphasizes the need to consider the significance of a sustainability issue to the business, as well as its impact on stakeholders. It recognizes that sustainability issues may be critical to the business’s operations, but may not be relevant to all stakeholders. It involves considering not only the impact of sustainability on a company’s performance and position, but also the impact that the company has on broader sustainability issues.
The importance of materiality and double materiality in business sustainability reporting cannot be overstated. Materiality and double materiality ensure that sustainability reporting is relevant, credible, and reliable. By considering the importance of sustainability issues to the business and its stakeholders, companies can ensure that they are reporting on the most critical sustainability topics, and provide meaningful and relevant information to stakeholders.
To apply materiality and double materiality in business sustainability reporting, companies can conduct a materiality assessment. This involves engaging with stakeholders, such as customers, employees, suppliers, and investors, to determine the significance of sustainability issues. The results of the materiality assessment can then be used to inform the company’s sustainability reporting strategy, including the selection of sustainability topics to be reported on, the level of detail to be included, and the frequency of reporting.
In ESG, two dominant approaches to materiality can be seen – financial materiality and impact materiality. Financial materiality is centered around creating economic value and concentrates on the issues that influence a company’s financial performance and its ability to generate economic returns for investors and shareholders. Impact materiality, on the other hand, focuses on the external effects of a company’s operations, such as impacts on communities and the environment. This includes the organization’s contributions to air and water pollution, GHG emissions, and other environmental hazards. These two types of materiality are not mutually exclusive as some issues may create both internal financial risks and external impacts.
The interrelatedness and importance of both financial and impact materiality has led to the rise of the concept of double materiality. This idea combines both perspectives to provide a comprehensive approach to sustainability reporting.
The different ESG reporting frameworks can be confusing as some focus on financial materiality and others on double materiality. The European Sustainability Reporting Standards (ESRS) proposed by the European Financial Reporting Advisory Group (EFRAG) require mandatory disclosure for European companies based on double materiality. However, the two draft standards from the International Sustainability Standards Board (ISSB) concentrate on financial materiality. Over time, it is possible that the approaches to materiality across frameworks will converge, as seen in Global Reporting Initiative’s (GRI) emphasis on double materiality and its collaboration with both EFRAG and ISSB. Companies will need to adapt to the changing demands of ESG reporting frameworks, and ESG software that facilitates materiality and double materiality assessments can provide the necessary support.
Author: Victor O. Nyakinda