Broadening the materiality lens

For decades, materiality assessments have been a cornerstone of financial reporting – a tool used to assess inward business risk. More recently, materiality has played a similarly important role in sustainability reporting, helping evaluate the importance of outward impacts.

Now, as sustainability becomes more deeply and holistically embedded in business, investors are beginning to focus on how a company’s outward impacts on the economy, environment and people affect operational and financial risk. Simply put, ESG issues are becoming more financially material and as a result are increasingly being integrated across investor strategies and new policies.

The result is the emergence of a new concept: double materiality, that combines and integrates what have traditionally been two separate processes to create a more joined-up approach.

Driven by regulators, investors and standard-setters

Double materiality offers companies a way to respond to stakeholders while also strengthening the long-term sustainability of their business. It forms the basis of robust, relevant ESG strategies and reporting and helps decision-makers to focus their efforts in the areas where they can and do have the most significant financial and outward impact.

It’s not only good business practice. It’s also backed by standard-setters, investors and regulators – including forming a mandatory component of Corporate Sustainability Reporting Directive (CSRD) compliance. These changing expectations mean double materiality is becoming essential for legal compliance, keeping pace with evolving reporting best practices and the ability to meet the growing demands of stakeholders.

The building blocks of double materiality

To deliver holistic insights, double materiality brings together two perspectives:

Outward Materiality: External impacts an organisation has – or could have – on the economy, environment and people (including human rights), that could positively or negatively impact on sustainable development.

Financial Materiality: Internal impacts, including any ESG issues considered important to investors in making investment decisions. These can significantly impact – either positively or negatively – a company’s business model and value drivers, such as growth, markets and capital.

To understand more about double materiality – what it is, why it matters, and how to get started – take a look at our focused guide that covers everything you need to know not only to comply with changing global legislation, but to understand how double materiality will add value to your ESG strategy and management.