Double Materiality

August 30, 2023

Double materiality is a concept deeply embedded within the framework of sustainability reporting standards such as those developed by the International Financial Reporting Standards (IFRS) Foundation, including IFRS S1 and the Sustainability Accounting Standards Board (SASB) standards. It refers to the process of considering how sustainability issues affect a company's financial performance (financial materiality) and how a company's operations impact the environment and society (impact materiality).

  1. Financial Materiality: This aspect of double materiality focuses on the sustainability-related risks and opportunities that could reasonably be expected to affect a company's financial condition, operational performance, or cash flows. Financial materiality is concerned with the information that investors and other stakeholders need to assess and make decisions about providing resources to the company.
  2. Impact Materiality: This aspect considers the company's impacts on the environment, society, and economy. It is about understanding and reporting on how a company's operations, products, or services create, contribute to, or address sustainability issues. This includes considering the company's dependencies and impacts on natural resources, social equity, and economic development within its value chain.

The IFRS S1 and SASB standards, among others, have integrated the concept of double materiality into their reporting frameworks to ensure that entities provide a holistic view of their sustainability performance. This includes both the financial implications of sustainability issues for the entity and the entity's impacts on society and the environment ​​. The goal is to provide a comprehensive set of disclosures that help stakeholders understand how sustainability-related risks and opportunities are managed and how the entity contributes to or mitigates sustainability challenges. This dual focus enables more informed decision-making by investors, lenders, and other stakeholders, promoting a more sustainable global economy.

Double materiality reporting is increasingly being required in jurisdictions that are focusing on enhancing the transparency and accountability of businesses regarding their sustainability practices and impacts. The European Union (EU) is at the forefront of implementing double materiality through its regulatory frameworks, particularly in the following initiatives:

  1. Non-Financial Reporting Directive (NFRD): The EU's NFRD requires large companies and groups to disclose information on the way they operate and manage social and environmental challenges. This directive is a step towards integrating double materiality, requiring companies to report on their impact on the environment and society, as well as how sustainability issues affect the company.
  2. Corporate Sustainability Reporting Directive (CSRD): An evolution of the NFRD, the CSRD significantly expands the scope of companies required to report non-financial information and introduces more detailed reporting requirements, including the concept of double materiality. The CSRD is part of the European Green Deal and the Sustainable Finance Disclosure Regulation (SFDR), aiming to create a more sustainable and resilient economy.
  3. Sustainable Finance Disclosure Regulation (SFDR): While primarily focused on the financial sector, SFDR requires financial market participants in the EU to disclose how they consider sustainability risks in their investment decisions and the adverse impacts of their investments on sustainability factors, aligning with the concept of double materiality.
  4. European Sustainability Reporting Standards (ESRS): Developed by the European Financial Reporting Advisory Group (EFRAG) as part of the implementation of the CSRD, these standards will operationalize double materiality by setting out specific disclosures companies need to make regarding their sustainability impacts and risks.

Outside of the EU, the concept of double materiality is being recognized and incorporated into reporting standards and frameworks globally, albeit at varying degrees and under different terminologies. Organizations such as the Global Reporting Initiative (GRI) and the International Sustainability Standards Board (ISSB), which is part of the International Financial Reporting Standards (IFRS) Foundation, are working towards harmonizing sustainability reporting standards that encompass the principles of double materiality. However, the adoption of double materiality in reporting requirements varies by country and is less explicit outside of the EU.

The push for double materiality reflects a broader shift towards integrated reporting, where companies are expected to provide a holistic view of their financial and non-financial performance, including environmental, social, and governance (ESG) factors, to better inform investment decisions and policy making.

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