What does double materiality mean for your ESG strategy?

“Double materiality is essential for understanding and addressing the environmental and social impacts of your business.” 

The idea of ‘materiality’ in corporate reporting is undergoing a fundamental shift following the adoption of the EU’s Corporate Sustainability Reporting Directive (CSRD). 

Rather than simply considering the impact of external factors – an ‘outside-in’ perspective – many companies will soon have to adopt a much more holistic ‘double materiality’ approach. 

In this blog, we look at what double materiality means in different contexts and where it fits in with the CSRD requirements.  

We also provide several practical examples of how to apply it and explore how embracing the concept can benefit your company’s ESG strategy. 

What exactly does double materiality mean? 

Double materiality is about broadening the scope of ESG-related information your company reports on. In short, this means that more factors are considered ‘material’ (relevant) for reporting. 

In traditional materiality reporting, information is only considered material if it’s related to factors that impact a company’s financial performance. In double materiality reporting, on the other hand, information related to a company’s impact on people and the environment is also considered material. 

Double materiality reporting therefore combines an ‘outside-in perspective (external factors affecting the company) with an ‘inside-out’ view (the company’s impact on communities and the environment). 

Below are two examples that illustrate the differences between traditional reporting and the double materiality approach. 

Example 1: An international seafood company 

Imagine a large company that profits primarily from selling seafood globally. Data indicating that overfishing and climate change are depleting global fish stocks would be considered material information for this company because these changes have the potential to affect its future ability to generate revenue. 

Under a traditional materiality reporting approach, this issue would simply be reported as a potential negative impact on the company.  

However, using double materiality reporting, the company would also report on how its own activities are impacting fish stocks by contributing to overfishing and climate change. 

In this case, stakeholders reading its report would learn that the company’s own activities are adding to an issue that will likely impact its future financial performance. 

This demonstrates a link between how a company impacts the world around it and how those changes will ultimately impact the company itself – helping to underline the importance of sustainability actions from a business perspective. 

Example 2: A dissatisfied and unproductive workforce 

If a company conducted an employee satisfaction survey and the results indicated that its employees were largely dissatisfied and unmotivated, this information would certainly be considered material to report. 

Using a traditional materiality approach, such an issue would simply be reported as harming the company’s overall productivity and financial performance. The company might even seek to replace many of its employees as a result of such a report. 

However, looking at this issue from a double materiality perspective, the company would also look at how its governance structures and (lack of) employee engagement activities impact levels of employee satisfaction and motivation. 

Based on this additional information, the company would be in a position to take an alternative approach. For example, it could adapt its governance structures and implement initiatives to increase the job satisfaction and motivation of its current employees. 

These two examples provide a good introduction to the concept of double materiality, but how does it relate to the upcoming CSRD requirements? 

Double materiality: A key CSRD requirement 

The CSRD is an EU directive that seeks to significantly raise the bar on reporting requirements for companies that fall within its scope – creating a level playing field for sustainability reporting by making information more transparent, accessible and comparable. 

The directive was first announced in April 2021, and the first of the new reporting requirements will apply to reports published in 2025 (covering the year 2024). 

Double materiality will play an important role for companies that need to comply with these new requirements.  

Specifically, the CSRD will apply to all large EU companies (including EU subsidiaries of non-EU parent companies) that meet at least two of the following criteria: 250 employees, €40 million in turnover or €20 million in total assets. 

This means that for the thousands of companies affected by the CSRD, double materiality reporting on ESG issues will soon become mandatory. 

So, if your company is one of the 49,000 that’s expected to be subject to the CSRD, it’s essential to know what double materiality will look like in your corporate reporting.  

Of course, each company will approach this differently, but the following practical example may help kick-start your thinking about this important topic. 

How can you apply double materiality in your company? 

A practical example 

A great place to start with double materiality reporting is your company’s energy consumption. Currently, you may be reporting on the financial cost of the energy your company uses and how this affects your overall financial performance. But if you were to apply double materiality reporting to this situation, you would also need to report on the environmental and social impact of your energy consumption. 

This would involve measuring the amount of greenhouse gases (GHGs) emitted each year as a result of energy used throughout your company’s value chain.  

You may also be required to measure and report how your energy consumption contributes to resource depletion, water pollution and solid waste generation. 

Double materiality reporting would also be useful when assessing the potential benefits of switching to renewable energy. This would involve reporting on the potential cost savings that switching would bring to your business.  

At the same time, it would mean reporting on the reductions in GHG emissions and other environmental benefits that switching would bring to the world at large. 

What are the benefits of double materiality? 

In addition to the environmental benefits, there are a number of organisational benefits to double materiality reporting, from increasing stakeholder engagement to attracting investors. 

Corporate transparency 

Implementing comprehensive double materiality reporting promotes greater transparency about your company’s impact on society and the environment. This can be valuable when it comes to responding to requests from stakeholders, such as customers and suppliers, for more information on your company’s impacts. 

Increased stakeholder engagement  

Double materiality reporting should also involve engaging with different stakeholder groups and working with them to identify what they consider to be material topics. This will provide a much more holistic view of the challenges and opportunities facing your organisation than standard financial reporting. 

Mitigate reputational threats 

Implementing double materiality reporting will require you to identify any negative impacts that your business may be having on the world, from biodiversity to human rights. If left unaddressed, these impacts can ultimately damage your brand’s reputation, so it’s essential to detect and address them before this happens. 

Strategic sustainability management 

Using double materiality will provide your sustainability team with valuable information to help them prioritise climate actions more effectively. This will ensure that your organisation is focusing its energy in the right places, leading to more effective results in the long term. In addition, double materiality can help you prioritise actions according to urgency, for example, in relation to upcoming regulations. 

Unlock access to investment 

In many cases, the inclusion of ESG metrics in investment decisions is now standard practice. Companies may, therefore, struggle to attract investment without first providing clear and comprehensive information about their ESG impacts. As we’ve already discussed, double materiality reporting is an effective way to provide just that.  

Double materiality and your ESG strategy 

With CSRD coming into force, conducting a double materiality assessment could soon become mandatory for your business. And while this is certainly a persuasive argument for double materiality reporting, the benefits to your business, society and the environment are even more compelling. In short, double materiality is essential for understanding and addressing the environmental and social impacts of your business. 

And when implemented correctly, double materiality can become not just a part of your strategy but a key driver of it.  

That’s because a holistic approach to identifying environmental and social impacts is essential to ensure that your sustainability initiatives are truly effective – both for your business and for all your stakeholders. 

If you require support with your double materiality assessment or any aspect of your sustainability strategy, don’t hesitate to contact us.