Double Materiality
AdvancedDouble materiality is the principle that companies should report both how sustainability issues affect their financial performance and how their activities affect people and the environment.
Traditional financial reporting focuses on financial materiality, information that affects a company’s value and is important to investors. Double materiality adds a second perspective, impact materiality, which covers the company’s effects on society and the environment, whether or not those effects currently affect its finances.
For example, under financial materiality, a clothing company would report how water shortages might disrupt its cotton supply. Under double materiality, it would also report how its factories’ water use and pollution affect local communities and ecosystems.
Double materiality is the basis of the European Union’s Corporate Sustainability Reporting Directive and the European Sustainability Reporting Standards. Companies covered must carry out a double materiality assessment to decide which topics to report. The EU later reduced the number of companies covered and simplified the requirements.
By contrast, the ISSB standards focus mainly on financial materiality, information relevant to investors. Supporters of double materiality argue it gives a fuller picture of a company’s sustainability, while critics argue it adds complexity and cost.
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