What does Double Materiality mean in ESG?


Alberto Bailin Co-founder of Lienzo

Photo by Mikita Yo

Double materiality is a concept in corporate social responsibility (CSR) that acknowledges the dual impacts that a company can have on both the environment and society, as well as the potential impacts that environmental and social issues can have on the company's operations and financial performance.

Traditional CSR focuses primarily on direct impact on the environment and society, companies look into things such as reducing greenhouse gas emissions or supporting local community programs. However, double materiality expands this perspective to also include not only the indirect impacts that a company's operations may have on the environment and society, but also the potential risks and opportunities that environmental and social issues pose to the company's financial performance. In other words, a company must report both on how its business is affected by sustainability issues (“outside in or financial materiality”) and how their activities impact society and the environment (“inside out or impact materiality”). 

Let's look at this definition through an example:

Let's say a fashion company produces clothing using materials that are environmentally harmful, such as polyester, which is a petroleum-based fabric that releases microplastics into the water system when washed. However, there are also indirect impacts to consider. For instance, the company may be vulnerable to reputational damage and legal action related to their use of environmentally harmful materials. As consumers become more aware of the environmental impact of the fashion industry, they may be less likely to buy from companies that are seen as contributing to these issues. As a result, this directly affects the company’s financial performance. 

Why is double materiality important?

A double materiality assessment is the first step towards CSRD compliance. This assessment is required for organizations to subsequently focus their efforts on the sustainability matters that are most relevant to them and their stakeholders. As a reminder, the Corporate Sustainability Reporting Directive (CSRD) will replace the Non-Financial Reporting Directive (NFRD) as of 2024. This regulation establishes a uniform framework for the reporting of non-financial data for companies operating in the European Union. 

As per the CSRD regulations, companies will be required to disclose a substantial amount of new and highly detailed data. This implies that many organizations will need to significantly enhance their administrative procedures and internal oversight to be compliant. Collecting data across the value chain will likely become one of the biggest challenges of the CSRD requirements, so companies should start working on this by engaging suppliers all across the value chain in order to implement the new sustainability requirements.