Double materiality is a concept prevalent in corporate sustainability reporting, such as in CSRD. It involves combining financial materiality and impact materiality in order to provide a thorough assessment of an organization's current performance. 

A double materiality analysis is composed of two complementary perspectives:

• Financial materiality: This aspect of double materiality analyzes how ESG (Environmental, Social, Governance) issues can impact a company's financial performance. For example, a regulatory risk associated with CO₂ emissions could have an impact on costs or business profitability.
• Impact materiality: This aspect of double materiality considers how a company's operations positively or negatively impact the environment and society, such as pollution generated by the production chain or improvements in employee working conditions.

It is important to note that a company’s evaluation is no longer solely tied to their financial performance, but also encompasses their impact on society and the environment. As a whole, this approach illustrates the development of the concept of materiality, which historically focused on analyzing financial risks for shareholders prior to expanding business operations to include stakeholders and encourage transparency outside the financial framework.

Double materiality is currently in effect under the CSRD, and now requires the process to adhere to a specific, structured process in addition to engaging all internal and external stakeholders. The process of double materiality under the CSRD usually includes mapping the value chain, identifying ESG and financial impacts, and then prioritizing these issues in a double materiality matrix.

An example of conducting a double materiality assessment includes a shoe manufacturer who may realize that the use of toxic substances in their manufacturing process has negative social and environmental impacts.

FAQ

What are the two components of double materiality? 

Double materiality includes financial materiality and impact materiality. Financial materiality refers to how sustainability issues impact the company’s financial performance, whereas impact materiality seeks to better understand how business operations impact people, the environment, and society.

Does the CSRD require all companies to conduct a double materiality assessment?

Yes, all companies are required under the CSRD (Corporate Sustainability Reporting Directive) to conduct a double materiality assessment, which includes needing to assess and report on both financial and impact materiality. This is a paramount component to the new reporting standards under the CSRD.

Should all companies conduct a double materiality assessment? 

Even if an organization is not legally required to conduct a double materiality assessment or adhere to the CSRD as a whole, it’s strongly recommended – as seeking to understand how sustainability issues affect both your business and the world could help to improve risk management, stakeholder trust, and long-term carbon reduction strategies.