Last update on June 5, 2024
In a nutshell:
- Materiality is a way of understanding which ESG topics should be prioritized in a company鈥檚 business policies and practices
- Double materiality is a way of determining important topics based on two facets: impact materiality and financial materiality
What is the Concept of Materiality?
Materiality can be described as a principle that companies use to understand which topics are most important, or 鈥渕aterial鈥�, for them to prioritize when considering their ESG practices and potential future progress.听
Material topics are topics that represent an organization's most significant impacts on the economy, environment, and people. A materiality assessment is a formal way of assessing a company鈥檚 activities and providing an understanding which specific information is essential to include in their corporate reports.
According to EFRAG, materiality can be assessed based on:听
- the significance of the information in relation to the phenomenon it purports to depict or explain, as well as聽
- its capacity to meet the needs and expectations of the stakeholders of a company and of the company itself, allowing for proper decision-making, and more generally聽
- the needs for transparency corresponding to the public interest.
While the concept may seem abstract, a simple example to understanding materiality could be an airline company. CO2 emissions, or greenhouse gas emissions more generally, would be a material topic for this company, since a dominant factor in their environmental impact is the emissions produced from flying airplanes, and thus would need to be a topic on which they focus on in their climate action plan.
What is Considered as Double Materiality Assessment under the EU Sustainability Reporting Directive (CSRD)?
When it comes to reporting under the EU Sustainability Reporting Directive (CSRD), you must first perform a double materiality assessment. This assessment helps determine which requirements regarding environmental, social and government (ESG) topics are relevant for your organization specifically.听
Double Materiality refers to two types of materiality that you need to consider:
- Impact materiality
- Financial materiality
Impact Materiality (Inside-out)
Impact materiality focuses on how your company鈥檚 actions impact people and the planet in the short, medium, and long term.听
And remember, it鈥檚 not just about your own operation; you also need to assess the impact of your entire value chain. A negative impact anywhere in your value chain could still count as a material topic to your company, even if you are not the one directly carrying out the action.听
For example, a car company would be responsible for the negative impacts of all the companies who manufacture any parts which they purchase and sell.
Negative impacts which 鈥渁re linked to the company", whether they are indirect or direct impacts, would all count as factors which contribute to impact materiality.听
An example given by EFRAG of an indirect impact material topic would be an organization which uses cobalt which is mined using child labor. While the organization is only interested in the cobalt, they are indirectly linked to the negative impacts of child labor and thus could be considered a material topic for the company purchasing or using the cobalt.
Financial Materiality (Outsinde-in)
Here, the focus shifts to how sustainability issues impact your business financially. This includes factors such as your company鈥檚 growth, performance, and cost of capital in the short, medium, and long term.
If a topic could generate risks or opportunities that influence the future cash flows of your company, but are not necessarily captured by financial reporting at the time of reporting, they can still be considered material topics.
Financial material topics could be categorized into two groups:
- They affect the company鈥檚 ability to continue to use or obtain the resources needed in the production process
- They affect the company鈥檚 ability to rely on necessary relationships in the production processes
Double Materiality:听Summary
By making an assessment of both impact materiality and financial materiality, you can figure out which risks and opportunities are material for your company and should be included in your sustainability reporting.听
A sustainability topic can be considered material if it meets the criteria from the impact perspective, finance perspective, or both.听
馃憠 It鈥檚 important to establish appropriate thresholds to help you make this decision, such as the likelihood of occurrence and the potential financial effect. This way, you can ensure that you include important information in your reports.
Check out our in-depth Practice Guide about the Double Materiality Assessment for detailed information on how you can prepare your company for the double materiality under CSRD.
