What your CFO needs to know about double materiality

Materiality needs to be reported in a more holistic way, but is often only looked at through a financial lens. This means your investors and wider stakeholders don't have all the information they need about your approach to sustainability. In this article, we explain the concept and why it is important to implement.

Materiality is a concept that defines why and how certain issues are important for a company or a business sector. A material issue can have a major impact on the financial, economic, reputational, and legal aspects of a company, as well as on their stakeholders.

There is a confusion about materiality as many companies focus on one half of the equation. To make it clear, there are two main directions of thinking about materiality, which make up the concept of “double materiality” – financial materiality and impact materiality. See below.

Source: www.globalreporting.org/media/r2oojx53/gri-perspective-the-materiality-madness.pdf

While there has been a move within corporate reporting to look purposefully at how issues such as climate change are affecting businesses financially (with the Task Force on Climate-related Disclosures Framework), it is important that you consider impact materiality to provide a more holistic view of your impacts as a business. For instance, rather than only looking at how an issue like climate change impacts your finances and strategy, looking through the lens of double materiality will allow you to consider the impacts of this issue on your wider stakeholders.

Considering double materiality can provide several benefits:

1. Attract investors with increased interest in sustainable investment
   As the London School of Economics reports: “Financial disclosures could be made decision-useful again to the growing number of investors who seek to align their investment practices with climate or wider sustainability goals – whether due to specific mission statements or the enlightened self-interest that there is no profit on a dead planet.”
   www.lse.ac.uk/granthaminstitute/news/double-materiality-what-is-it-and-why-does-it-matter/
2. Provide your stakeholders with the information they want and need
   Regulators, consumers and society at large are increasingly needing to know every company’s impact on environmental and social issues. Armed with the information from a double materiality assessment, your sustainability team can communicate accurate objectives and push goals by tackling authentic issues affecting your stakeholders.
3. Help you authentically communicate with your stakeholders
   Despite having conducted a materiality evaluation, companies might continue to get queries from stakeholders about additional issues. By considering double materiality, you will be better prepared to answer these questions, even though they are not directly impacting the finances of your company.
4. Contribute to the long-term success of your business
   Ultimately, if you invest in assessing your Impact materiality, it can benefit your future finances, be that through attracting investors or eliminating threats to your reputation.

As the number of reporting requirements increases, companies will need to establish relevant reporting processes, systems and formats to fulfil them, beyond the financial ramifications of single materiality. We know that the trend in reporting is towards merging sustainability frameworks, and as a result it will be easier to implement double materiality because of the simplified sustainability landscape.

Using double materiality can result in clearer, better quality sustainability communication and quicker progress on sustainability objectives. This could also create a stronger connection between your finance and sustainability teams. A separate sustainability report may be on the horizon as the scope of your reporting increases.

Get in touch with us, to have a chat about considering double materiality in your reporting.