Double Materiality

The European Financial Reporting Advisory Group defines double materiality as the combination of 'financial materiality' and 'impact materiality'. In that regard, impact materiality involves identifying sustainability matters that are material in terms of the impacts of the reporting entity's own operations and its value chain, based on: 

• The severity (scale, scope, and remendability) and, if appropriate, the likelihood of actual and potential negative impacts on people and the environment; 
• The scale, scope, and likelihood of actual positive impacts on people and the environment in relation to a company's operations and value chain; 
• The urgency derived from social or environmental public policy and planetary boundaries.

There are several benefits of incorporating double materiality into a company's materiality assessment:

• Improved risk management: By considering both financial and non-financial impacts, companies can better identify and manage risks that could affect their long-term success. This can help companies avoid costly disruptions and reputational damage.
• Enhanced stakeholder engagement: By considering the impact of their operations on society and the environment, companies can better engage with stakeholders, such as customers, employees, and communities. This can help build trust and support the company's activities.
• Long-term value creation: Incorporating double materiality into a company's decision-making can help ensure that the company is creating long-term value for both shareholders and society. By addressing non-financial impacts, such as environmental and social risks, companies can create a more sustainable and resilient business model.
• Improved reporting: By considering both financial and non-financial impacts, companies can provide more comprehensive and transparent reporting to stakeholders. This can help build trust and accountability and improve the company's reputation.
• Regulatory compliance: Many countries are now requiring companies to report on non-financial impacts, such as environmental and social risks. By incorporating double materiality into their materiality assessments, companies can better meet these reporting requirements.

While incorporating double materiality into a company's materiality assessment has many benefits, there are also several challenges and issues that companies may face:

• Lack of standardized metrics: Unlike financial metrics, which are well-established and standardized, non-financial metrics such as environmental and social impacts can be more difficult to measure and compare across companies and industries.
• Complex stakeholder expectations: Different stakeholders may have different expectations about what constitutes a material impact on society or the environment. It might be challenging for companies to identify which issues are truly material and how to prioritize them.
• Limited resources: Conducting a comprehensive materiality assessment can be time-consuming and resource-intensive, particularly for small and medium-sized enterprises (SMEs) that may have limited resources to devote to non-financial reporting.
• Inconsistent regulatory requirements: While many countries are now requiring companies to report on non-financial impacts, there is still significant variation in regulatory requirements across countries and regions. This can make it challenging for companies to develop consistent reporting practices.
• Risk of greenwashing: Companies may face the risk of greenwashing or making false or misleading claims about their environmental or social impacts. This can erode trust and credibility with stakeholders and harm the company's reputation.
• Lack of materiality expertise: Incorporating double materiality into a company's materiality assessment requires a high level of expertise in both financial and non-financial reporting. Companies may need to invest in training and hiring staff with these specialized skills.