Understanding double materiality

Dougie Spencer

  /  

4 minutes

  /  

Knowledge

“The times they are-a changin’ ”, the ever-true adage sung by Bob Dylan rings especially true in the fast-evolving physical, economic, and societal climate of today. And going hand in hand with the physical, economic, and societal change is the financial risk posed to companies. However, companies also pose risk to the environment and society. Hereunder we introduce and discuss the concept of double materiality and its implications for business.

June 8, 2022
Image: 
Mathieu Turle

A key concept

Materiality is an essential idea in the field of reporting, one that is integral to the process of drafting company disclosure documents and validation by auditors. Essentially, materiality is used to filter information that is either relevant or irrelevant for companies to report to stakeholders. Information filtered into the report is material if it affects the stakeholder’s process of decision-making in regards to the reporting company. However, the question of whether information is relevant or irrelevant is subjective to the stakeholder. Therefore, the concept of materiality does not have defined boundaries and there is room for alternative interpretations of material information by differing stakeholders, take financiers and civil society as two stakeholders who often differ in their points of view.

Financial materiality

The term materiality has historically been associated with financial materiality, and in the context of climate change, this refers to the financial effect of climate change on a company’s development, performance, and position. This concept is of particular importance to investors and hence financial reporting is mature and a well-established practice which is guided by the Task Force on Climate-Related Financial Disclosures (TCFD).  

Financially material issues include physical, transitional, and liability risks. A physical risk of climate change could be the event of drought which negatively impacts total crop yield for an agribusiness company and therefore their total profits. A transitional risk of climate change could impact a coal company that operates in an economy moving away from coal-derived energy.

A liability risk of climate change could be posed when an investor of an agribusiness company is insufficiently informed by the agribusiness company of the physical risk of climate change. Due to this lack of transparency, the investor does not make a well-informed decision regarding their investments, meaning that when the crop yields drop due to sustained droughts, so does the value of the investment. In this case the investor could make a claim against the agribusiness company for not providing transparent information on its financial vulnerability to climate change. Liability claims could also be made by individuals against polluting businesses who suffer from physical effects of climate change.  

Impact materiality

The impacts, risks, and opportunities of climate change and a company’s activity are not just a one-way street. In fact, a company’s activity and climate change interact with each other through impacts, risks, and opportunities. Therefore, it is important or material that the second interaction, namely how a company’s activity impacts upon the environment and society, is also reported. Hence, environmental and social materiality together with financial materiality form the concept of double materiality. The primary audience for the environmental and social materiality reports are consumers, civil society, investors, and employees.

Image source: Trakref

“the concept of stakeholder capitalism not based on the concept of double materiality, just makes no sense at all.” - GRI

Why is double materiality important?

Using double materiality as a framework to identify financial, environmental, and social issues that impact and influence your company, society and the environment allows you to identify and prioritise the activities in your business’s strategy development to transform into a sustainable organisation for a sustainable planet. Not only is reporting on double materiality of ethical interest to businesses, but it is also becoming increasingly important under ever increasing stakeholder and consumer pressure for companies to become more transparent in the environmental and social effects of their undertakings. For consumers and investors alike to make fully informed decisions, the holistic approach to reporting of double materiality is necessary and required. Following the implementation of the CSRD in the coming years, companies operating in Europe will also be legally mandated to report on their environmental, social, and governance (ESG) strategy, implementation, and performance, based on the double materiality principle.

How can you report on double materiality?

The European Financial Reporting Advisory Group (EFRAG) are working with the International Financial Reporting Standards (IFRS) to produce and advise on financial standards taken up by the European Commission and by drafting EU Sustainability Reporting Standards (ESRS) for the European Commision. However, reporting on environmental and social issues is no easy endeavour for businesses due to its novel emergence in the reporting field and the process is often arduous, inefficient and time-consuming. That is why at Salacia, we have developed a Software-as-a-Service (SaaS) platform that allows companies to seamlessly integrate their environmental impact data into our platform and generate ESRS-compliant impact reports over a streamlined timeframe.

Interested in learning more about our impact reporting platform? Visit our website https://www.salaciasolutions.com  or even get in touch via info@salaciasolutions.com, we’d love to hear from you!

other news