What You Need to Know About Double Materiality

Note: A version of this article appeared in IR Magazine in March 2024

On the heels of the SEC’s final climate disclosure rule, we can see much is about to change for what companies must disclose to investors.

A materiality assessment is typically a financially oriented assessment that identifies and prioritizes broad ESG impacts that can affect a company’s performance, value creation, reputation and legal position. It forms the strategic foundation for planning, budget allocation, risk management and, of course, reporting. Essentially, it’s an assessment of risks and opportunities that might affect the company, the outside-in view. Many reporting frameworks – GRI, TCFD, SASB and the International Sustainability Standards Board (ISSB) – require materiality assessments, and the SEC’s rule requires financial materiality. What does it all mean? 

What is double materiality?  

Double-materiality adds the dimension of capturing a company’s impact on the environment and communities, adding the inside-out perspective. Assessing ESG impacts from these two angles is what we mean by double-materiality: how a business is financially impacted by ESG topics, also known as financial materiality, and how a business impacts people and the environment (impact materiality). 

The concept of double-materiality aims to encourage greater transparency and accountability from companies and promote more holistic decision-making that considers the broader implications of business activities. Most companies have already begun to incorporate some aspects of these dual perspectives, inviting sustainability team members to investor calls and addressing sustainability issues in their annual report and proxy. Beyond communications, this shifting lens means potential impacts on internal team structures, external suppliers and stakeholder awareness.


Who’s required to report double materiality?  

Right now, no US company is required to use this standard. While the concept of double-materiality isn’t new, there has been a huge increase in interest over the last year because it is required for the Corporate Sustainability Reporting Directive, which will reach beyond Europe to US companies with significant business in the continent.

Companies that meet certain thresholds in Europe will be required to report, even private firms of scale. In the US, meanwhile, voluntary reporting has been leaning this way, with GRI embracing it. Some companies will be affected soon, as they fall under required reporting in one or both zones.

How to prepare 

If your company is already reporting with GRI or ISSB, you are in good shape. If you’re just getting started understanding what’s required for double-materiality, here are some helpful tips:

If you’re eager to move toward the new requirements today without sticking your neck out, consider the frameworks that will enable you to be ready from a financial materiality perspective (TCFD and SASB). Working toward these now will put you on the path and give your company enough runway to take care of any operational or data-gathering issues.

If your company will be subjected to CSRD or wants to move toward this more robust framework, get started right away. The analysis can yield recommendations that take time to implement.  

And remember: don’t neglect the storytelling and humanity. This is still needed to bring your data to life and ensure your messages are understood with the intended effect.

 

IOP Can Help   

If you find yourself struggling to get started with your double materiality assessment, consider expert help. We’ve engaged in reporting strategy and Materiality discussions with clients and created many stakeholder-pleasing sustainability/ESG reports as well as impact communications. Email us to get in touch if you need help with your next step. 

Updated March 2024
Photo by Donald Giannatti on Unsplash