Double materiality in ESG: A key concept for sustainable business

The double materiality concept is one of the central concepts in ESG reporting that is gaining increasing attention in the context of new regulatory requirements such as the CSRD. This approach emphasises that firms need to consider two aspects when assessing their impact:

1. Financial or quantitative materiality focuses on how a firm’s environmental, social and governance factors affect its financial performance. It is about what risks and opportunities these factors bring to the firm and its financial performance. For example, significant climate change in a company can affect costs or threaten supply chains, which can have a significant impact on a firm’s profits.

1. Significance for society and the environment or qualitative significance examines how the company’s activities affect wider society and the environment. This includes emissions, use of natural resources, working conditions and other factors that may have an impact on the external environment. This approach emphasises the need for companies to contribute to sustainability and reduce negative impacts on society as a whole.

The dual materiality assessment is a mandatory first step under the CSRD to help companies streamline their reporting and through which they will identify topics that are material (i.e. relevant and material) to the ESG report, so that they do not waste time chasing down irrelevant data. Given the complexity and intricacy of the concept of double materiality, most firms use external consultants to assist with this process. Regardless of whether the evaluation is managed internally or outsourced to a consultant, the European Sustainability Reporting Standards (ESRS) offer four general steps as guidance:

• Involving stakeholders in sustainability topics

• Aggregating stakeholder input and suggestions

• Making comparisons against materiality thresholds

• Mapping significant topics to selected ESRS standards

As the assessment of double materiality itself is a relatively complex and time-consuming process, firms need to start the double materiality assessment well in advance. Starting a dual materiality assessment early will allow firms to identify risks and opportunities that may impact their ESG performance and ensure they are compliant with the new regulatory requirements. For large firms that need to collect data and prepare an ESG report as early as 2025, it is highly recommended to start the dual materiality assessment during 2024 to allow sufficient time to identify data points, inventory and then prepare and validate the data.