What is Double Materiality?
Sustainability is an ever-evolving landscape and the regulation and legislation companies will be required to comply with is becoming more comprehensive. Mandatory disclosure is increasing, in terms of both the requirements on companies to report and in the scope of companies that will be required to report.
One of the new international reporting requirements within the EU is the Corporate Sustainability Reporting Directive (CSRD). CSRD entered into force on 5 January 2023. It applies to all listed companies in the EU market, specifically:
- all listed companies on the EU-regulated market (including listed SMEs, but no micro-enterprises)
- all large companies exceeding two of the three following criteria (as per the Accounting Directive 2013/34/EU):
- 250 employees during the financial year
- balance sheet totalling EUR 20 million or more
- net turnover of EUR 40 million or more
- non-EU companies generating a net turnover of more than EUR 150 million in the EU andthat have at least one subsidiary or branch in the EU must follow the criteria applicable to EU companies.
It is estimated that over 50,000 companies will have to report in accordance with CSRD. The CSRD replaces and is wider in scope than the Non-Financial Reporting Direction (NFRD), with the goal of increasing the standard of sustainability reporting to the same level as the standard for financial reporting. Essentially, legislation requires in-scope companies to give equal weighting to non-financial performance as they would to their financial performance.
One component of the legislation is the concept of reporting under a Double Materiality framework. The Sustainability community is abuzz with talk of Double Materiality and exactly what this will mean for nearly 50,000 business entities. While sustainability professionals are still strategising the best ways to maximise the outcomes of the Double Materiality process, there is uniform sentiment amongst the community that the framework brings sustainability to the forefront of business reporting disclosures, and that can only be a good thing.
The Double Materiality process is designed to determine what the priority Environmental, Social and Governance (ESG) topics are that go in to building a company’s ESG strategy and reporting information. This process involves a comprehensive stakeholder engagement and mapping exercise, which will determine which topics are material for the business and the impacts the business will have on the topic and the stakeholders.
Traditional single materiality has focused on the outside-in risk to business in terms of social and environmental issues. In a Double Materiality process, the inside-out impacts and outside-in risks are considered, making the process more robust, thorough and encompassing. This is both good for businesses, which will have greater internal understanding of their internal and external impacts and for stakeholders, who will have better visibility of the way issues might become financially material either across an entire industry or for an individual company.
The CSRD directs that there is mandatory assurance for sustainability information that is reported, including for the Double Materiality process. Given the complexities of the process and the rigour and analysis the process demands, it is advisable for a company to begin work on their Double Materiality assessments as soon as possible. Ultimately, this will be good for business, good for industry, good for stakeholders and good for the planet.
For support in achieving your Double Materiality targets, contact us or request a call-back.
Author: Kendall Reid, Head of ESG and Sustainability Strategy
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