Double Materiality: Why it Matters for Organisations and Businesses

The concept of Double materiality within the ESG (Environmental, Social, and Governance) sphere has been increasingly used as a strategic tool to help businesses identify risks, prioritise material themes, and effectively assess their impacts. A recent KPMG press release highlighted that 95% of the world’s top 250 companies are now publishing carbon targets (up from 80% in 2022) which perhaps indicative of several evolving trends and a growing importance of ESG reporting.

While comprehensive ESG materiality reports have been published by the world largest companies, medium sized and small businesses can equally benefit from undertaking ESG reports and assessments. In particular, undertaking double materiality assessments isn’t simply about mimicking trends or simply aligning with business status quo. Instead, ESG assessments can be highly impactful for business leaders looking to enhance transparency through sustainability objectives and to future proof their business through the mitigation of climate risks.

Double Materiality in Practice

The term ‘Materiality’ itself originates from an accounting principle that mandates companies to disclose any factors that significantly impact investor decision-making. This principle ensures that businesses maintain transparency by accurately recording and reporting key financial information. Within the context, ESG materiality, commonly referred to as ‘double materiality’, extends beyond financial materiality to include the broader impact that a company has on society and the environment. Specifically, this concept is divided into two primary categories: (1) financial materiality, which evaluates how external ESG factors affect a company’s financial performance, and (2) impact materiality, which considers how a company’s operations influence social and environmental factors.

While the term itself might still remain obscure, a practical example of double materialist can be seen in the Fashion Industry. For example: a global fashion retailer faces financial material risks due to climate change and resource scarcity. If extreme weather events disrupt cotton supply chains needed for the use of fabrics and materials, or there is a significant increase water costs, the company's production expenses could rise, effecting profitability. Investors and financial stakeholders would need this information to assess the company’s long-term viability but also to seek solutions on how to better fortify their position and mitigate against such risks.

At the same time, the company has an impact material risk due to its environmental and social footprint. Specifically, if the retailer relies on suppliers within their value chain that use unethical labour practices or contribute to excessive water pollution, then the business activities are negatively impacting communities and ecosystems. A business looking to reduce its impact material risk would seek to remedy and improve these negative impacts both on communities and the environment. This dual perspective demonstrates why the company must integrate both financial and impact considerations into its sustainability strategy.

While the above fashion retailer example provides a very high level illustration, business leaders looking to successfully conduct a double materiality assessment must tailor their approach based on their sector, operational context, and stakeholder expectations. The process typically involves engaging with their stakeholders to understand their key concerns, identifying ESG topics that are most relevant to the business, assessing financial and impact materiality using qualitative and quantitative methods, and integrating findings into corporate sustainability strategies and reporting frameworks. The benefits of adopting a double materiality approach are extensive, enabling companies to remain informed about stakeholder concerns, facilitating improved analysis analysis of material risks, and providing strategic direction for sustainability initiatives.

Understanding the Regulatory Environment

The regulatory landscape for ESG materiality assessments continues to evolve, with increasing mandatory requirements shaping corporate sustainability reporting.

At the forefront is the European Sustainability Reporting Standards (ESRS) under the EU Corporate Sustainability Reporting Directive (CSRD), which mandates large businesses to conduct double materiality assessments in their ESG disclosures.

The International Sustainability Standards Board (ISSB) has established itself as a significant global framework for sustainability and climate-related reporting, providing standardised guidance for organisations worldwide. While the Global Reporting Initiative (GRI) was one of the earliest frameworks to introduce materiality as a core principle in ESG reporting, its voluntary nature means organisations can choose whether to adopt its guidelines. This diverse regulatory environment, though not fully standardised, reflects the growing importance of structured ESG reporting in corporate governance.

The Strategic Importance of Double Materiality

Beyond compliance, materiality assessments serve as a best practice for corporate sustainability strategies. As noted above, they support organisations in identifying business opportunities and risks, streamlining decision-making processes, and fostering stakeholder dialogue. A well executed double materiality assessment clarifies which ESG themes a company should prioritise and facilitates a more structured and rigorous approach to the development of a business’ sustainability strategy.

Double materiality and ESG materiality reporting are not just responses to burgeoning regulatory obligations. Instead, organisations should regard them as crucial strategic tools that enhance risk management, business resilience, and transparency. As regulatory pressures increase and stakeholders demand higher accountability, organisations that proactively implement double materiality assessments will be better equipped to navigate ESG challenges and capitalise on sustainability-driven opportunities.

Practical recommendations for  implementing materiality assessments:

• Start Simple and Scale: Begin with a focused assessment of your most significant impacts and risks. Use existing resources and tools, materiality assessment templates, and gradually expand your approach as capacity grows.

• Leverage Existing Relationships: Engage with your immediate stakeholders first - your employees, key customers, and local suppliers, then expand outwards. Their insights can provide valuable perspective without requiring extensive resources for stakeholder engagement.

• Focus on Business-Critical Issues: Identify and prioritise ESG issues that directly affect your business operations and local community. This might include energy costs, waste management, or local employment practices.

• Integrate with Current Systems: Rather than creating separate processes, incorporate materiality considerations into existing business planning and risk assessment activities to maximise efficiency.

• Take Achievable Actions: Select 2-3 priority areas based on your assessment and develop practical, measurable actions.