The European Commission’s recent approval of the Corporate Sustainability Reporting Directive (CSRD) has sparked renewed interest and questions about one of the requirements: double materiality.
You may be wondering what double materiality is, where it is required (or not), and what the benefits of this approach are when determining priority sustainability topics for your company. We’ve compiled a list of Frequently Asked Questions below.
FAQ #1: What is “double materiality?”
“Double materiality” means looking at a sustainability topic from two vantage points: how a topic significantly impacts a company’s value creation AND how the company impacts people, the economy, and the environment.
“Impacts” refers to the actual or potential positive and negative impacts of a company on the issue and its stakeholders (an inside-out view) and impacts of the issue on the company (an outside-in view).
A company could have a positive impact on people by providing well-paying jobs and contributing to economic development in the communities they operate OR a negative impact on people through violations of human rights or labor policies. There are also risks and opportunities for companies based on things like customer data breaches or new lines of business in sustainably sourced materials and products.
FAQ #2: Why is double materiality important and why should we do it?
Double materiality is intended to provide more comprehensive insights about a company's ESG risks and opportunities. It will help you:
- Assess issues for risk and opportunities to the business and to your stakeholders
- Solicit feedback on current performance on key sustainability issues
- Prioritize your sustainability topics
- Engage key stakeholders
FAQ #3: I’ve heard a lot about sustainability regulation from the SEC and the EU? Do they require double materiality?
According to the SEC’s proposed climate disclosures, an issue is “material” if it poses a financial risk to the company. So, a double materiality approach is not required.
However, CSRD legislation mandates companies use a double materiality approach. It requires companies to engage stakeholders on topics they consider important, as well as those that pose the biggest sustainability risks and opportunities for the company.
FAQ #4: My company isn’t based in the EU, would double materiality requirements in the CSRD still apply to us?
Maybe. At least 10,000 companies outside of the EU are expected to have to adhere to CSRD reporting rules (including at least 3,000 US-based companies). For non-EU companies, factors like being listed on an EU-regulated market or having EU-based subsidiaries will require reporting in alignment with CSRD requirements. Ultimately, your legal team will need to review the CSRD parameters and determine whether (and which phase of implementation) applies to your company.
FAQ #5: My company is already doing sustainability reporting using existing standards and frameworks. Do these require double materiality?
Some do. SASB, TCFD, and the recently-launched ISSB Standards prioritize disclosures that investors look for to measure environmental, social, and governance risks. In these cases, “materiality” means information that is financially material to the company (and therefore investors). For example, this might include financial risks (and opportunities) the company faces as a result of climate change, social change, and shifting regulatory requirements.
However, other sustainability reporting frameworks and standards like GRI, require a double materiality approach in their disclosures. In the General Standards and available Sector Standards, GRI asks companies to consider the impacts of an issue on the business alongside impacts on the economy, environment, and people. In fact, the CSRD materiality guidelines were modeled after the materiality approach in the GRI Standards.
FAQ #6: If none of the above apply to my company, is there still a reason to consider double materiality in our approach to materiality?
Yes. Approaching materiality through the lens of double materiality enables you to assess environmental, social, and governance topics more holistically, considering the impact issues have on your company and the impact your company has on the issues. This enables you to understand your potential impact on key stakeholders both within and outside of your company.