In the legislation that pushes companies to provide consumers, investors and regulators with more information on how they address global challenges, double materiality plays a very important role. Sustainability reporting is an increasingly strategic tool for companies as it allows them to transparently report on their efforts to manage environmental, social and governance (ESG) impacts. Within this framework, double materiality reflects the need for a comprehensive view that encompasses not only the risks and opportunities related to ESG factors that may affect the company, but also how the company itself contributes to these factors.
What is double materiality?
Formally introduced with the update of the Non-Financial Reporting Directive (NFRD) and later extended by the Corporate Sustainability Reporting Directive (CSRD), double materiality obliges companies to consider two distinct and interconnected perspectives when analysing their activities:
- Financial materiality (outside-in): assesses how external elements related to ESG factors (environmental, social and governance) affect the company’s financial and operational performance, constituting risks or opportunities for its business. One example is climate change, which can represent a material risk for a company, with impacts on supply chains, operating costs and regulatory compliance.
- Impact materiality (inside-out): analyses the effects generated by a company’s activities on the environment and society. Impact materiality analysis considers aspects such as, for example, greenhouse gas emissions, waste management, use of natural resources, working conditions and respect for human rights.
An example of double materiality
As an example of the application of the principle of double materiality, let us consider the issue of ‘climate change’, one of the most relevant and urgent issues for companies, since it has direct and indirect effects both on their operations and on the environment and society.
Conducting a double materiality analysis of a company’s operations can reveal climate change on the one hand as a material risk for the company and its operations, with significant effects on its financial performance and an increase in the risks that the company has to deal with, while on the other hand as something that the company itself acts upon, generating impacts on the environment and society.
Companies that adopt sustainable practices, reducing emissions and improving energy efficiency not only protect their operations from certain climate risks, but also contribute to the mitigation of climate change itself. The issue of climate change is therefore a material element here, both from the perspective of financial materiality (outside-in) and impact materiality (inside-out).
Benefits and challenges
Double materiality is crucial not only to meet regulatory requirements, but also to improve corporate strategy and stakeholder engagement. Investors and customers are increasingly seeking transparency and clarity on how companies manage risks and opportunities related to ESG factors. Integrating double materiality into business operations improves the ability to manage long-term risks, identify opportunities for improvement and enhance a company’s reputation.
A further benefit of double materiality is the contribution it can make in fostering a sustainable corporate culture: companies that adopt a transparent and socially and environmentally focused approach tend to improve trust from external stakeholders, such as consumers and local communities.
However, double materiality analysis also poses some challenges. Indeed, the complexity of measuring ESG factors and their impacts requires advanced tools and precise data, which are not always readily available and which entail an investment by companies in more sophisticated and reliable data collection systems. Furthermore, managing these processes requires the acquisition of new skills, either by training staff or by hiring experts in the field of sustainability. This change requires time and resources, as well as an internal cultural transformation to orient the company towards long-term, sustainable goals.