The Corporate Sustainability Reporting Directive (CSRD) has us all talking about materiality. But what is materiality in sustainability? This article defines materiality and explores how it can help you drive sustainable change.
Defining Materiality and Double Materiality: What’s the difference?
Materiality is the evaluation and prioritization of Environmental, Social, and Governance (ESG) factors that significantly impact a company. Factors are assessed for their impact on the company and their importance to its stakeholders. This process helps organizations identify the issues that truly matter in the broader context of sustainable business practices.
Materiality in sustainability includes considerations like climate change, social responsibility, and ethical governance. By understanding and addressing material ESG factors, companies can enhance transparency, build stakeholder trust, and contribute to long-term environmental and societal well-being.
Double materiality is a process that evaluates impact, described above, and financial materiality. Financial materiality assesses the significance of sustainability factors that affect a company’s financial performance. Impact materiality extends the scope to non-financial aspects, emphasizing the broader societal and environmental impacts of a company’s operations. The results are often displayed in a materiality matrix.
Together, double materiality helps businesses to align business practices with sustainable outcomes which fosters a holistic approach to decision-making and reporting.
Financial vs. Impact Materiality
What is Financial Materiality?
Financial materiality, in the realm of sustainability, evaluates a company’s financial performance in the context of its broader sustainability practices. It involves identifying the sustainability factors that have a substantial impact on a company’s financial outcomes. Financial materiality helps companies decide which sustainability aspects are crucial for maintaining financial stability and meeting the expectations of stakeholders.
Examples of financially material sustainability factors include the cost of natural resource inputs, managing supply chain risks related to climate change, or investing in employee wellness programs. For instance, water scarcity is material to a beverage company as it relies on a steady supply of water to produce its product. The link between financial performance and sustainability becomes apparent as companies address these material factors.
Investing in sustainable practices mitigates risks and enhances brand reputation. These practices can also foster stakeholder trust and contribute to improved financial performance. This connection underscores the strategic importance of understanding and incorporating financial materiality into sustainable business practices.
What is Impact Materiality?
Impact materiality is the identification and prioritization of non-financial factors that extend beyond the immediate operations of a company. It encompasses the company’s broader societal and environmental impacts. Impact materiality evaluates issues like carbon emissions, community engagement, and ethical supply chain practices. A company’s approach to human rights, diversity and inclusion, or its contributions to local communities can be deemed impact material, as these factors significantly affect the company’s broader social footprint.
Impact materiality extends beyond operational considerations due to its role in shaping a company’s reputation and stakeholder relationships. Organizations that proactively address material issues with sustainable practices enhance their public image and foster stronger relationships with stakeholders. For example, a company committed to reducing its environmental footprint may gain positive recognition, while one neglecting its social responsibilities may face reputational risks.
The results of impact materiality can help define corporate sustainability strategies. This use of an impact materiality assessment supports ethical, social, and environmental considerations in the company’s overall approach. By prioritizing impact material sustainability factors, companies can contribute to positive societal change while strengthening their position as responsible and ethical entities.
Double Materiality for Strategic Decision-making
The intersection of financial materiality and impact materiality is double materiality. Double materiality can be used to develop strategy and make sustainable decisions. For example, a company that prioritizes sustainability might invest in renewable energy sources (impact materiality) to reduce its carbon footprint. This strategic decision aligns with environmental considerations and contributes to cost savings and efficiency, positively impacting financial performance (financial materiality). In this way, companies can effectively manage materiality by identifying synergies between financial and non-financial factors.
One example of a company effectively using materiality to drive strategy is Unilever. Unilever embraces sustainability as a core tenet of its business strategy and addresses both financial and non-financial material issues. By integrating sustainability into its operations and supply chain practices, Unilever reduced its environmental impact and enhanced brand reputation and stakeholder relationships.
Reporting and Disclosure Practices
Sustainability legislation and voluntary frameworks take a crucial role in guiding businesses towards materiality and double materiality assessments. The EU CSRD increased the disclosure requirements companies must make for material issues. It also mandates a double materiality assessment for entities subject to CSRD reporting.
Aside from legislation, voluntary frameworks also emphasize materiality. GRI 3: Material Topics 2021 emphasizes the importance of materiality with guidelines for identifying economic, environmental, and social topics. Similarly, SASB’s industry-specific standards address financial materiality considerations with sector-specific sustainability issues.
Materiality As Your Compass
In conclusion, single materiality sets the stage, focusing on Environmental, Social, and Governance (ESG) factors that resonate with stakeholders. However, the evolution to double materiality is paramount to connect financial and impact materiality. Successfully managing this intersection can drive positive change, enhance corporate reputation, and strengthen stakeholder relationships.
About the Author
Jennifer Debias leads business development, sales, and marketing at ensogo, working with ESG and EHS professionals to optimize their sustainability strategies with technology. She has more than 15 years in EHS&S leadership experience in global facilities operations, construction, regulatory compliance, and software. Before joining ensogo, Jennifer served as EHS Director for AECOM, Director of Business Development at RegScan, and ESG product specialist at Intelex.