Materiality and its related concept of double materiality play fundamental roles in sustainability and environmental, social and governance (ESG) reporting. As interest in these areas continues to grow, having a strong grasp of materiality is essential for both organisations and stakeholders.
This article will explore the core definitions and applications of materiality, as well as the emerging perspective of double materiality.
Materiality is a fundamental concept that helps identify and prioritise the most important environmental, social and governance (ESG) issues facing an organisation. It determines which issues will truly impact sustainability performance. Companies conduct materiality assessments to determine which issues are material.
Materiality assessments consider the potential impact of ESG issues on an organisation's sustainability performance and stakeholders. This involves engaging with stakeholders such as employees, customers, suppliers, communities and NGOs to understand their concerns and expectations.
For beginners, assessments typically follow three steps. First, relevant ESG issues are identified through research, analysis of industry reports and frameworks such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and Task Force on Climate-Related Financial Disclosures (TCFD) standards.
Secondly, stakeholders' perspectives on these ESG issues can be gathered through surveys, interviews and focus groups. This provides a holistic view of an organisation's ESG impacts to different stakeholders.
Finally, issues are prioritised based on their potential sustainability impacts and stakeholder relevance. This allows organisations to focus on the most important issues for implementing effective sustainability strategies.
In recent years, the concept of double materiality has also emerged. Double materiality identifies the interconnectedness between an organisation's internal operations and its external environmental and social impacts. It reconstructs materiality by considering both inside-out and outside-in perspectives.
The outside-in view examines an organisation's impacts on the external environment and society, such as climate change, biodiversity, human rights and community well-being. The inside-out view considers how environmental and social factors impact the organisation itself through issues like supply chain management and operational practices.
By considering both perspectives, double materiality provides a more holistic understanding of ESG issues highly relevant to organisational sustainability and long-term viability. It enables alignment of strategies, risk management and decision-making with broader sustainability goals.
Under the regulations of the European Union, double materiality is gradually becoming a mandatory requirement for many companies under directives such as the Corporate Sustainability Reporting Directive (CSRD). Assessing double materiality involves in-depth value chain analysis and stakeholder engagement to identify and prioritise issues.
Overall, double materiality is important as it expands organisational perspectives in sustainability assessments. A more comprehensive understanding supports more effective identification and addressing of ESG risks and opportunities across products, services and supply chains.
Leading companies like Unilever are utilising double materiality to not only minimise environmental footprint but actively contribute to sustainability goals through initiatives such as their Sustainable Living Plan. While the journey may be long, evaluating materiality from both inside-out and outside-in angles is key to enabling positive impacts on sustainable developments.