Understanding double materiality vs. single materiality in ESG reporting

Materiality assessments are formal processes to help businesses identify Environmental, Social and Governance (ESG) priorities, risks, and opportunities. Now, they have found a permanent place in the evolving landscape of ESG reporting. ‘Single materiality’ and ‘double materiality’ are two distinct, but related frameworks for this assessment. Understanding these two materiality approaches is critical for compliance with sustainability reporting and risk assessment.

What is single materiality?

Single materiality primarily focuses on the financial impact of ESG factors on a company’s performance. In this framework, companies assess how environmental and social issues could influence their financial health and investor decisions.

This approach aligns closely with traditional financial reporting, emphasising shareholder value. For example, a manufacturing company might evaluate how regulatory changes regarding carbon emissions could lead to increased costs or fines, thereby impacting profitability.

Essentially, single materiality works to answer the question: How do ESG risks and opportunities affect the company’s bottom line?

What is double materiality?

Double materiality expands the lens through which companies assess material issues. This approach takes into account that in some cases, financial materiality and impact materiality don’t overlap – but oftentimes, they are intertwined.

Double materiality is a dual lens, requiring business to assess their social and environmental impact, in addition to the financial implications of material sustainability risks and opportunities.

Following this framework will answer:

1. How do ESG risks and opportunities affect the company’s financial performance?
2. How does the company’s operations affect the environment and society?

This perspective recognises that businesses are part of larger ecosystems and have responsibilities beyond just financial returns.

The importance of double materiality in ESG reporting

Adopting a double materiality approach can provide a more holistic view of a company’s risks and opportunities. By recognising the interconnectivity of financial performance and societal impact, businesses can make informed decisions that align with sustainable practices.

As the global focus on sustainability intensifies, understanding and implementing double materiality is becoming increasingly essential. Even where double materiality assessments aren’t mandated by regulators, businesses that adopt this approach can not only enhance their ESG reporting but also strengthen their resilience and reputation in a rapidly changing market.

Double materiality reporting for the CSRD

The EU Corporate Sustainability Reporting Directive (CSRD) is a regulatory framework introduced by the European Union to enhance corporate sustainability reporting.

The CSRD has replaced the Non-Financial Reporting Directive (NFRD), and will likely impact 50,000 companies who will have to comply. Any businesses who reported under the NFRD will be required to submit their first CSRD reports as early as 1 January 2025 for the 2024 financial year – with more businesses soon to follow.

A double materiality assessment is a critical step for compliance with the CSRD and the accompanying European Sustainability Reporting Standards (ESRS). Currently, the CSRD does not mandate a specific method for conducting the double materiality assessment. However, the European Financial Reporting Advisory Group (EFRAG) has published implementation guidance. This gives reporting businesses flexibility to tailor their approach to their unique circumstances.

New to the CSRD? Check out our explainer here!

Single and double materiality assessments are critical to ESG reporting, and are now finding a permanent place in regulation. The CSRD is set to massively impact ESG reporting for applicable businesses in the EU – don’t wait to prepare for the directive’s standards. Get in touch with our experts at Sustainable Energy First so your organisation will be ready for the new reporting directive.