Double Materiality

The first question is called impact materiality and looks outward, at harm or benefit the company causes through its operations and value chain. The second is financial materiality and looks inward, at risks and opportunities that could shift cash flows, access to capital or value. A topic is reportable if it passes either test, so the two lenses are added together and not averaged. A company can find that emissions pass both, while the pay of contract workers passes only the impact test. The concept is built into the EU’s sustainability reporting standards. Other regimes, such as the ISSB standards, use financial materiality alone. Preparers meet it as a documented assessment involving stakeholder input, thresholds and board sign-off. Its result is the list of topics a report must cover: a topic failing both tests can be left out, and one passing either must go in.

A packaging company scores its sustainability topics on both lenses. Plastic waste ranks high on impact because of pollution from its products, and also high on financial risk because of new levies. Water use in its plants ranks low on impact but high on financial risk, since one site sits in a drought area. Both topics are reported.