Double materiality is defined as the union (in mathematical terms, i.e., union of two sets, not intersection) of impact materiality and financial materiality. A sustainability or ESG matter has double materiality if it is material from either an impact or environmental perspective, a financial perspective, or both.

Materiality is a financial accounting concept that, more recently, is seeing increased usage and relevance through a sustainability or ESG (environmental social governance) strategy, risk management, and reporting lens.

According to the the International Financial Reporting Standards (IFRS) Foundation, a topic is 'material' if it influences investors' perception of a company's enterprise value. For example, in sustainability, if an insurance company underwrites insurance policies in a region that's expected to increasingly be hit by storms and severe weather due to climate change, that is a material risk for the insurer. It ultimately informs the value and risk profile of the business.

Sustainability Double Materiality in the ISSB and ESRS

Recently, the IFRS' International Sustainability Standards Board (ISSB) has extended the concept of financial materiality to sustainability by provided two definitions of double materiality:

  1. Financial materiality of sustainability topics outlines how sustainability impacts the financial performance and prospects of a company
  2. Impact materiality of sustainability defines how a company's activities, operations, and value chain impact external stakeholders and the broader world

In addition to the ISSB standards, double materiality also features prominently in the European Sustainability Reporting Standards (ESRS). ESRS guidance states:

"The performance of an objective materiality assessment is pivotal to sustainability reporting which shall include relevant and faithful information about all impacts, risks and opportunities (IROs) across environmental, social and governance matters determined to be material from the impact materiality perspective or the financial materiality perspective or both."

ESRS recommends double materiality be assessed using "appropriate quantitative and/or qualitative thresholds" based on (a) the severity, scale, scope, or significance of impacts, as well as (b) their likelihood. Financial materiality should be based on anticipated financial effects related to an entity or company's performance, financial situation, cash flows, access to capital, and cost of capital.

Impact or Environmental Materiality within Double Materiality

According to standards like ISSB and ESRS, an event or matter has impact or environmental materiality if it's connected to actual or high-probability significant impacts on the environment and/or society over a short-, medium-, or long-term timeframe. For example, if everyone who drives a car stops using fossil fuel transportation and switches to using electric vehicles (EVs), this has material environmental and social impact, both at a societal level, as well as for specific companies in the automotive and fuel value chain.

For companies, a matter or topic with double materiality can have impacts directly caused by the company's own operations, products, or services, or impacts linked to that company's upstream and downstream value chain.

In this type of example, if a company's product is created using child labor somewhere in its supply chain, that's a material risk for the company, even though the company itself may not have knowingly caused or contributed to the negative impact directly.

Similarly, a company deciding to invest in renewable energy will likely have double materiality considerations. The company could see an increase in short-term costs associated with clean energy CAPEX, but achieve long-term financial benefits, such as lower, more predictable energy costs, better energy security, and improved reputation, as well as positive environmental impacts, such as reducing greenhouse gas emissions. Another illustration of double materiality.

Examples of Double Materiality in Different Business Sectors

Double materiality can be seen in a variety of different industries and sectors whenever companies make strategic decisions or risk assessments that consider both financial and environmental impacts.

For example, in the consumer goods industry, a company might choose to implement sustainable sourcing practices for the raw materials used in their products. This decision has an environmental impact by reducing the company's natural resource usage, and likely also has financial implications in areas like material costs, consumer loyalty, and brand reputation.

Another double materiality example in the financial services industry involves how banks review their lending practices and loan portfolios to make sure they're not indirectly financing activities that are harmful to the environment. These decisions can have a positive environmental impact (such as divesting from fossil fuel investments) while also impacting the bank's financial performance and lending risk.

Healthcare company UnitedHealth Group has employed and implemented double materiality in several different ways in its business. From a financial perspective, investing in the health and wellness of employees helps reduce absenteeism and healthcare costs, which improve employee productivity and engagement. Additionally, by promoting healthier lifestyles, UnitedHealth Group can position itself as an employer of choice and attract and retain high-quality talent.

In recent years, UnitedHealth has implemented workplace wellness programs where employees can participate in activities such as fitness classes, health screenings, and stress management workshops to improve their physical and mental well-being. The company also launched a program called "UnitedHealthcare Community Plan" which aims to improve the health and well-being of low-income populations and other underserved communities. This program provides access to health care services and community-based support systems, such as transportation assistance and meal delivery, that are designed to help people manage chronic health conditions.

All of these initiatives and programs embody the sustainability principle of double materiality.

Using Double Materiality as a Strategic Tool

For boards, corporate executives, and ESG and sustainability practitioners, materiality is a powerful concept to understand and put into practice. Materiality assessments are projects that help an organization organize and prioritize its material topics and themes to guide its sustainability or ESG strategy.

Every organization's double materiality approach should be unique to its organizational context. However, there are a few general best practices organization's should consider when embarking on materiality and double materiality consideration and strategic decision-making:

  • Conduct a materiality assessment: Materiality assessments are research projects to identify which environmental and social issues are most relevant and impactful for the business and its stakeholders. This can help a business better understand double materiality, prioritize which issues to focus on, and decide how to allocate resources to address them
  • Use a double materiality framework: Common double materiality frameworks include Triple Bottom Line, the ISSB, GRI, and the EU Corporate Sustainability Reporting Directive (CSRD)'s ESRS standards
  • Use long-term scenarios and forecasts: When making strategic decisions that consider double materiality, business leaders should evaluate the long-term implications of strategic decisions and business practices, and try to anticipate or forecast how they will affect the company's financial and environmental performance
  • Plan and document your materiality process: Many sustainability reporting standards like the ESRS require reporting entities to disclose information about how they assess double materiality. Whether this materiality process incorporates surveys, stakeholder interviews, scenario planning, or other inputs, double materiality needs to be scoped, planned, socialized, timed, and budgeted in the context of an organization's sustainability reporting requirements
Double Materiality Definition

For more on materiality, please refer to our Materiality Assessment Overview Guide, or feel free to contact us if you need direct double materiality support and guidance.