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 perspectives.
Materiality is a financial accounting concept that, more recently, is seeing increased usage and relevance through a sustainability or ESG (environmental social governance) strategy lens.
According to the the International Financial Reporting Standards (IFRS) Foundation, a topic is 'material' if it influence's 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.
An event or matter is considered to have impact or environmental materiality if it's connected to actual or high-probability, potential 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 or contributed to 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.
For corporate leaders and ESG practitioners, materiality is a powerful concept to understand and put into practice. Materiality assessments are projects to help an organization understand, organize, and prioritize its material topics and themes to guide and inform its sustainability or ESG strategy.