Materiality is the importance of an item of information to a decision-maker. In the context of sustainability reporting, materiality refers to the importance of sustainability issues to a company’s financial performance and its impact on the environment and society. Below, we list what single and double materiality are and why it matters to companies.
Single materiality: What is it?
Single materiality is a sustainability reporting concept that refers to the identification and reporting of sustainability issues that are “material” to a company’s financial performance. In other words, single materiality focuses on the impact of sustainability issues on a company’s bottom line.
Why is single materiality important?
There are several reasons why single materiality is significant. Firstly, it can help companies to focus their sustainability reporting efforts primarily on the issues that are most influential to their financial performance. Having a clear and concise way to communicate sustainability performance to investors and other stakeholders is critical to investment opportunities, and using a clear framework helps save time and money.
Second, single materiality helps companies identify and manage the risks and opportunities associated with their sustainability practices. By understanding the sustainability issues that are most material to their business, companies can take steps to mitigate risks and capitalise on opportunities.
What are the drawbacks of single materiality?
There are a couple of potential drawbacks to single materiality:
- Incomplete picture: Single materiality only provides a partial picture of a company’s sustainability performance. It doesn’t consider the impact of sustainability issues on the wider world, such as the environment and society.
- Greenwashing: Single materiality can be used for greenwashing by making false claims about a single aspect of performance, while ignoring the wider picture.
Double materiality: What is it?
Double materiality goes a step further than single materiality. Instead, it covers the identification and reporting of not only sustainability issues that are material to a company’s financial performance, but also those that impact on the wider world.
Why is double materiality important?
Double materiality recognises the sustainability performance of a company can have a significant impact on the wider world. This includes the environment, society, and the economy. A double materiality approach helps companies ensure that their sustainability performance is aligned with the needs of the wider world.
What are the benefits of double materiality?
There are a number of benefits to adopting a double materiality approach to sustainability reporting. These include:
- Complete picture: Double materiality provides a more complete picture of a company’s sustainability performance.
- Alignment with stakeholders: Double materiality can help companies to align their sustainability performance with the needs of their stakeholders. This can build trust and help to ensure that the company is making a positive contribution to the world.
- Risk management: By understanding the impact of sustainability issues on the wider world, companies can take steps to mitigate risks and capitalise on opportunities.
What are the drawbacks of single materiality?
Double materiality also isn’t without its drawbacks, the main two include:
- Increased complexity: Companies will need to consider a wider range of factors when making decisions, and being able to communicate them to stakeholders in a clear and concise way can be difficult.
- Cost: Companies have to collect and analyse more data, and they may need to hire consultants or other experts to help them with the process, this takes additional time and resources to complete.
Example of single and double materiality
A company that produces and sells bottled water is considering a new water bottling plant. The company estimates that the new plant will cost £10 million to build and will generate £1 million in annual profits.
- From a single materiality perspective: The decision to build the new plant would be considered material because it would have a significant impact on the company’s financial performance.
- From a double materiality perspective: The decision would also need to consider the environmental impact of the new plant, such as the amount of water that would be used by the new plant, the amount of pollution that would be emitted, and the impact that the plant would have on the local ecosystem.
If the environmental impact of the new plant is considered to be material, then the company may decide not to build the plant, even though it would be profitable from a financial standpoint.
Which approach should companies take?
Both approaches have advantages and disadvantages. Ultimately, the decision should be made on a case-by-case basis, considering the specific circumstances of the company and the needs of its stakeholders, such as:
- The size and complexity of the company. Larger and more complex companies may need to adopt a double materiality approach in order to fully understand and manage their sustainability risks.
- The industry in which the company operates. Some industries, such as the energy and mining sectors, are more exposed to sustainability risks than others.
- The company’s stakeholders. Some stakeholders, such as investors and customers, may be more interested in a company’s sustainability performance than others.
Materiality in regulations and standards
In some situations, companies will have no choice but to adopt double materiality. For example, organisations that are subject to the EU’s Corporate Sustainability Reporting Directive (CSRD) will be required to report on the sustainability impacts of their activities, both financial and non-financial, starting in 2024.
At this stage, the CSRD’s counterpart, the ISSB, and its IFRS S1 and S2 standards do not currently require companies to report on double materiality.
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In summary
Single materiality and double materiality offer two different approaches to sustainability reporting, both are worth understanding if you or your organisation is required to or looking to disclose on sustainability related information.
| Single materiality | Double materiality |
|---|---|
| Focuses on the impact of sustainability issues on a company’s financial value. | Considers both the impact of sustainability issues on a company’s financial value and the impact of the company’s activities on the environment and society. |
| Is a more traditional approach to sustainability reporting. | Is a more progressive approach to sustainability reporting that is gaining in popularity. |
| Is often seen as being less comprehensive than double materiality but easier to perform. | Is more comprehensive, but requires more time and resources to perform. |
| Is more likely to be used by companies that are primarily focused on their financial performance. | Is more likely to be used by companies that are committed to sustainability and social responsibility. |
| Is required as part of standards such as the ISSB. | Is a requirement of sustainability regulations such as the CSRD. |
