Demystifying the double materiality debate

By Valerie Phua and Teo Ying Ying

Reporting standards & materiality

Figure 1: Positions taken by major reporting standards on double materiality

Materiality is a concept at the heart of any sustainability strategy. Originally a term used in accounting and legal circles, materiality described issues that would be considered significant to a reasonable investor[i]. Within sustainability, the definition of materiality has been extended to describe issues of significant importance to not just investors, but to a company’s key stakeholders.

But opinions differ on who these key stakeholders should be, and the types of issues that should be considered material.

Double materiality has emerged as a concept at the heart of the debate between major reporting standards, which have different positions.

In this 10 minute read, we will ask:

  • What is double materiality, and what does double materiality mean in the context of a company’s sustainability strategy?
  • What positions have been taken by the major reporting standards?
  • What is at the heart of the debate across these standards?
  • What is the outlook for a global sustainability reporting landscape?

What is double materiality?

What is double materiality?

Figure 2: What is double materiality?

Double materiality implies duality and refers to the application of both financial and impact materiality.

Financial Materiality

Financial materiality focuses on how environmental, social and governance (ESG) issues impact a company, adopting an outside-in perspective. Within this approach, companies would ask themselves:

Themes: Questions to ask:
What risks are presented by this ESG issue or trend to my business? Will labour issues along my supply chain such as forced or child labour present reputational risks to my company?

How can I stay ahead of human rights litigation trends?

What opportunities could be unlocked by ESG issues or trends? How can I leverage on the growing market demand for low-carbon technology in my product development strategy?
What will be the financial impact of ESG risks and opportunities on my bottom line? How will increasing carbon prices affect the costs of energy or returns on investment within my portfolio?

What is the value of my company’s dependency on ecosystem services such as pollination?

What is the cost of non-compliance relating to ESG issues?

Impact Materiality

On the other hand, impact materiality focuses on a company’s impacts on environmental, social, and governance causes. It adopts an inherently inside-out perspective. Within this approach, companies would ask themselves:

Themes: Questions to ask:
What is the environmental impact of my business on the climate and natural environment? What is my company’s contribution to the global carbon budget?

What are the environmental impacts of my operation’s waste production?

How can my business practices protect or restore local ecosystems?

What is the social impact of my business on employees, workers along the supply chain, and communities where we operate? How can I create a working environment for my employees to thrive?

How can I ensure that employees and workers along the supply chain are paid a liveable wage?

What role can my company play in contributing to ethical and just societies? How will anti-competitive practices undermine the level playing field for participants within my industry?

How can I support and strengthen local institutions by enforcing anti-corruption and anti-bribery policies?

A double materiality approach unifies both financial and impact materiality, and asserts that companies should adopt both an outside-in and inside-out perspective.

Figure 3: Comparing financial and impact materiality

What position do the different reporting standards take?

Not everyone agrees that companies should consider both financial and impact materiality.

Some sustainability reporting standards place more emphasis on financial materiality, while others place more emphasis on impact materiality.

The Taskforce for Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) are two standards that focus on financial materiality. Both standards guide companies towards providing comparable, consistent, and reliable sustainability data that meets investor needs[ii]. Both the TCFD and SASB have been designed to facilitate investment decisions and effective capital allocation.

Task Force Climate Related Financial Disclosures

The TCFD adopts an outside-in perspective, that seeks to identify, assess, and eventually evaluate the financial impacts of climate change on an organization[iii].

The SASB standards likewise seek to promote ESG disclosures that enable investors to assess how ESG issues translate into risks and opportunities for each business.

SASB standards focus on financial materiality

On the other hand, the GRI Universal Standards, and the EU’s Corporate Sustainability Reporting Directive (CSRD), emphasise the importance of impact materiality.

The GRI Standards place impact materiality at the centre of its definition of what an organisation should consider material, while acknowledging that understanding a company’s impacts could reveal what is financially material. The GRI  Standards are clear that impact materiality should take priority on the basis of public interest, and asserts that topics which are not financially material should still be included[iv].

GRI standards focus on ESG

The Corporate Sustainability Reporting Directive (CSRD) similarly emphasises impact materiality, but positions it on equal footing with financial materiality. It thus remains the only corporate reporting standard that explicitly incorporates double materiality into its reporting directive for companies. The intent of the CSRD is to make it possible for investors and the public to assess companies’ contribution to a sustainable and fair economic system[v].

EU EFRAG's definition of double materiality

The GRI and CSRD depart from the TCFD and SASB standards because they encourage companies to consider issues that may not necessarily have a financial impact.

What is at the heart of the debate?

Reporting standards & materiality

Impact and financial materiality both aim to define ESG issues that are significant to a company. However, both approaches have inherently different aims, and target audiences.

Financial materiality caters to investors and anyone who has a financial stake in the company’s performance. It thus seeks to assess the impact of an ESG issue on enterprise value.

Impact materiality caters for a broader group of stakeholders, including employees, civil society, local communities. In short, it recognises that businesses should create value for all its stakeholders, in recognition of planetary boundaries.

The fundamental question that confronts most businesses is whether they should be responsible for issues beyond those that have a clear or direct financial impact.

It can be hard to establish a direct relationship between human rights issues along the supply chain and enterprise value, but does that mean that respect for human rights is beyond the company’s responsibility to enforce? If we did not have carbon taxes or emissions trading systems, should companies still reduce their contribution to the global carbon budget? If companies do not have direct dependencies on ecosystem health, should they still ensure that their waste management practices do not cause pollution?

Should businesses be held accountable for issues outside of their direct influence and control?

What is the outlook for the reporting landscape?

A global common language for sustainability reporting is on the way. The International Sustainability Standards Board (ISSB), created by the IFRS Foundation, seeks to harmonise the fragmented reporting landscape and build an international baseline of sustainability disclosures. A unifying reporting standard will bring clarity to the market, and help companies, regulators, and investors to navigate sustainability reporting requirements.The IFRS Sustainability Disclosure Standards are expected to be adopted by many national regulators, including Singapore, Hong Kong, and Japan.

How such a global reporting standard defines materiality has naturally drawn intense interest from all stakeholders. The ISSB describes one of its objectives as “Develop standards for a global baseline of sustainability disclosures meeting information needs of global investors”, and defines information as material “if omitting, misstating or obscuring it could reasonably be expected to influence investor decisions.”[vi] Both of these statements imply a focus on financial materiality.

The ISSB does qualify that “A company’s ability to deliver financial value for investors is inextricably linked to stakeholders with whom it works and serves, societies in which it operates, and natural resources upon which it draws.” However, it has drawn criticism from stakeholders focused on impact materiality for its lack of attention to environmental and social impacts caused by the company.

ISSB and materiality

As a global standard-setter that could become the basis for regulators’ sustainability reporting requirements, the ISSB’s definition of materiality could have far-reaching implications.

The ISSB will tentatively be effective for reporting periods from 1 January 2024, and it is currently finalising its reporting requirements. As the reporting landscape continues to evolve and consolidate its requirements, the ramifications of the ISSB’s definition of materiality remains to be seen.




[i] A guide to materiality past, present, and future, FrameworkESG, October 2020

[ii] Why Companies Use SASB Standards, SASB Standards, August 2022

[iii] Position paper – Materiality and climate related financial disclosures, CDSB, 2018

[iv] GRI 1: Foundation 2021, The GRI 2021 Universal Standards

[v] Final Report – Proposals for a Relevant and Dynamic EU Sustainability Reporting Standard-Setting, European Financial Reporting Advisory Group, February 2021

[vi] An update from the International Sustainability Standards Board, IFRS Sustainability, February 2023