How Double Materiality is Transforming ESG Reporting

by Rabia Akram

October 13, 2024

What if the future of business wasn’t just about profit but also about the impact companies have on the world? The world would be a better place, indeed. Double materiality is turning that question into a reality by reshaping how companies approach ESG reporting. 

Today, it’s not enough to report what affects your business – you must also explain and show how your actions affect society and the environment. As this concept gains popularity, businesses must incorporate it into their strategies. But why and how? 

What is double materiality?

At its core, double materiality challenges the traditional view of what really matters in business reporting. It broadens the lens beyond financial performance. It demands that companies evaluate both: how external factors impact their finances and how their actions impact society and the environment.

To understand how it works, think of a large farming company. Under the traditional mode, this business would primarily focus on risks that could hurt its profits – drought, rising costs of fertilizers, or shifts in consumer demand.

But under dual materiality, the scope widens. This company will also have to report on how its farming practices affect local ecosystems, carbon emissions, or even labor conditions.

Stakeholders, from investors to communities, are demanding this border transparency. They want to know: Is this company doing more harm than good?

All in all, double materiality looks at both sides of the coin. But why should it be included in business strategy?

The role of double materiality in business strategy

For a company to truly excel in today’s landscape, it needs to add dual materiality to its business strategy. Let’s return to our hypothetical large farming company. Traditionally, its strategy might have centered around maximizing crop yields, cutting costs, and navigating market fluctuations.

But now, with double materiality, the company will be required to answer these questions:

• What is the impact of its water usage on local communities?
• Are its agricultural practices degrading the soil?
• Does it affect labor rights in the regions in which it operates?

By considering these broader impacts, companies are beginning to understand societal and environmental risks are not isolated from financial outcomes – they are intertwined. 

For example, water-intensive practices of that farming company may reduce its operational costs for the short term. Still, they could lead to long-term water scarcity, community backlash, and increased regulatory pressure. These factors can circle back to threaten its financial liability.

So in short, double materiality ensures  that a company knows what the risks and opportunities are. This can, in turn, lead them to make well-informed decisions. This is why many ESG regulations are now including double materiality. But understanding this can be complicated. That’s why tools like IMPAKTER PRO exist to provide simplified solutions to sustainability reporting.

CSRD and double materiality in EU: a new era for ESG reporting

CSRD is transforming the landscape of ESG reporting in the EU. Introduced by the EU, the CSRD aims to standardize sustainability reporting, requiring more detailed and transparent disclosures from companies about their environmental and social impacts. A key feature of the CSRD is its emphasis on double materiality

With the CSRD and double materiality in the EU, ESG reporting is entering a new era of transparency and accountability. Companies are now required to think about sustainability from a 360-degree perspective, considering both financial and societal impacts. This shift helps businesses not only manage their own risks but also contribute to global sustainability goals.

Overcoming challenges in CSRD reporting

By 2024, almost 50,000 companies in Europe will need to comply with these new standards, making it essential for businesses to adopt the right ESG reporting tools. Platforms like IMPAKTER PRO are designed to help companies navigate these complex requirements by offering robust ESG reporting solutions tailored to meet the CSRD’s needs.

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This article is referenced from The rising influence of double materiality in ESG reporting by FinTech Global

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This article was originally published on IMPAKTER. Read the original article.