The Concept of Materiality in Sustainability: Definition and Importance for Businesse

In the evolving landscape of sustainability reporting, the concept of materiality takes on a central role to ensure transparency and accountability. Materiality allows companies to identify and disclose the most relevant information regarding their impact on the environment, society and their financial sustainability. The Corporate Sustainability Reporting Directive (CSRD) introduced the concept of double materiality, which combines the perspective of impact materiality and financial materiality for more comprehensive reporting connected to European Sustainability Standards (ESRS).

 Materiality Definitions

 Materiality of Impact

Impact materiality is about the effects of an organization’s activities on people and the environment. This perspective considers both the positive and negative impacts that can result from business operations, both in the short and long term. In other words, it focuses on the environmental and social outsourcing of a business, regardless of whether these have immediate financial consequences.

Examples of impact materiality include:

– A company’s CO2 emissions and their effect on climate change.

– Working conditions along the supply chain and their impact on human rights.

– Water pollution caused by industrial production.

 Financial Materiality

Financial materiality, on the other hand, focuses on sustainability-related risks and opportunities that can affect an organization’s economic performance. This concept is derived from traditional financial reporting and is crucial for investors and other financial stakeholders who need to assess the long-term value of a company.

Examples of financial materiality include:

– The risk of environmental regulation that could increase a company’s operating costs.

– The adoption of new green technologies that can represent a market opportunity.

– The reputational risk related to unethical business practices.

 Double Materiality in CSRD

The CSRD introduced the concept of double materiality as an obligation for companies subject to the directive. This principle requires considering both impact materiality and financial materiality, recognizing that significant social or environmental impact can turn into a financial risk or opportunity over time.

Double materiality offers a more complete frame of reference, as:

– Integrate the stakeholder perspective with the investor perspective.

– It makes sustainability reporting more effective in supporting the management of business risks and opportunities.

– It contributes to the transparency and comparability of data at European level, facilitating the decisions of investors and financial institutions.

 Example of Double Materiality Application

An automotive company that manufactures internal combustion vehicles may need to consider:

1. Impact materiality: Greenhouse gas emissions from its vehicles contribute to climate change and public health issues.
2. Financial materiality: The regulatory evolution that limits emissions and the growing demand for electric vehicles can affect the value of the company and its ability to attract investment.

In this case, the double materiality highlights how environmental and social sustainability is closely linked to the financial sustainability of the company.

 The Importance of Materiality for Companies

The integration of materiality into the corporate strategy and reporting brings numerous benefits:

– Better risk management: Identify and address environmental and social risks before they become financial problems.

– Increased transparency and trust: Stakeholders and investors receive comprehensive and reliable information on sustainability performance.

– Alignment with European regulations: Companies that comply with ESRS standards are better prepared for future obligations.

– Innovation opportunities: understanding sustainability trends allows you to develop new products and services in line with market needs.