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What is Single Materiality and Double Materiality?

February 2, 2024

“Single materiality” and “double materiality” are distinct yet interrelated approaches to evaluating environmental, social, and governance (ESG) risks and opportunities, including those related to climate change. Understanding the difference between these approaches to risk assessment is crucial, including in the context of climate-related disclosure.

Single materiality — definition

“Single materiality” refers to how climate and other ESG risks and opportunities impact an organization’s financial performance and position. Organizations conduct single materiality assessments to identify those risks and opportunities that could substantively affect their operations, earnings, physical assets, and other elements that contribute to their enterprise value. This approach focuses solely on impacts to the organization, rather than the organization’s impacts on the climate and environment.

Double materiality — definition

In contrast, “double materiality” considers both the effects an organization has on the climate and environment and the potential impact of these factors on its financial performance. 

A double materiality approach recognizes that organizations contribute to, and are affected by, climate change. Double materiality assessments are therefore more complex and comprehensive than single materiality assessments as they extend beyond an organization’s internal operations to include its influence on society, the environment, and the broader climate agenda.

Why materiality matters for climate disclosure

In 2019, the European Commission formally cited double materiality as the approach organizations should take to identify and manage ESG risks, including climate risks. The double materiality approach is now embedded in the European Sustainability Reporting Standards (ESRS), which apply to companies covered by the Corporate Sustainability Reporting Directive (CSRD).

Double materiality was further elevated at COP26, the United Nations Climate Change Conference that took place in Glasgow in 2021. The concept has also gained traction among climate-conscious investors who want to minimize the adverse impacts of their financing activities. Certain investors further believe that a double materiality approach provides a more comprehensive understanding of a portfolio company’s true exposure to climate risks and opportunities

Getting started with materiality assessments

The European Financial Reporting Advisory Group (EFRAG), which advises European authorities on financial and sustainability reporting standards, developed implementation guidance to support organizations in understanding and performing double materiality assessments as required under the ESRS. EFRAG also released guidance on double materiality. The following step-by-step guide draws from EFRAG’s materials.

Step 1: Initial preparation

  • Identify purpose and scope: Clearly define the objectives and boundaries of your double materiality assessment. This requires a thorough understanding of why your organization is conducting the assessment and what aspects of sustainability will be covered.
  • Prepare resources: Gather the necessary resources to conduct your double materiality assessment — including personnel and internal and external data. You should also set up processes for conducting, validating, and reporting the assessment.

Step 2: Stakeholder mapping and engagement

  • Identify impacted stakeholders: Create a comprehensive list of stakeholders potentially affected by the organization’s activities — encompassing customers, employees, suppliers, local communities, and more.
  • Determine influential collaborators: Recognize key partners with the potential to influence the organization, such as regulators, investors, employees, and advocacy groups. Involve the C-suite in this assessment process.
  • Gather stakeholder input: Collect insights from clients and internal and external stakeholders through surveys, interviews, and/or focus groups. Understand how your organization’s actions impact them and the environment during these engagements. Organize the feedback systematically to make it easier to analyze and interpret the results accurately.
  • Synthesize feedback: Aggregate and organize the insights from your stakeholder engagements to determine what positive and negative impacts the organization has on the climate and environment.
  • Quantitative and qualitative data: For each impact, conduct a comprehensive assessment utilizing quantitative and qualitative data. Relevant quantitative data may include Scope 1, 2, and 3 emissions data, energy efficiency metrics, and the value-at-risk of assets and/or operations vulnerable to climate risks. Qualitative data may include insights from forward-looking climate scenario analyses and high-level climate risk assessments, as well as subjective interpretations of government and regulatory ambitions as they relate to climate.

Step 3: Materiality identification

  • Identify impact materiality: Determine which of the assessed impacts may have significant adverse consequences for people, the environment, and/or society. Assessments of material impacts should be linked to short-, medium-, and long-term time horizons. Assessments should also consider how these impacts may flow through various transmission channels linked to your organization, including their value chains, products, services, and business relationships. You should account for sector-specific and sector-agnostic impacts and apply impact tolerance thresholds to rank them by severity, considering factors like scale, scope, likelihood, and stakeholder input.
  • Identify financial materiality: Determine which of the assessed impacts may have adverse financial consequences for your organization. Material impacts should be linked to specific time horizons and, where possible, particular aspects of your organization’s financials such as revenues, cash flows, access to capital, and asset values.
  • Aggregate assessments: Synthesizing the results from both assessments will produce a thorough double-materiality view of your organization’s impacts, risks, and opportunities. In turn, this should facilitate better-informed decision-making, both from a sustainability and financial standpoint.

Step 4: Reporting and disclosure

  • Disclose assessment process and outcome: Integrate a description of the double materiality assessment as well as the outputs of this assessment in public reports. Ensure that these align with the requirements of relevant standards and regulations, such as the CSRD.
  • Transparency: Where possible, ensure disclosures are transparent and consistent across reporting periods. Accurately disclose changes to processes or shifts in the materiality of identified impacts that occur between reporting periods.

Step 5: Assessment improvement

  • Regular monitoring: Continuously monitor and review your materiality assessment process. This involves periodically re-assessing the materiality of already identified impacts and scanning for emerging ones.
  • Adaptation: Be prepared to adapt the materiality assessment based on evolving stakeholder expectations and changing circumstances. Continuous improvement means being responsive to the dynamic nature of sustainability and climate expectations.

Best practice examples of double materiality assessment disclosure

Below are two best practice examples of double materiality assessment disclosure.

VINCI, 2022 Universal Registration Document

“To identify the material environmental issues for the Group’s activities, in addition to the mapping of physical risks associated with extreme weather events, a broader analysis of main environmental risks for each business activity was performed. As a result of this risk assessment for each of the 15 business activities, specific action plans for each risk were developed. The geographical factor was also taken into account; main environmental risks were identified for each country where the Group is present. The reported index is the average of nine environmental indicators: biodiversity and protection of marine areas, biodiversity and protection of land areas, exposure to climate change, vulnerability to climate change, deforestation, environmental regulatory framework, waste management, water pollution, and water depletion. VINCI also produced a map positioning its countries of operation based on local environmental regulations. In 2022 this assessment was expanded to encompass the principle of “double materiality”. This concept distinguishes between financial materiality, which considers how environmental risks could affect the Group’s financial performance, and impact materiality, which considers how the Group’s activities could impact their environment. Impact materiality is assessed through interviews conducted with the Group’s environmental experts, applying the same approach as VINCI’s existing risk analysis procedures. These analyses served to identify the main risks for the Group’s activities, as well as the different risk management strategies available and their suitability.” 

Citi, 2022 TCFD Report 

“For the purposes of discussing climate risks and opportunities in this TCFD Report, we use an approach to materiality that is consistent with the TCFD recommendations. Therefore, this report incorporates a climate change “double materiality” perspective — looking at both the climate’s impact on our company, and our company’s impact on climate — and, for example, uses longer time frames to assess potential impacts than those time frames customarily used in our required disclosures, including those mandated by SEC rules and regulations. This layered approach means that this TCFD Report and many of our other voluntary disclosures capture details on ESG issues, including climate-related risks and opportunities that may not be and are not necessary to be, incorporated into our required disclosures. Our approach to materiality in this TCFD Report and other voluntary ESG disclosures also means that statements made in this report and in our other voluntary disclosures use a greater number of assumptions and estimates than many of our required disclosures. These assumptions and estimates are likely to change over time, and, when coupled with the longer time frames used in these voluntary disclosures, make any assessment of materiality inherently uncertain. In addition, our climate risk management efforts and net zero strategy remain under development, and the data underlying our climate risk management efforts and strategy are expected to evolve over time, particularly given ongoing challenges related to the quality, accuracy, and quantity of climate data. As a result, we anticipate that certain disclosures made in this report and our other voluntary ESG disclosures are likely to be amended, updated, or restated in the future as the quality and completeness of our data and methodologies continue to improve.”

Materiality challenges

Performing a double materiality assessment is more challenging than a single materiality assessment due to its added complexity and the relative novelty of impact assessments that extend beyond organizations’ own financials. Double materiality assessments can also be more costly than single materiality assessments, and inherently more uncertain due to the nature of the data, estimates, and assumptions used to calculate an organization’s impact on ESG factors. However, a double materiality approach will generally produce a more holistic understanding of an organization’s ESG risks and opportunities, which explains why climate-focused companies and investors are increasingly taking it up. 

How to move forward

Organizations should identify whether the climate- and/or sustainability-related disclosure requirements they are subject to mandate double or single materiality assessments and prepare accordingly. 

Even where double materiality assessments aren’t mandated by regulators, organizations should consider the preferences of clients and investors when deciding which materiality assessment approach to adopt. Organizations should also consider the potential reputational risks associated with choosing one approach over the other, as there is a risk of being accused of “greenwashing” for failing to perform a comprehensive assessment of their actions on the environment and society or by minimizing an impact, as it was only considered through a single materiality lens.

In many cases, adopting a double materiality approach enables organizations to better understand their risks and opportunities while also positioning them as forward-thinking entities.

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