The concept of double materiality

An undertaking which is obliged to report on sustainability matters should provide information from two perspectives: 1) how a certain sustainability issue affects the entity’s activity and 2) how the entity affects a given sustainability issue.

To understand this, let’s use a simple example. A fund that holds a number of logistics centers across Europe develops them in areas which were originally of agricultural character. After pouring tons of cement to harden the surfaces with maneuvering areas, loading areas, parking lots and warehouses, the natural water retention in the area drastically decreases. This may result in flooding of these areas, especially if the number of heavy storms increases in the area due to climate change. Using the double materiality approach, the undertaking should report on how logistics centers affect the natural environment (decreased rainwater retention) and how the climate change affects the developer's operation (e.g. flooding, necessary repairs, delays in deliveries to logistics centers, claims by users of logistics centers, increased insurance premiums).

Such a double materiality analysis is a great opportunity for managers to map sustainability initiatives for implementation. Taking the given example, by comparing losses resulting from damage caused by extreme weather conditions and costs of implementing climate-friendly solutions (e.g. installing water recycling systems), the entity could embrace the sustainability issue and increase its reputation as a climate-conscious entity and attractiveness among its clients.

The double materiality concept is linked to the Accounting Directive[1] (as amended by NFRD). Its origin lies in Articles 19a (1) and 29a (1) introduced by NFRD[2] based on which the "undertakings are required to report both on the impacts of the activities of the undertaking on people and the environment, and on how sustainability matters affect the undertaking". Based on justification to the CSRD[3] directive (sec. 29), this concept was not well understood and applied by market members, so the CSRD aimed to clarify this perspective and make it more specific.

[1] https://en.lawforpleasure.com/items-1-1/accounting-directive-[2] https://en.lawforpleasure.com/items-1-1/nfrd-directive-introducing-non---financial-reporting-obligations[3] https://en.lawforpleasure.com/items-1-1/csrd-directive-introducing-sustainability-reporting