If popular media and television are anything to go by, investors are archaic figures who are carnivores for high capital and nothing else. From slick-talking Bobby “Axe” Axelrod in the acclaimed television series Billions, to Jared Vennet and his famous “when you come for my payday, I’m going to rip your eyes out” monologue in The Big Short, investors have been depicted as sub-human cash guzzlers.
Materiality, a concept originally conceived in the accounting world, has generally supported the archaic investor prototype, defining materiality exclusively as issues or events that impact financial returns. However, with investors increasingly getting younger, dropping the pin-striped suits, and becoming savvy to environmental issues and social inequalities, the information they consume is changing too. Naturally, materiality and its scope are widening to account for investors who don’t look like John Pierpont Morgan and his bulging belly from the late 1800s.
What is Double Materiality, and What is it Not
Let’s get some definitions out the way. Materiality generally refers to something relevant or significant. In financial reporting, materially refers to information that is relevant to understanding how a company is financially performing now, and in the medium to long term. Companies conduct materiality assessments on an intermittent basis.
More recently, there has been a recognition that companies don’t merely exist in the air-conditioned siloes of Sandton and Shenzhen, but rather in larger environmental and social ecosystems. Sustainability issues such as climate change, gender equality, and health and safety have therefore been slowly integrated into the long list of potential risks that could impact a company’s sustainability. Progress, right? Yes. There is only one snag, though.
Materiality assessments have typically looked at how a range of issues impacts a company. A one-sided relationship if you will. Seldom do they account for how a company itself impacts a range of issues. For example, how does a mining company and its fleet of fifteen-year-old fuel-chunking Nissan Hardbody’s impact the environment? Or to what extent does a multinational beverage manufacturer and its excessive use of water impact the supply of water available to nearby communities?
These issues may not have an immediate bearing on a company’s balance sheet, but they do, however, stifle the broader ecosystems upon which the company exists and invariably relies upon. Herein lies the importance of taking a two-pronged approach when it comes to materiality. Cue, double materiality.
How it’s Validating the Investor of Today
Double materiality, in essence, recognises that companies and financial institutions should manage and take responsibility for the actual and potential adverse impacts of their decisions on people, society and the environment. Over and above limiting potential risks to enterprise value, companies must determine and respond to the risks they themselves pose to their own environmental and social ecosystems.
Gaining traction in the investor community, double materiality has been confirmed as a basis for comprehensive non-financial disclosure by the EU Green Taxonomy. It has also been endorsed by the EU Corporate Sustainability Reporting Directive (CSRD) which is due to be implemented in 2023.
Double materiality requires wider and more direct stakeholder engagement to gain a comprehensive understanding of what is material in complex and often ever-changing industries and operating environments. It is a process of definition, management, and communication of key issues impacting a company inward, and how the company is impacting stakeholders outward.
Moreover, double materiality represents an appreciation for the evolution and, almost humanisation, of the investor. It veers away from the robotic, short-term investor archetype to one grounded in nuance and the recognition of the overlapping interests shared between people, planet and, you guessed it, profit.
Are you interested in a materiality assessment for your risk management or reports?