What is Material? It is simply another way to say, 'what matters most.'
But what matters most differs from person to person. Just as beauty is subjective and depends on an individual's perspective, materiality (what matters most) differs from stakeholder to stakeholder.
There are dozens of different types of stakeholders, and they broadly fall into two categories: investors and non-investors. Non-investors include everyone from employees to customers, suppliers, governments, and the general public, all of whom may benefit or suffer from the actions of a company.
Most of a company's value today comes from intangible assets. This means that the value of companies is typically derived from something other than cash, physical assets, or recurring revenues that are reasonably certain to occur. In many industries, over 80% of the value consists of factors like the valuation of personnel, intellectual property, manufacturing, and more.
This has led to the realization that there's more to business success than money alone. In fact, financial success often depends on the way all the non-financial operational activities are orchestrated and run. By effectively managing these, a business can generate value over the longer term.
All of this is well known to investors and non-investors who, over the last 20 years, have been familiar, or engaged with, the identification and measurement of the environmental and societal impacts which companies have been making as a result of their focus on delivering dividends to shareholders and repaying debt.
Over recent decades investors have become increasingly conscious that their investment methodologies were less reliable than before as they observed the effects of globalization in a multi-polar, hyperconnected world that is growing in uncertainty.
Investors do not like uncertainty. To minimize risk, they employ a variety of techniques, models, and tools to accurately assess the potential returns of an investment. This helps them identify which factors are most influential in their decision-making process and enables investors to gain insight into what matters most when evaluating the pros and cons of investing in something.
Materiality: A Subjective Perspective?
If you're focused on financial returns only, then so-called single materiality is what matters most to you.
If you're focused on saving the planet, addressing social inequalities, or investing in companies exploiting opportunities in these areas, then impact materiality is what matters most to you.
However, as with most things in life, it's more complex than that. Managing uncertainty requires that investors understand two things:
What is Material to cashflow and a company's prospects, i.e., financial performance, and
What is Material to the operational activities which underpin financial performance.
Today, many of the world's largest investment funds are using ESG data as a proxy, a leading indicator of the likelihood of performance over the longer term. According to a recent Bloomberg survey of global business leaders, “the vast majority of respondents see ESG as an important consideration when making investment decisions in their own organizations, even among non-ESG fund managers.”
This is where double materiality comes into play. With double materiality comes the hope of financial and sustainability-related, non-financial (aka impacts) information being presented in a way that is:
Comparable (to financial data)
Verifiable (limited assurance rising to reasonable assurance over the next few years)
Timely (in sync with financial reporting), and
Why We All Should Care?
The lines between single and double materiality, as illustrated and defined by the IFRS's ISSB and the CSRD, are fuzzy.
The objective of IFRS S1 General Requirements for Disclosure of Sustainability related Financial Information … is to require an entity to disclose information about its sustainability-related risks and opportunities that is useful to primary users of general-purpose financial reports in making decisions relating to providing resources to the entity'.
However, it further states in the Application Guidance, which has the same authority as other parts of the standard, that …' information about sustainability-related risks and opportunities is useful to primary users because an entity's ability to generate cash flows over the short, medium and long term is inextricably linked to the interactions between the entity and its stakeholders, society, the economy and the natural environment throughout the entity's value chain. Together, the entity and the resources and relationships throughout its value chain form an interdependent system in which the entity operates. The entity's dependencies on those resources and relationships and its impacts on those resources and relationships give rise to sustainability-related risks and opportunities for the entity'.
CSRD, on the other hand, defines double materiality as having two dimensions: impact materiality and financial materiality. A sustainability matter meets the criterion of double materiality if it is material from the impact perspective or the financial perspective, or both.
In essence, the IFRS, with its mandate to produce international accounting standards, asserts alignment with the CSRD. The CSRD's approach begins with a GRI-informed materiality assessment. However, it also mandates a financial materiality assessment. In this process, the final step includes a 'more likely than not' evaluation of the impacts on financial and other forms of capital.
How Archer ESG Solutions Can Help Companies Calculate Double Materiality
The Archer Double Materiality Calculator helps you quickly and easily assess, calculate, and report on double materiality impacts. Pre-configured assessments based on the E.U.'s ESRS framework allow for evaluating individual impact and performing financial assessments. The Archer Double Materiality Calculator provides a simple and intuitive environment that enables users to quickly and efficiently input the required data by simply responding to questions and prompts in alignment with the ESRS framework.
Integrated with the Archer ESG Management & IRM platform, financial and impact assessments can be incorporated into the organization's overall ESG risk analysis and provides financial teams with the critical information required to determine what ESG information needs to be disclosed.
As with all Archer solutions, real-time, integrated graphical dashboards, reports, heatmaps, and quantifiable risk data help inform executives and senior leadership with decision-useful information to help achieve corporate strategic ESG goals and milestones.
If you want to learn more about how Archer can help your organization assess double materiality, download our short whitepaper, ESG Reporting: From Data to Action, for additional information on best practices and steps you can take to today address your ESG reporting challenges.
Contact us to speak with an Archer expert.