Double materiality is defined as the union (in mathematical terms, i.e., union of two sets, not intersection) of impact materiality and financial materiality. A sustainability or ESG matter has double materiality if it is material from either an impact or environmental perspective, a financial perspective, or both perspectives.

Materiality is a financial accounting concept that, more recently, is seeing increased usage and relevance through a sustainability or ESG (environmental social governance) strategy lens.

According to the the International Financial Reporting Standards (IFRS) Foundation, a topic is 'material' if it influences investors' perception of a company's enterprise value. For example, in sustainability, if an insurance company underwrites insurance policies in a region that's expected to increasingly be hit by storms and severe weather due to climate change, that is a material risk for the insurer. It ultimately informs the value and risk profile of the business.

Impact or Environmental Materiality within Double Materiality

An event or matter is considered to have impact or environmental materiality if it's connected to actual or high-probability, potential significant impacts on the environment and/or society over a short-, medium-, or long-term timeframe. For example, if everyone who drives a car stops using fossil fuel transportation and switches to using electric vehicles (EVs), this has material environmental and social impact, both at a societal level, as well as for specific companies in the automotive and fuel value chain.

For companies, a matter or topic with double materiality can have impacts directly caused or contributed to by the company's own operations, products, or services, or impacts linked to that company's upstream and downstream value chain.

In this type of example, if a company's product is created using child labor somewhere in its supply chain, that's a material risk for the company, even though the company itself may not have knowingly caused or contributed to the negative impact directly.

Similarly, a company deciding to invest in renewable energy will likely have double materiality considerations. The company could see an increase in short-term costs associated with clean energy CAPEX, but achieve long-term financial benefits, such as lower energy costs and improved reputation, as well as positive environmental impacts, such as reducing greenhouse gas emissions. Another illustration of double materiality.

Examples of Double Materiality in Different Business Sectors

Double materiality can be seen in a variety of different industries and sectors when companies make strategic decisions that consider both financial and environmental impacts.

For example, in the consumer goods industry, a company might choose to implement sustainable sourcing practices for the raw materials used in their products. This decision would have an environmental impact, as it would reduce the company's impact on natural resources, but it may also have financial implications in areas like material costs, consumer loyalty, and brand reputation.

Another double materiality example can be found in the banking industry, where many banks are reviewing their loan portfolio to make sure they are not indirectly financing activities that are harmful to the environment. These decisions can have a positive environmental impact (divesting from fossil fuels) while also impacting the bank's financial performance.

Healthcare company UnitedHealth Group has employed and implemented double materiality in several different ways in its business. From a financial perspective, investing in the health and wellness of employees helps reduce absenteeism and healthcare costs, which improve employee productivity and engagement. Additionally, by promoting healthier lifestyles, UnitedHealth Group can position itself as an employer of choice and attract and retain high-quality talent.

In recent years, UnitedHealth has implemented workplace wellness programs where employees can participate in activities such as fitness classes, health screenings, and stress management workshops to improve their physical and mental well-being. The company also launched a program called "UnitedHealthcare Community Plan" which aims to improve the health and well-being of low-income populations and other underserved communities. This program provides access to health care services and community-based support systems, such as transportation assistance and meal delivery, that are designed to help people manage chronic health conditions.

All of these initiatives and programs embody the sustainability principle of double materiality.

Using Double Materiality as a Strategic Tool

For corporate leaders and ESG practitioners, materiality is a powerful concept to understand and put into practice. Materiality assessments are projects to help an organization understand, organize, and prioritize its material topics and themes to guide and inform its sustainability or ESG strategy.

Every organization's double materiality approach should be unique to its organizational context. However, there are a few general best practices organization's should consider when embarking on materiality and double materiality consideration and strategic decision-making:

  • Conduct a materiality assessment: Materiality assessments are research projects to identify which environmental and social issues are most relevant and impactful for the business and its stakeholders. This can help a business better understand double materiality, prioritize which issues to focus on, and decide how to allocate resources to address them
  • Use a double materiality framework: Common double materiality frameworks include Triple Bottom Line and the EU Corporate Sustainability Reporting Directive (CSRD and ESRS)
  • Use long-term scenarios and forecasts: When making strategic decisions that consider double materiality, business leaders should evaluate the long-term implications of strategic decisions and business practices, and try to anticipate or forecast how they will affect the company's financial and environmental performance
Double Materiality Definition

For more on materiality, please refer to our Materiality Assessment Overview Guide, or feel free to contact us if you need direct double materiality support and guidance.