What is dual materiality?

The European Commission defines dual materiality in the Corporate Sustainability Reporting Directive (CSRD, Directive (EU) 2022/2464) as the obligation for companies to analyse and report on two key dimensions: how environmental, social and governance (ESG) factors affect the company's financial performance (financial materiality) and how the company's activities affect society and the environment (impact materiality).https://finance.ec.europa.eu/sustainable-finance/corporate-sustainability-reporting_en)

This approach is also reflected in the GRI - Global Reporting Initiative, which explains that sustainability reporting should reflect both the risks to the company and the risks and impacts caused by the company on the environment or communities. The GRI Standards are among the first to promote such dual responsibility in reporting. (https://www.globalreporting.org/standards/)

The European Financial Reporting Advisory Group (EFRAG) has also operationalised this approach and included the concept in the European Reporting Standards (ESRS), requiring companies to assess both perspectives and document them transparently. (https://www.efrag.org)

Essentially, dual materiality marks the shift from investor-orientated reporting to one that integrates the interests of society as a whole. Companies can no longer ignore the external effects of their activities - they become an integral part of corporate accountability and transparency.

Why is it important for businesses?

For companies, especially those operating in European markets or working with regulated firms, understanding dual materiality is important for several reasons.

Firstly, it is a criterion in complying with the new European legislative framework. The CSRD requires organisations to adopt this approach in all their sustainability reporting starting from the 2024 financial year for large companies, with a progressive extension to listed SMEs.

Secondly, this approach allows companies to identify real risks: climate change can affect supply chains, natural resources or production costs. At the same time, business activity can contribute to environmental degradation or social problems, and these effects are increasingly being scrutinised by authorities, investors and consumers.

Investors, in turn, increasingly demand evidence of how a company manages both dimensions of sustainability. Lack of dual materiality analysis or incomplete reporting can lead to a loss of trust and, in turn, exclusion from sustainability funds or international value chains.

In practical terms, applying this principle involves a process of careful analysis of all the company's impact areas: energy, emissions, human resources, social rights, supply chain, etc. In many cases, this is done through stakeholder consultation, materiality mapping and prioritisation of relevant issues.

For those interested in the concrete steps for carrying out a dual materiality assessment (identification of ESG themes, stakeholder consultation, materiality map), find information here "Steps for companies to follow in assessing dual materiality" - ESGmedia

A hypothetical example

Let's say a company in the agri-food sector is analysing the issue of climate change:

- from the perspective financial materialityprolonged drought and volatile commodity prices can affect supply chains and profit margins

- from the perspective impact materialityintensive farming operations can contribute to soil degradation, excessive water consumption and greenhouse gas emissions.

Both dimensions will be analysed and the company must show how it is managing the risks that may affect it and what concrete measures it is taking to reduce the negative impact it generates on the environment and society.

A real example

SAP (a global leader in software solutions) communicates publicly and applies the principle of dual materiality. In its 2024 sustainability report, SAP published a materiality map reflecting both perspectives: what is important for the company (financial impact) and what is important for society and the environment (external impact). The process involved data analysis, stakeholder consultation and prioritisation of key themes such as data protection, inclusion, climate change and technology impact. Access the SAP report here.