Emerging perspectives: double materiality and dynamic materiality

The topics, definitions, and existing concepts of materiality are continuously evolving. Besides, several leading organizations have different views on how materiality should be tackled. Therefore, determining which non-financial topics are considered material for your company can be confusing, and remains a lively area of discussion. In this blog, we give you a bit more clarity about the current developments regarding the collaborations, definitions, and concepts related to materiality.

Recently five leading sustainability and integrated reporting organizations – the Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), Climate Disclosure Standards Board (CDSB), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB), recognized the need for an overarching comprehensive solution for corporate reporting and announced their intention to join forces.

When streamlining the information between these organizations, it seems that one of the key issues is the definition of materiality. There are two different points of view. First, the materiality of financial information. This approach reflects the investors point of view, in which topics are seen from a financial perspective and affect the value of a company. The second point of view concerns the materiality of sustainability topics. From this perspective, materiality can be approached as something that impacts society and environment, which reflects the non-financial information of an organization.

Double materiality: both a financial and a non-financial perspective
Both perspectives are related to each other and considered equally important. Therefore, the EU commission, as part of the Non-Binding Guidelines of the Non-Financial Reporting Directive (NFRD), introduced a new concept called ‘double materiality’. Double materiality means that topics can be material from both a financial and a non-financial perspective. Topics that are considered material from an environmental and social perspective, may have financial consequences over time. There is a continuity between these two perspectives, meaning that double materiality does not imply the existence of two materiality definitions, rather, that topics can be material from either one or both perspectives.

Overlap can be found for instance on the topic of climate change. A company’s activities can have an external impact on the climate, this indicates the environmental & social materiality. But climate change can also have an impact on the activities of a company,  the so-called financial materiality, as this might have a financial consequence. More topics will likely be considered both financial and environmental & social material in the future. The positive and/or negative impact of a company on the climate and society will, to a greater extent, translate into business opportunities and/or risks that are financially material.

Dynamic materiality: connecting financial, enterprise, and sustainable materiality.
In that respect ‘Dynamic materiality’ can offer the conceptual solution. It describes that every company and/or industry has unique topics that evolve either gradually or very quickly. Covid-19 is a clear example of this. The topic went from virtually zero in mid-January to now over 60 percent of total information volume on SASB issues just three months later. When looking at this concept, it brings financial, enterprise, and sustainable materiality together into one continuously moving box and therefore allows different users (such as investors, governments, and employees). Dynamic materiality is a welcome solution, as it bridges the gap between the different reporting organizations.

In a nutshell: double materiality explains how issues can be financially and non-financially material, and dynamic materiality expresses the dynamics that move a material topic along the continuum. Both are interrelated concepts touching upon different aspects of the same process. Whatever concept is chosen, important is that materiality is a time and context-sensitive concept that needs to be designed flexibly.


Authors: Nur Karapinar and Daniek Ehrismann

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