Sustainability reporting is changing. Organizations are no longer being asked simply to disclose the environmental, social and governance issues they consider important. Increasingly, they are expected to demonstrate why those issues matter, how they affect people and the environment, and how they may influence the organization’s ability to create value over time.
This is where double materiality becomes important.
At its core, double materiality recognizes that sustainability matters can be significant from two different perspectives. An organization can have significant impacts on people, the environment and the economy, while sustainability-related developments can also create risks and opportunities for the organization itself. A robust materiality assessment therefore needs to consider both directions: the impact an organization has on the world and the way sustainability matters can affect the organization.
This is often described as the difference between impact materiality and financial materiality.
Impact materiality looks outward. It asks what an organization is doing to people and the environment through its operations, products, services and business relationships. Financial materiality looks inward. It asks how sustainability-related risks and opportunities could reasonably be expected to affect the organization’s prospects, including its financial performance, cash flows, access to finance or cost of capital.
While double materiality is a central concept within the European Sustainability Reporting Standards (ESRS), the thinking behind its two perspectives is highly relevant to organizations working with the GRI Standards and the ISSB Standards. In particular, GRI provides a strong foundation for understanding impact materiality, while ISSB provides a useful framework for considering sustainability-related risks and opportunities from a financial perspective.
Understanding these connections can help organizations move away from treating sustainability reporting as a collection of separate compliance exercises and instead build a more integrated understanding of what matters to the business and its stakeholders.
Under the GRI Standards, material topics are determined based on an organization’s most significant impacts on the economy, environment and people, including impacts on their human rights. This means that the starting point is not necessarily whether a sustainability issue creates a financial consequence for the organization. The question is whether the organization is causing, contributing to, or otherwise connected to a significant impact through its activities and business relationships.
Consider a manufacturing company that operates in a water-stressed region. Its water consumption may affect the availability of water for surrounding communities and ecosystems. From a GRI perspective, this impact may be significant even if the company has not yet experienced a material financial consequence from water scarcity. The assessment therefore needs to consider the scale of the impact, how widespread it is, how difficult it would be to remedy, and, where relevant, the likelihood of potential impacts occurring.
This is the essence of the impact materiality perspective: what is the organization’s impact on the world around it?
Financial materiality asks a different question.
Under IFRS S1, the ISSB requires organizations to disclose information about sustainability-related risks and opportunities that could reasonably be expected to affect their prospects. These may influence the organization’s cash flows, access to finance or cost of capital over the short, medium or long term.
Returning to the manufacturing company, water scarcity may also create significant business risks. Declining water availability could interrupt production, increase operating costs, require investment in water-efficient technologies, expose the organization to regulatory restrictions or affect its ability to operate at certain locations. In this case, the same sustainability matter that represents an impact on communities and ecosystems may also represent a financial risk to the organization.
This illustrates why the two perspectives should not be viewed as competing approaches.
They are asking different questions about the same sustainability landscape.
A company can have a significant impact on the environment without that impact immediately translating into a financial risk. Equally, a sustainability-related risk or opportunity may be financially significant even when the organization’s direct impact is relatively limited. Some matters will be material from both perspectives, and the relationship between the two can evolve over time.
For example, poor working conditions may initially be identified as a significant impact on workers. Over time, that impact could contribute to employee turnover, productivity losses, recruitment costs, legal exposure and reputational damage, creating financial implications for the organization. Similarly, climate change may represent a significant environmental impact while also creating physical and transition risks that affect assets, supply chains, revenues and operating costs.
This interaction is what makes double materiality particularly valuable.
A credible Double Materiality Assessment should therefore begin with a broad understanding of the organization and its value chain. It is not enough to look only at what happens within the organization’s own offices, factories or facilities. Significant impacts, risks and opportunities may exist across suppliers, distributors, customers, communities and other business relationships.
The assessment should consider the organization’s business model, products and services, geographical footprint, operations, supply chain, workforce, customers, communities, natural resource dependencies and regulatory environment. From this foundation, the organization can identify the sustainability matters that could potentially have significant impacts or financial implications.
These matters may range from climate change, greenhouse gas emissions, water, biodiversity and pollution to human rights, labour practices, occupational health and safety, community impacts, customer welfare, business ethics and responsible supply-chain practices.
The objective at this stage is not to immediately decide what is material. It is to ensure that the organization has considered the sustainability matters that are genuinely relevant to its activities and value chain before prioritizing them.
Read also: Using materiality matrices for strategic sustainability
The next step is to examine those matters through the two materiality lenses.
From an impact perspective, the organization should determine the significance of its actual and potential positive and negative impacts. This requires looking at factors such as the scale and scope of an impact, its severity, how difficult it would be to remedy, and the likelihood of potential impacts occurring. Stakeholder perspectives are particularly important because the people affected by an organization’s activities may have information and experiences that are not visible through internal business data.
From a financial perspective, the organization needs to consider whether sustainability-related risks and opportunities could reasonably be expected to affect its prospects. This means looking beyond immediate financial performance and considering potential implications for revenues, costs, assets, liabilities, cash flows, access to finance, cost of capital, operational resilience and strategic opportunities.
Time horizon is also important. A sustainability matter may not create a significant financial effect today but could become increasingly important over the medium or long term. Climate change provides an obvious example. Physical climate risks, changing regulation, technological developments and shifts in customer preferences can gradually alter the financial outlook of an organization even where the effects are not immediately visible.
This is why a Double Materiality Assessment should not simply ask whether an issue is financially significant today. It should consider whether there is a reasonable basis to expect that the matter could influence the organization’s prospects over relevant time horizons.
The results of these two assessments can then be brought together to determine which sustainability matters are material from one or both perspectives.
Some matters may be material primarily because of the organization’s impact on people or the environment. Others may be material primarily because of their potential financial implications. Others may be material from both perspectives.
For instance, water scarcity could be significant because of the organization’s impact on local water resources while simultaneously creating financial risks through production disruption and increased operating costs. Climate change could have significant environmental impacts while also affecting insurance costs, supply chains, asset values, access to capital and long-term business strategy.
This is where the relationship between GRI and ISSB standards, IFRS S1 and IFRS S2 becomes particularly useful.
GRI’s impact-focused approach can provide valuable information for understanding an organization’s significant impacts, while ISSB’s focus on sustainability-related risks and opportunities can help organizations examine how those matters may affect their prospects. EFRAG has recognized this relationship, noting that an assessment conducted using the GRI Universal Standards can provide a good basis for assessing impacts under ESRS, while the financial materiality concepts within ESRS and ISSB are aligned in scope.
For organizations already using GRI, this means that the information gathered through the GRI materiality process can provide an important starting point for the impact side of a broader Double Materiality Assessment. Organizations working with ISSB can similarly use their assessment of sustainability-related risks and opportunities to inform the financial side.
However, this does not mean that GRI and ISSB are interchangeable or that an organization can simply combine the two frameworks into one reporting standard. They have different purposes and different audiences. GRI is designed primarily to help organizations report on their impacts, while ISSB standards are focused on information about sustainability-related risks and opportunities that is useful to users of general purpose financial reporting.
The value comes from understanding how the perspectives connect.
A well-designed Double Materiality Assessment should also go beyond stakeholder surveys and scoring exercises. Stakeholder engagement is important, particularly for understanding impacts, but it should be supported by evidence from the organization’s operations, value chain, risk management processes, industry context, regulatory developments, scientific information and other relevant sources.
Likewise, the familiar materiality matrix should not become the assessment itself.
A matrix can provide a useful visual representation of the results, but it does not explain why a matter was considered material. Behind the matrix should be a clear methodology showing how sustainability matters were identified, how impacts were assessed, how financial risks and opportunities were evaluated, which stakeholders and experts were consulted, what thresholds were applied and why particular matters were ultimately prioritized.
This evidence is increasingly important as sustainability reporting becomes more connected to corporate governance, risk management and strategic decision-making.
Most importantly, a Double Materiality Assessment should not end with a list of material topics.
Its real value lies in what the organization does with the information.
If climate change is identified as material from both the impact and financial perspectives, the result should influence climate strategy, risk management, capital allocation, emissions targets and operational decisions. If human rights emerge as a significant impact, the organization may need to strengthen due diligence, supplier monitoring, grievance mechanisms and remediation processes. If water scarcity represents both a significant impact and a financial risk, the organization may need to invest in water efficiency, strengthen operational resilience and engage with affected communities.
In this sense, materiality is not simply a reporting exercise.
It is a way of connecting sustainability information to business decisions.
This is particularly important as organizations navigate an increasingly interconnected reporting environment. Rather than conducting completely separate exercises for every sustainability framework, organizations can develop a stronger underlying information system that identifies impacts, risks and opportunities, gathers reliable data, engages relevant stakeholders and connects the findings to strategy and risk management.
The growing interoperability work between GRI and the IFRS Foundation further reinforces this opportunity. The two organizations have been working to identify common information and improve interoperability while maintaining the distinct purposes of their respective standards.
For organizations, the practical question is therefore becoming less about choosing between different frameworks and more about building a credible process for understanding sustainability matters from different perspectives.
A strong Double Materiality Assessment ultimately asks two fundamental questions:
What impact are we having on people and the planet?
And how can sustainability-related matters affect our organization?
GRI can provide an important foundation for answering the first question. ISSB can help organizations address the second. Bringing these perspectives together provides a more complete understanding of what matters, why it matters and what action may be required.
The goal of double materiality should not be to produce another matrix or another reporting checklist.
It should be to help organizations understand their impacts, anticipate risks and opportunities, make better decisions and communicate information that is meaningful to the people and institutions that rely on it.