Materiality (a.k.a. material issues) is an extremely important concept in corporate reporting, especially in the context of environmental, social, and governance (ESG) investment regulation. It refers to the assessment and reporting of sustainability issues that are considered relevant and influential to a company's financial performance and stakeholder decision-making. There are two main users of this information: investors and stakeholders. By identifying and prioritizing these key issues, companies can focus their reporting efforts and address the areas of greatest impact.

This paper aims to briefly summarize materiality, which has been gaining recognition among Japanese companies in recent years, and then classify sustainability reporting standards, which are gaining influence internationally, based on the concept of materiality (single/double).

1. what is single materiality?

Single materiality is a concept that traditionally refers to information that could reasonably be expected to influence the economic decisions of investors and other users of a company's financial reports. It identifies and reports sustainability issues that have a material impact on a company's financial performance. The main benefits of single materiality to a company's financial performance include

Clear focus:
Single Materiality helps companies prioritize their reporting efforts by identifying sustainability issues that have a significant financial impact. This allows for effective resource allocation and response to material issues.

Financial risk management:
By considering the financial impact of sustainability issues, companies can better manage and aim to mitigate risks to their financial performance. This can contribute to improved financial stability and resilience.

Investor confidence:
Through Single Materiality Reporting, investors are provided with relevant and meaningful information about sustainability risks and opportunities that could affect a company's financial performance. This transparency increases investor confidence and attracts sustainable investments.

Compliance with reporting standards:
Many reporting frameworks and standards, such as International Financial Reporting Standards (IFRS) and SASB Standards, still use the Single Materiality as the basis for reporting. By adopting the Single Materiality, companies can ensure compliance with these standards and meet stakeholder expectations.

While many advantages can be identified as described above, there is a possibility that single materiality may not capture the broader impact of a company's activities on society and the environment. Therefore, in recent years, the concept of "double materiality" is emerging as an evolutionary version.

What is Double Materiality?

Double materiality is a concept that goes beyond the financial impact of sustainability issues on a company to include a perspective that considers the environmental, social, and economic impact of the company's activities themselves. The benefits of double materiality are as follows

Comprehensive report:
Double materiality allows companies to present a complete picture of their sustainability performance by considering both internal (financial) and external (non-financial) impacts. This is expected to improve decision-making and evaluation by stakeholders.

Stakeholder engagement:
Double materiality encourages companies to engage with a wider range of stakeholders, including investors, consumers, business partners, and civil society organizations. By involving stakeholders in materiality decisions, companies gain a holistic perspective and build trust and transparency.

Risk management:
By considering the environmental, social, and economic impacts of their operations, companies can better identify and manage potential risks and opportunities. This includes understanding the financial implications of sustainability issues and addressing non-financial risks.

Harmonization with international standards:
Double materiality is increasingly being adopted by many key sustainability standards, such as GRI and CSRD (Corporate Sustainability Reporting Directive). By adopting double materiality, companies can ensure consistency with these standards and increase comparability and consistency in their reporting.

3. which regulations adopt which materiality?

Sustainability reporting regulations are becoming more and more diverse by region and country. In such regulations, it is important for companies to confirm whether single materiality or double materiality is adopted.

Figure 1: Typical ESG reporting standards materiality split (prepared by author)

Conclusion

Materiality plays an important role in ESG investment regulation and corporate reporting. Single materiality focuses on the financial impact of sustainability issues, while double materiality has a more comprehensive view by considering both financial and non-financial impacts. Both approaches have their advantages and have been adopted by various regulations and standards.

Companies can benefit from a single materiality by focusing on key sustainability issues with high financial impact. On the other hand, a double materiality is expected to provide a more comprehensive view of a company's sustainability performance and improve stakeholder engagement, risk management, and alignment with global reporting standards.

Given the global evolution of regulations to emphasize double materiality, companies will need to adapt their reporting practices to incorporate both financial materiality and social and environmental materiality. By doing so, companies can increase transparency, attract sustainable investment, and meet stakeholder expectations in a business environment that is increasingly ESG-conscious.

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