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What is double materiality?

Explainer: While the concept of double materiality evolved in EU, the same has been widely accepted by Indian companies as well.

Materiality is an accounting concept, which evaluates the ‘significance’ of financial information. Simply put, if a particular information can impact the decision-making, it is termed as ‘material’, and ‘immaterial’ otherwise, in an accounting parlance. Double materiality is an extension of this concept, which incorporates the environmental, social and governance (ESG) factors.

As businesses enter a new era of accountability wherein there are added responsibilities to cater to different stakeholders, viz. regulators, investors, community, employees and so on. The focus has expanded to include sustainability parameters. This has resulted in the introduction of double materiality.

Unlike conventional financial reporting frameworks that focus solely on the factors affecting businesses financially, double materiality gauges the impact a company’s actions hold on its stakeholders, including the environment, social and governance consequences. This provides companies with a holistic view, aiding them in cost-effect analysis, and re-strategising their reporting approach to imbibe the ESG considerations.

The concept of double materiality originated in 2019, when the European Commission adopted it into its Non-Financial Reporting Directive (NFRD). Since then, it is viewed as a benchmark of sustainability reporting alongside the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD).

Adopting double materiality is more than just ticking the boxes of ESG compliance—it’s about redefining success parameters. It forces companies to consider how global challenges like climate change and inequality affect their functioning vis-a-vis how their strategies, products, and supply chains shape the communities and the world around them.

Along with helping corporates in risk aversion and future-proofing their approach, double materiality also helps them take well-informed decisions that do not hinder their relevance in a rapidly changing global dynamic. 

While the concept of double materiality evolved in EU, the same has been widely accepted by Indian companies as well. For instance, Tata Steel’s investments in green technologies have helped it comply with international carbon regulations while enhancing sustainability across its supply chain. Similarly, Similarly, Axis Bank has used double materiality to align their financial strategies with ESG goals, ensuring both resilience and stakeholder trust.

While double materiality has been steadily accepted as a norm in reporting standards, it still faces few roadblocks in implementation. Conducting two-way impact assessments require significant capital allocation for data collection, analysis, and stakeholder engagement, which not all businesses can find resources for – either capital or human or both. Without such authentic assessments, there are higher chances of greenwashing, as some companies may misuse double materiality to make unsubstantiated claims.

Sankar Chakraborti is CEO, Acuité Group