Material information is anything deemed relevant for assessing a company’s financial performance – its bottom line. Regulations ensure companies must disclose to investors anything that could be construed as material.
Double materiality broadens the definition of what is deemed necessary information by including factors that could not only impact a company’s financial health but also the health of society and the planet. What companies produce, how they produce it, and later how it is consumed and disposed of all have wide ranging costs and impacts that are not reflected in financial statements and regulatory filings.
The link between company activities and significant sustainability challenges such as carbon emissions and climate change, systemic discrimination and social unrest makes it clear that companies contribute to sustainability risks. Waste, pollution, and carbon emissions damage natural capital, whereas workplace bias, pay gaps and social inequalities reduce the potential of human capital. Over the long-term, resources become scarce or damaged and everyone loses, the environment, society, value chains and companies. The opposite is also true; company products and processes can also have positive impact.
Recognizing the risk as well as the opportunity, investors and financial regulators increasingly require companies to report how they are measuring, managing and mitigating the positive and negative effect of their activities on the environment and society.
Initiatives like the Task Force on Climate-related Financial Disclosure (TCFD) and the Task Force on Nature-related Financial Disclosure (TNFD) are bringing global awareness and acceptance of more disclosure from companies on their exposure and management of risks and contributions to impact.
In Europe, the EU’s Corporate Sustainability Reporting Directive (CSRD) uses double materiality as a basis for non-financial reporting for all companies listed and operating in EU regulated markets. In addition, investment funds classified as Article 9 under the Sustainable Financial Disclosure Regulation (SFDR) are required to demonstrate evidence-based proof of positive impact of portfolio holdings.
In this way, double materiality reporting helps governments, citizens and investors better understand both the financial and non-financial impact of companies and invest in those that perform well on both metrics.
Creating real world impact is one of six strategic pillars of Robeco’s Sustainable Investing Strategy. Our impact fund range were created with the conviction that informed investments can create socioeconomic benefits in addition to competitive financial returns.
For these funds, double materiality is a critical part of the investment process. Our SI research team assesses sustainability risks through the lens of financial materiality. They combine bottom-up company level analysis of ESG data with broader sustainability risks and trends at the industry and macroeconomic levels. Moreover, to measure company impact, SI analysts use an internally designed SDG Framework to evaluate companies across a comprehensive range of impact criteria that are aligned with the targets and goals of the UN SDGs.