In the often-confusing world of sustainability and its intersection with accountancy, a familiar term has acquired an additional dimension: materiality. What is materiality? In simple terms, it concerns financial significance. More precisely, when discussing materiality in financial reporting, we examine whether information about an item, error or omission is significant enough to influence the economic decisions of users relying on a company’s financial statements. If financial information matters to investors, lenders or other users, it may be material. If it does not, it may be immaterial.
So far, so good. However, in recent years, this seemingly straightforward concept has acquired a new dimension: double materiality. What has doubled? The answer is perspective.
These perspectives are known as impact materiality and financial materiality. The former concerns how a business affects people and the environment; the latter concerns how sustainability matters affect, or could affect, the business financially. Significance remains central, but its scope has expanded. Rather than asking exclusively whether a matter affects the business financially, we must also consider the consequences of the business’s activities for the world around it. The implications extend beyond the narrow columns of Excel.
This becomes clearer when we consider the European Sustainability Reporting Standards, or ESRS. These are EU standards specifying the sustainability information that undertakings within their scope must disclose. They establish a common reporting framework and operationalize the principle of double materiality. As with many European regulatory initiatives, bureaucracy makes an appearance: it can overcomplicate matters, but it can also provide structure where structure is needed.
One might assume that this development represents a peculiar departure from an otherwise rigid world (the author is an accounting student). Indeed, it might. Optimists could argue that the expansion of the concept provides useful clarification in an ever-changing environment, helping accountants and auditors navigate unfamiliar situations with clearer guidance. Pessimists might argue that the expansion risks overcomplicating reporting: why turn a relatively straightforward question of significance into an exercise that consumes substantial time and resources?
I am not here to declare either side victorious. First, I am still developing the theoretical foundations necessary to engage fully with the subject. Second, I believe that both positions have merits and weaknesses worth examining. I shall therefore attempt to approach the matter from a broader perspective, moving beyond the technicalities of sustainability reporting to consider the underlying question of why these distinctions exist in the first place.
The Question of Value
The big question here is: what is value?
One might provocatively define value as the quality that makes something worth retaining rather than discarding. This deliberately broad definition becomes more useful than it might initially appear when we consider the environment and the consequences of human activity. When is something worth preserving? When does something cease to be disposable? And who gets to decide?
Machiavelli might offer a pragmatic answer: when it serves our purposes. Whether or not this interpretation adequately captures his thought, it raises an interesting question. Let us detach ourselves from the rigidities of accountancy for a moment. Why do we do what we do?
In financial reporting, we seek to communicate information about a business’s financial position and performance to those who need it. Investors may wish to evaluate their investment; lenders may assess creditworthiness; governments may require information for regulatory and fiscal purposes. Different users have different objectives, and information derives much of its practical value from its relevance to those objectives.
Let us return to double materiality. Impact and financial materiality are closely related, but they are not identical. What value does their differentiation provide? How does distinguishing between the two help us understand and report a business’s activities more accurately?
The answer, I believe, lies precisely in the differentiation itself.
Financial significance and the significance of a business’s impacts on people and the environment are not interchangeable. An activity can have serious consequences for a community or an ecosystem without immediately producing a corresponding financial loss for the undertaking. Conversely, a business can face substantial financial risks arising from environmental or social developments that it did not cause.
As economic activities and their surrounding social and environmental contexts become increasingly complex, a single undifferentiated perspective risks overlooking important distinctions. Standardized reporting requirements can help practitioners recognize and assess these distinctions rather than leaving every decision to individual interpretation.
The development of double materiality can therefore be understood, at least in part, as an attempt to provide greater structure to a broader understanding of significance. The principle distinguishes between the outward consequences of business activity and the financial implications of sustainability matters for the business itself.
This brings me to an analogy drawn from my unpublished work, Anti-liminality: The Transcendence of the ‘Limit’ in the Postmodern Age. In that work, I use the German expressions “das Äußere” and “das Innere” to explore the external and internal dimensions of the limit as a concept with an ontological presence. I shall borrow the distinction here, as this discussion also concerns boundaries: how we define significance, where we locate it, and how we determine its relevance.
Das Äußere: The Outward Dimension
Impact materiality can be approached through the idea of das Äußere: the outward dimension of significance.
A business does not operate in a vacuum. Its activities take place within social and ecological systems, and its operations may affect workers, customers, communities and the environment. Its products consume resources, its suppliers operate within particular conditions, and its decisions produce consequences that extend beyond the organization itself.
In this sense, the outward dimension concerns what a business leaves behind. What are the consequences of its activities? Who experiences them? What changes in the surrounding environment, and how significant are those changes?
The concept is useful because it directs attention towards consequences that may not be adequately represented by financial performance alone. A company might remain profitable while contributing to pollution, placing pressure on local water resources or exposing workers to harmful conditions. The absence of an immediate financial penalty does not make these impacts insignificant.
Yet a distinction is necessary. The fact that business activities produce effects does not automatically mean that every effect is material for sustainability reporting. Materiality requires an assessment of significance, taking account of the relevant criteria and circumstances. The existence of an impact and its materiality are related questions, but they are not the same question.
The distinction does not weaken the underlying argument. On the contrary, it makes it more precise.
A business is embedded in the world around it. Even seemingly minor commercial decisions can produce consequences through changes in prices, purchasing behavior, resource consumption or supply relationships. The scale and significance of these consequences will vary, but the organization cannot be understood entirely independently of the systems in which it operates.
Consider an egg. Its shell provides a useful analogy for the boundary between an object and its surroundings. However, the analogy has its limitations: the shell is a physical structure, whereas the outward dimension of a business’s impacts is not a fixed boundary. It extends through activities, products, services and business relationships, including parts of the value chain over which the undertaking may have limited direct control.
The more useful conclusion, therefore, is not that every activity necessarily produces a material impact, but that business activity must be examined in its wider context. The outward perspective helps us identify and evaluate the consequences that might otherwise remain outside the traditional financial picture.
Das Innere: The Financial Dimension
Let us now turn to das Innere: the inward dimension of significance.
If impact materiality asks how a business affects people and the environment, financial materiality asks how sustainability matters affect, or could affect, the business itself.
The distinction is straightforward, but its implications are considerable. A company depends on resources, infrastructure, labor, markets and a functioning social environment. Changes in these conditions can affect its financial position and performance, cash flows, access to finance or cost of capital.
Consider water scarcity. For a manufacturer operating in a water-stressed region, reduced water availability might interrupt production, increase operating costs or require investment in alternative technologies. The environmental issue acquires financial significance because of its implications for the undertaking.
Government intervention may also play a role. Environmental legislation, penalties, reporting requirements and other regulatory developments can influence the financial consequences of business activities. A commercial dispute is one thing; a dispute that also results in substantial legal costs, regulatory sanctions or litigation is another.
However, government regulation is only one mechanism through which sustainability matters can affect a business financially. Market developments, customer preferences, resource dependencies, physical climate risks and changes in the availability of finance can also create material risks or opportunities.
The inward dimension should therefore not be understood as exclusively determined by government or the owners of a business. Owners establish objectives and exercise influence, but they do not control every circumstance that determines financial outcomes. External conditions can constrain, reshape or fundamentally alter the undertaking’s prospects.
The distinction between das Äußere and das Innere is consequently best understood as a distinction between perspectives, rather than a strict division between two independent realities. The business affects its surroundings, while developments in those surroundings can affect the business. The two dimensions are analytically distinct, but they are often interconnected.
This is where double materiality becomes particularly interesting. An environmental impact may eventually create financial consequences for the undertaking, but it need not do so to be material from an impact perspective. Equally, a sustainability-related financial risk may arise without being attributable to an adverse impact caused by the undertaking itself.
The two perspectives are neither identical nor mutually exclusive. Their differentiation allows us to examine a situation without reducing every consideration to the same measure.
The Role of the ESRS: Structure, Guidance and Limits
Here is where the ESRS enter the discussion.
In a reporting environment involving complex operations, diverse stakeholders and increasingly elaborate sustainability considerations, common standards provide a shared reference point. They help structure what must be assessed and disclosed, establish common requirements, and support consistency in reporting.
Without such a framework, undertakings could approach similar sustainability matters in substantially different ways. Practitioners might apply different assumptions, thresholds or methods, making the resulting disclosures more difficult to compare and interpret.
This is one of the advantages of standardization. It does not eliminate judgment, but it can help discipline it.
The distinction is important. The ESRS are not a substitute for all applicable legislation, nor do they eliminate the need for professional judgment. They provide a structured framework for sustainability reporting, including the assessment of material impacts, risks and opportunities. Their practical value depends in part on whether practitioners understand both the requirements and the reasoning behind them.
A standard can provide guidance, but it cannot guarantee that the person applying it will understand its purpose. Nor can the existence of a detailed framework ensure that every assessment will be appropriate.
Consider two practitioners faced with the same undertaking and broadly similar information. Both have access to the relevant standards, yet they may interpret the available evidence differently, overlook different considerations or misunderstand the requirements. Their conclusions may therefore differ in quality.
This is not an argument against standards. It is an argument for understanding them.
The challenge becomes especially apparent when the practical realities of professional work enter the picture. Accountants and auditors operate under deadlines, resource constraints, performance expectations and competing responsibilities. They may encounter substantial volumes of data and highly technical reporting questions, all while trying to meet organizational targets.
At the heart of it all lies a question familiar to many professionals:
“Will I hit my KPIs, or will I be put on a PIP?”
The humor is obvious, but the underlying problem deserves attention. What happens when the pressure to complete a task overtakes the effort required to understand it properly?
Suppose an accounting team and an auditing team are both working with sustainability information. Each has access to the ESRS, and each has some understanding of double materiality. Yet a misunderstanding of the requirements, an inappropriate assessment or a failure to recognize a relevant impact may still result in an error.
Such errors do not automatically lead to fraud or catastrophic consequences. Nevertheless, mistakes in identifying, assessing or reporting material matters can undermine the quality and reliability of sustainability disclosures. Inadequate understanding can also make it harder to identify weaknesses in the information supplied or the judgments underlying it.
The problem is not necessarily a lack of rules. It may be a lack of understanding of what the rules require, why they exist and where their limits lie.
Standards are useful precisely because they provide a common point of reference. But their effectiveness depends on how they are interpreted and applied. Under pressure, a practitioner may be tempted to focus on completing the reporting exercise rather than understanding the significance of the underlying information.
The danger is that compliance becomes a mechanical exercise, detached from the purpose it is intended to serve.
Education and the Meaning of Professional Judgment
What, then, should be done?
Education is an obvious starting point. Practitioners need to understand the standards, the concepts underlying them and the methods used to apply them. Reading the requirements matters, but so does developing the judgment necessary to interpret them in context.
A technically proficient accountant who misunderstands the relevant reporting requirements may create problems that cannot be solved by spreadsheet expertise alone. Familiarity with software, formulas and procedural shortcuts is valuable, but it does not replace conceptual understanding.
The same principle applies to double materiality. A practitioner must understand the difference between an impact and its materiality, between an external development and its financial consequences, and between identifying a material matter and determining what information must be disclosed.
These distinctions are not merely theoretical. They shape the conclusions reached and the information communicated to users.
There is also a broader lesson here. Every framework has boundaries. Standards establish requirements and provide guidance, but practitioners must understand what those requirements address and what remains a matter of judgment. They must recognize when the available evidence is insufficient, when an assumption requires scrutiny and when a conclusion needs further examination.
Double materiality is therefore a necessary development insofar as it provides a more comprehensive framework for examining the significance of sustainability matters. Its value, however, depends on its application.
Attitude matters. Understanding matters. Professional judgment matters.
If practitioners understand the purpose and limitations of the standards, the distinction between the outward and inward dimensions of materiality becomes more useful. If the framework is approached hastily, mechanically or without sufficient understanding, its complexity may become a burden rather than an advantage.
Perhaps the older, narrower conception of materiality sometimes feels more comfortable because it asks a more familiar question. But familiarity alone does not make a framework adequate to the circumstances it is intended to address.
Double materiality invites us to consider a broader set of consequences and relationships. The ESRS provide a structure for doing so. Neither, however, can substitute for the understanding required to apply them properly.
Ultimately, the question is not simply whether a matter is material, nor whether a standard provides an answer. It is whether we understand what we are assessing, why it matters and what our conclusions mean.
Sometimes, the most important limit is not the one imposed by the standard, but the one imposed by our own understanding.
