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[Ed. note: This guest blog comes from Dinah Koehler, ScD of CSO Partner.  Dinah has extensive experience in environmental and climate matters and holds a doctorate in environmental risk assessment and management from Harvard School of Public Health. This is the first in a short series of blogs on the concept of materiality in sustainability/climate reporting.]

Materiality – the word can’t be avoided in sustainability and climate discussions. But a rift has developed in applying that word/concept in our world: in one corner, there is single (or financial) materiality – the historical framework for financial reporting.  In the other corner, we have the newcomer double materiality – intended to reflect not only financial impacts of sustainability to a company, but also the company’s impact on society and the planet.  Yet the difference between single materiality and double materiality has been overstated. It is better to think of them as two sides of the same coin or “intertwined”. Impact materiality based upon scientific evidence forms the objective context for financial materiality of a sustainability issue.

Financial materiality is a function of time and in the context of environmental/sustainability matters, how it evolves is determined largely by advances in science (e.g. environmental risk assessment) along with stakeholders’ engagement with and reaction to the risk. For example, per- and polyfluoroalkyl substances (PFAS) were declared a hazardous substance under EPA’s  Superfund law in April 2024. This means manufacturers are responsible for clean-up of soil and drinking water contamination under the “polluter pays principle” and joint and several liability. The scientific evidence of potentially material impacts to human health from exposure to PFAS emerged in studies conducted by Dupont – the leading manufacturer of PFAS – in the 1960s. DuPont did not share its findings with the EPA until 1998 and subsequently obstructed regulation. Today, the compounds are ubiquitous in water, human blood and wildlife. Clean-up costs for PFAS manufacturers are estimated in the billions – not including prior settlements. For instance, 3M’s 2018 settlement with the state of Minnesota for $850 million equated to about 2.6% of the company’s $32.7 billion in revenue.  The annual cost of disease associated with US population exposure to PFAS could amount to tens of billions – a significant liability for PFAS manufacturers.

The path to financial materiality depends on multiple stakeholder decisions. Timing of that path depends on how/when multiple stakeholders perceive the company’s behavior to be severe or unethical and are motivated to act. Stakeholder perceptions can be fickle depending on the context, e.g. impact on personal health, the immediate family, community, the environment and resource availability, company reputation, political affiliation, etc. This process can take decades, especially when strict regulations are lacking and companies do not disclose impact materiality. For PFAS this took 70 years! For climate change, a good starting point is 1977 when Exxon scientists started developing global warming projections aligned with independent academic and government models. The company, however, deflected and funded a multidecadal counterinformation campaign. In 1988, Dr. James Hansen, a leading NASA climate scientist, testified in front of US Congress on the link between burning fossil fuels and rising global temperatures – officially establishing impact materiality. Financial materiality for the fossil fuel industry may not materialize until there is

  • mandatory prices on carbon emissions;
  • an increase in climate litigation;
  • regulation that prices negative impacts (externalities); or
  • low-carbon/transition economy market changes significantly reducing demand.

A combination of scientific impact assessment, business model exposure and stakeholder perception provide a good blueprint for evaluating potential financial materiality of an issue over time. Which is why the two types of materiality aren’t really that different.

Part 2 of the blog series will highlight commonalities in the role of stakeholders in influencing financial and double materiality.

Our members can find more information about materiality in ESG here.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile