What does the "double materiality" concept in ESG indicate?

The concept of "double materiality" in ESG refers to the idea that both the impact of sustainability issues on a company’s financial performance and the company's impact on the environment and society are important for a comprehensive understanding of material risks and opportunities. This perspective encourages companies and investors to evaluate how external sustainability factors, such as climate change and social issues, affect their financial health, alongside assessing how their operations affect the broader environment and communities in which they operate.

By considering both angles, organizations can develop a more holistic view of risks and opportunities, allowing for better strategic decisions and investments. This dual approach is increasingly recognized as essential for sustainable business practices, as neglecting either side could lead to unforeseen consequences that could undermine long-term value creation.

The focus on only the financial performance or only environmental aspects, as presented in the other options, does not fully capture the essence of double materiality, which emphasizes the interconnectedness of these factors. Additionally, stating that double materiality is unrelated to sustainability misses its foundational relevance to understanding the impacts organizations have on both their surroundings and their financial viability.