Faced with the challenges of climate change, companies are having to deal with the growing expectations of their various stakeholders. Employees, consumers and investors are demanding greater transparency about the overall impact of companies' activities on society and the environment.
Companies are encouraged to conduct in-depth assessments to identify the most relevant ESG issues they face. In this context, the principle of double materiality has emerged: an approach that enables companies' sustainability performance to be assessed in a holistic way. Materiality assessments play a crucial role in corporate sustainability and reporting.
The concept of double materiality is at the heart of EFRAG's development of ESRS (European Sustainable Reporting Standards). Double materiality assessment is considered by EFRAG (European Financial Reporting Advisory Group) to be a key point of the CSRD (Corporate Sustainable Reporting Directive), which came into force on 1 January 2024. The European Commission has made the topics covered by CSRD reporting subject to a double materiality analysis. This is particularly the case for "climate change". This double materiality assessment is complex and represents a real challenge for companies.
Why and how should a double materiality assessment be carried out? What are the different visions of materiality that clash internationally? We take a look at the issues involved.
What does the concept of double materiality cover?
Materiality analysis is a tool for building a company's CSR strategy. It is a comprehensive process consisting of identifying and prioritising the most important environmental, social and governance (ESG) issues for a company and its stakeholders.
The concept of double materiality corresponds to the analysis of two types of materiality: financial materiality and impact materiality (or extra-financial materiality).
- Financial materiality or simple materiality corresponds to the "Outside-In" vision : this materiality only takes into account the positive impacts (opportunities) and negative impacts (risks) generated by the economic, social and natural environment on the company's development, performance and results. This first dimension therefore concerns the financial aspects: revenues, profits, cash flow, etc.
- Impact materiality or socio-environmental extra-financial materiality corresponds to the "Inside-Out" vision. This materiality takes into account the negative or positive impacts of the company on its economic, social and natural environment and therefore encompasses environmental, social and governance (ESG) impacts.
The concept of double materiality emphasises that the two dimensions, financial and impact, are interdependent and must be taken into account together in the overall assessment of a company's performance.
According to this concept, companies must therefore report on both the impact of society and the environment on their company's financial performance and the impact of their activities on society and the environment.
Double materiality VS simple materiality: disagreements persist at international level
Materiality: double or single? This is the question that is crystallising debates at international level.
The Anglo-Saxon vision of the ISSB (International Sustainability Standards Board) created in 2021 by the IFRS (International Financial Reporting Standards) is opposed to the European vision of the EFRAG regarding the type of materiality to be taken into account.
The ISSB : the international vision
- The ISSB states that a simple materiality analysis is sufficient. They have recently developed a set of international reporting standards (IFRS S1 and IFRS S2) that do not take into account the measurement of a company's environmental impacts. You can find the full list of ISSB criteria here.
- The ISSB claims that the standards they have developed would make it possible to combat greenwashing and engage companies and investors in the energy transition. They insist that the ESRS standards developed by EFRAG would be too complex and inapplicable for many companies that have not even begun to carry out their carbon footprint, and therefore not very relevant.
EFRAG : the European vision
- The approach of EFRAG, which has been mandated by the European Commission to draft ESRS standards in the context of the CSRD, is more ambitious. EFRAG believes that the analysis of simple financial materiality is insufficient and that it is necessary to apply the concept of double materiality, i.e. both financial and impact materiality. Find the full list of EFRAG's criteria here.
- Environmental accounting specialists and defenders of the European Efrag standards refute the ISSB's arguments and want to introduce a more holistic approach to company performance by measuring their impact on the environment. According to EFRAG, ISSB standards that do not take impacts into account would therefore be incomplete.
But beyond these initial disagreements, the real objective through these various standards is to determine whether companies have embarked on their ecological transition.
Why carry out a double materiality assessment ?
EFRAG and the European Commission believe that the concept of double materiality should form the basis of the CSRD. Many companies have already aligned with EFRAG's recommendations on double materiality.
Double materiality assessment has many advantages. By combining the financial and impact dimensions, double materiality assessment allows companies to:
- To assess their overall impact, to understand all the risks and opportunities and to be more transparent about their performance.
- To meet the growing expectations of stakeholders: investors, consumers, employees, etc. Conducting a double materiality analysis can strengthen the trust of stakeholders in the organization, offer a competitive advantage, confer a good company reputation, etc.
- To effectively prioritize issues and develop a roadmap of priorities. This analysis allows them to know the changes to be implemented in order to guarantee their sustainability, and to integrate environmental and social issues into their strategy and actions, in particular by implementing responsible policies and practices.
How to carry out your double materiality assessment ?
To carry out an effective and useful double materiality analysis, several essential steps should be followed:
- Identify and involve stakeholders. This requires dialogue with stakeholders directly or indirectly impacted by the company's activities in order to gather information to know the impact of these activities.
- Identify relevant sustainability indicators in relation to the company. This means determining which topics should be considered based on their relevance and importance. The ESRS standards developed by EFRAG are sustainability topics that can be included in its dual materiality analysis. For example: climate change, air pollution, water pollution, biodiversity, etc.
- Collect and centralize the data collected. Taking into account the severity of the impact is a key element in the analysis of double materiality.
- Create your matrix of double materiality. To visually represent the results of your double materiality assessment, you can use a materiality matrix that will allow you to prioritize and visualize the importance of the various topics.
- Take action using the double materiality assessment to guide its business strategy and actions.
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→ Example of double materiality assessment for a company in the agri-food sector
Take the example of a company in the agri-food sector that wishes to carry out a double materiality assessment, and therefore assess its overall impact by taking into account both financial and impact criteria (extra-financial). Concretely, how does this analysis take place? Let's study the 3 steps together.
- Financial materiality analysis
As a reminder, financial materiality analysis consists in analyzing the impact of the environment on a company's finances.
The company looks at its revenues, production costs, profit margins, investments, etc. This allows it to understand its overall financial performance and identify financial risks and opportunities.
The company analyzes what is the impact of climate change on its finances. For example if a drought led to a decrease in agricultural yield or if a fire burned his crops, etc.
- Impact materiality analysis (extra-financial)
As a reminder, impact materiality analysis consists in studying the impacts of the company on its environment and society. The company analyzes and assesses its extra-financial impacts:
→ Environmentalists : the use of natural resources (water, agricultural land), greenhouse gas emissions, the use of fertilizers and pesticides, waste management, etc.
→ Social : It also analyzes its social impacts, taking into account responsible sourcing from local farmers, the working conditions of employees, food security, access to healthy food, the promotion of sustainable agricultural practices, etc.
→ Of governance : transparency, risk management, relationships with stakeholders (employees, consumers, etc.)
- Analysis of double materiality via the double materiality matrix
Once the company has collected this data, it can perform a double materiality analysis. This step consists in combining financial and extra-financial information to have a more complete vision of its overall performance and impact. The objective is to identify risks associated with financial and extra-financial dimensions and opportunities for improvement in order to guide the company's strategy and make it more sustainable.
A company in the agri-food sector can assess the financial impact (costs, savings, sales prices, etc.) of its sustainable initiatives if, for example, it chooses to turn to the production of organic products. It can assess the financial risks associated with extreme climate events, such as droughts or floods, that can affect production. It can also assess the costs of adapting to climate change. The company can also analyze how its social impact can benefit its reputation and attractiveness (for example by supporting local farmers or by promoting access to healthy food.)
This evaluation of double materiality can be represented visually by a matrix of double materiality.
→ Example of a double materiality matrix for a company in the luxury sector
Conclusion
Although the concept of double materiality has numerous advantages, some obstacles remain:
- Lack of consensus and lack of harmonization at the international level: this can be an operational concern if the standards are not harmonized due to differences in vision between the European (EFRAG) and Anglo-Saxon (ISSB) approaches.
- Complexity of the repository : The advent of the concept of double materiality comes up against the complexity of the ESRS framework, this is what the ISSB criticises.
- The European vision of double materiality is struggling to impose itself internationally. The ISSB, led by former Danone CEO Emmanuel Faber, seems to have partly won the communication battle to impose its vision of simple financial materiality. Many countries such as Canada and Japan have already indicated that they will base themselves on ISSB standards.
Other useful content to understand everything at CSRD
- Implementation guidance for materiality assessment, EFRAG, November 2023
- Everything about the CSRD: extra-financial reporting obligations
- The 25 questions that all businesses ask themselves about CSRD
- ESRS standards: understanding European reporting criteria
- CSRD: understand everything about the ESRS E1 “Climate Change” standard
- ESRS application guide for French companies, ANC, December 2023
- The ESRS checklist
- The table of expected data points for each ESRS
- First version of the ESRS adapted to European SMEs not affected by the CSRD, EFRAG, November 2023
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