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). This differs significantly from the Anglo-Saxon vision of the ISSB (International Sustainability Standards Board) created in 2021 by the IFRS (International Financial Reporting Standards). The ISSB indeed asserts that conducting a simple materiality analysis is sufficient. However, the EFRAG and the ISSB published in May 2024 a guide on interoperability between these two sets of standards to facilitate compliance for companies.
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.
1. 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.
2. 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.
3. How to carry out your double materiality assessment?
It is important to note first that the ESRS standards do not impose how the double materiality assessment should be conducted by companies because a unique process would not be suitable for the multiple sectors of activity, organizations or value chains of the companies concerned by the CSRD.
However, all CSRD actors, starting with the EFRAG, agree on the same main steps, starting with the identification of the company's context (activities, stakeholders, etc.) until the selection of material issues and the preparation of the reporting accordingly.
Thus, the approach can be divided into 3 main inescapable steps.
3.1 Identification of sustainability matters
This is the first phase and it consists of identifying the context in which the company operates and then identifying the first sustainability matters.
For this, it is necessary to:
- A state of the company's context
It is a question of understanding the company's activities, the products or services it sells, the places where it operates, its financial statements, etc.
- A mapping of the value chain and stakeholders
The challenge is to trace the company's flows, map its value chain, both upstream and downstream, and then identify the stakeholders affected by the company's operations and throughout its value chain.
- Establishing a first list of sustainability matters
The challenge here is to draw up a list of all the issues that will then be analyzed under the angle of double materiality in order to determine which are material.
To establish this list of matters, one does not start from scratch.
The first source is the list of sustainability matters provided by the EFRAG itself and which can be found in ESRS 1, AR 16. The EFRAG details the topics, sub-topics, and sub-sub-topics that the company must consider.
But this should not be the only source. This list must be supplemented by a documentary analysis to identify matters specific to the company through internal documents or an analysis of its sector of activity. Thus, a benchmark of the matters selected by the company's competitors can be very useful, as can the analysis of the voluntary sectoral frameworks published by the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) or the Morgan Stanley Capital International (MSCI).
It is from these different sources that the list of sustainability matters likely to be important for the company is drawn up and on which it will have to respond to the publication requirements in its sustainability report.
3.2 Description and rating of impacts, risks, and opportunities (IRO)
We enter here into the heart of the double materiality assessment since it is a question of determining, from the list built previously, which are the most material matters.
To do this, the company must determine the impacts, risks, and opportunities (IROs) related to the sustainability issues on its value chain. Then it must apply evaluation criteria on the impact materiality and the financial materiality in order to determine which are the material IROs.
Here are the evaluation criteria to be taken into account:
- For impact materiality
For negative impacts, it is the severity of the impact that is judged as well as its probability of occurrence for potential impacts. The severity criterion of the impact depends itself on 3 criteria:
- scale: what is the importance or severity of the impact? On human rights or on the environment, for example.
- scope: what is the scope of the impact? For example, the extent of environmental damage.
- and irremediable character: to what extent can the impact be repaired? Are environmental damages restorable and to what extent can the environment return to a situation at least equivalent to that observed before the negative impact?
For positive impacts, only the scale and scope of the impact are evaluated, as well as its probability of occurrence for potential impacts.
- For financial materiality
As a reminder, financial materiality corresponds to the risks and opportunities generated by the economic, social and natural environment on the financial performance of the company.
According to the EFRAG, the risks and opportunities for the company "generally arise from impacts, dependencies or other factors, such as exposure to climate hazards or changes in regulation that deal with systemic risks."
To evaluate this financial materiality, two criteria are to be taken into account:
- the potential magnitude of the financial effects on the basis of appropriate thresholds
- the probability of occurrence
This analysis should be done in the short, medium, and long term.
Thresholds should therefore be used by the company in order to rule on the materiality or not of the risks and opportunities. These may be monetary absolute or relative thresholds such as a percentage of the amount corresponding to its revenues, costs, total assets, or net worth.
A qualitative assessment should also be conducted since certain companies, because of their activities, are exposed to reputation risks. This risk, although it cannot be evaluated, can influence the availability of financing and/or the cost of financing and, consequently, can be financially material.
For both impact and financial materiality, the company must then establish a customized rating system to measure the intensity of each criterion: a scale of 0 to 3, for example, or 1 to 5. It is up to the company to decide, the EFRAG does not impose a unique methodology. Once the rating system is established, it is finally necessary to define the thresholds beyond which IROs will be considered material.
Once again, the EFRAG does not impose a methodology for the choice of the threshold, qualitative or quantitative, for the company but this latter will have to justify the way in which these thresholds have been defined and applied.
3.3 Preparation of the reporting
This is the last step of the double materiality assessment.
It is a question of formatting the materiality assessment and preparing the reporting accordingly.
Once the material matters have been defined, the format of the formatting is not imposed by the EFRAG. But the preferred format remains the double materiality matrix which allows to visualize and hierarchize simply the material matters for the company.
Finally, thanks to this list of material matters, the company can then define which are the publication requirements and the datapoints to be integrated into the sustainability report.
4. How Sami supports you in the double materiality assessment?
Thanks to our CSRD module integrated into our platform and thanks to the support of specialized consulting firms partners selected for their expertise, we are able to support you in the realization of your sustainability report and in particular on the double materiality assessment. Here is a summary of what we offer at each step.
4.1 On the identification of matters
Our consultants bring all their expertise to help the company draw up a first list of potentially material matters: construction of a benchmark of competitors, documentary analysis of international reference frameworks, analysis of the sector, understanding of the overall context of the company.
Our software allows in this first step to map all your stakeholders (employees, customers, suppliers...) and to adapt the ESRS framework to your situation. The list of sustainability matters, detailed in topics, sub-topics, and sub-sub-topics, provided by the EFRAG is integrated into our platform. You just have to parameterize the tool to adapt it to your matters.
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4.2 On the description and rating of impacts, risks, and opportunities (IROs)
During this phase, our software allows in particular:
- To easily evaluate your IROs
For each of the material matters defined, the software proposes a list of IROs. You determine the rating of these IROs according to the criteria expected by the EFRAG and the software automatically calculates the materiality score of each of the matters. The evaluation grid is based on EFRAG standards.
The exercise begins with an on-site meeting with our consultants and the people in charge of the company's CSRD project in order to give you the keys to the rating of the different impacts, risks, and opportunities.
Our consultants follow this step with you, examine the results of the first rating (before possible rectifications if necessary) and prepare the summary table of material IROs, a deliverable required by ESRS 2.
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- To solicit your stakeholders
The ESRS do not require companies to set up a dialogue with stakeholders for the double materiality assessment.
However, paragraph 24 of ESRS 1 specifies that stakeholder engagement is an important element in the quality of the materiality assessment.
Indeed, exchanging with your stakeholders (internal and external) should enable you first to understand how they are or may be impacted and thus help you to evaluate the severity and probability of the impacts. It is therefore an important actor in the construction of the materiality of your matters. And the dialogue with your stakeholders can also intervene in a second time, once the materiality is defined, in order to confirm or deny with them the evaluation of materiality. Engaging your key stakeholders is therefore a central element to ensure the quality and exhaustiveness of your double materiality assessment.
This is why our software allows you to easily and effectively question the stakeholders you have identified. Ready-to-use questionnaire models designed for the CSRD are integrated. But you can also define your custom questionnaires with a multitude of available fields. Finally, the software aggregates and analyzes automatically the answers of your stakeholders in order to enrich the rating of your IROs.
4.3 On the preparation of the reporting
Based on the rating of the IROs and the automatic calculation of the materiality scores for each matter, our software automatically provides a double materiality matrix to enable you to visualize at a glance your material matters.
Our consultants also prepare the materiality report in order to detail the methodology followed during this double materiality assessment and the results obtained (deliverable required in ESRS 2) and prepare a summary table of material matters, publication requirements, and datapoints to be integrated into the report.
At the same time, the software is parameterized to set up the data collection and sustainability report writing protocol.
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Do you still have questions about the double materiality analysis? You can consult our Questions/Answers article on the CSRD.
Other useful content to understand everything at CSRD
- Implementation guidance for materiality assessment, EFRAG, November 2023
- Everything about the CSRD: extra-financial reporting obligations
- 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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