Dual materiality is the great novelty of sustainability relationships. Founding concept introduced in the CSRD, it extends the simple materiality previously used to prioritize CSR topics. Even if the objective remains the same - sorting through all ESG topics, the expected realization for the double materiality analysis is very different.

This exercise is now mandatory for all European companies subject to the CSRD, and its results should appear explicitly in the sustainability reports, in the first section. It is very important for companies, because if done poorly, it is possible to miss sustainability topics and not to publish certain information in your report, which is important for readers.

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What is the principle of double materiality?

The principle of double materiality is an extension of the concept of simple materiality, based on impact materiality and financial materiality.

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Impact materiality

Impact materiality is the consideration of how the company impacts its ecosystem (environment and people), positively or negatively.

To identify material issues from the point of view of impact, you have to ask yourself What are the impacts, positive or negative, current or potential, of its activity on the outside.

Take climate change as an example. One might ask whether one's business is having a positive or negative impact on climate change. The answer is almost always yes: with its activity, a company emits greenhouse gases that increase climate change - this is a current negative impact. You could also say that your company wants to use a carbon offset system to store GHGs in the future - this is a potential positive impact on climate change.

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Financial materiality

The principle of financial materiality is the identification of the elements of the company's ecosystem that generate risks or opportunities for the financial performance of the company.

To identify material challenges from a financial point of view, you have to ask yourself What are the subjects to which the company's business is sensitive or dependent, and which can therefore generate risks or opportunities for the business.

Let's go back to the example of climate change. You could ask yourself if climate change is creating a risk for your business. The answer depends on the types of businesses: if its activity depends on natural resources, it is possible that the extreme weather events generated by climate change will decrease the accessibility of resources and therefore generate a risk for production. Likewise, if the activity is carried out outside, it is possible that repeated episodes of heat waves or droughts prevent employees from working. All these configurations correspond to risks for the business.

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What are the material challenges?

In double materiality, the issues considered material are those that are material from an impact point of view, or from a financial point of view, or both.

During your analysis of double materiality, it is therefore necessary to carefully consider these two aspects and to calculate the impacts, risks and opportunities at the same time - the famous IROs.

In the end, your sustainability report should contain the information from the ESRS associated with the results of your double materiality analysis. To find out more

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What is the difference between materiality and double materiality?

Both exercises, a materiality matrix and a double materiality analysis, have the same objective: to sort out your priorities in a subject as vast and multi-criteria as ESG. To achieve this prioritization, the two exercises propose very different approaches.

Simple materiality offers a “internal/external” approach : you ask your internal stakeholders (management, employees, etc.) to prioritize the issues in relation to each other according to the level of importance that they consider relevant for the company. You then ask the same question to your external stakeholders (customers, investors, suppliers...), and you place the results in a materiality matrix. This matrix uses an Internal Prioritization axis and an External Prioritization axis, and identifies in the upper right square the issues that are important from both points of view: these are the material issues.

This exercise is based on a subjective assessment of the issues for each stakeholder. It also makes it possible to identify topics that are very important for your external stakeholders that you could have missed.

Double materiality leaves less room for subjective appreciation, since it requires a rigorous scoring of sustainability topics based on specific criteria (severity, scope, probability, irretrievability) which must rely on numerical sources. These sources can be KPIs monitored internally, ratings given by satisfaction questionnaires, estimates using bibliography or prospective analyses...

However, this exercise still requires you to dialogue with your stakeholders, but in a completely different way. No more going to see all your stakeholders on all subjects: in this double reality, you will only have to contact the stakeholders directly concerned by the impacts, risks or opportunities. For example, you can chat with:

• your employees on the topics of skills development or work-life balance
• your suppliers on the issues of sourcing raw materials and workers on the value chain
• your customers on the issues of accessibility of your products or health...

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How to do a double materiality analysis?

As you will have understood, the analysis of double materiality is not an exercise to be taken lightly and that must be done seriously. Here are the steps of the methodology recommended by the CSRD.

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A study universe adapted to your context

For the analysis of double materiality, it is necessary to start by sorting out what are the issues relevant to the study. To do that, you have to Define a world of challenges adapted to your context of a company by answering a few questions: what is my sector? What is my value proposition? What is my geographic organization? What is my value chain? Who are my stakeholders?

By drawing up a 360° portrait of your company you will be able to identify the relevant issues. Feed the exercise with issues from different places: a list of CSRD issues, sectoral benchmark, global risk reports...

At the end of this stage you will have put aside issues that are unrelated to your activity, and will have identified a basis for study for the rest of the exercise.

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A qualitative dialogue with your stakeholders

Although the CSRD does not impose this part, it is strongly recommended to start a dialogue with your stakeholders to obtain their opinion on the issues identified.

On all the issues that you have identified, you will have to understand what are the stakeholders directly concerned to get their opinion on the subject. The objective of this dialogue is to obtain an initial estimate of the ranking of the issues. To do this, you can ask your stakeholders to validate or invalidate how you impact them or how they generate a risk for your business. You can thus get an idea of the number of people impacted, the importance of the impact, the probability of occurrence of risks...

To do this, we advise you to rely on the pre-existing dialogue within your company, such as customer satisfaction surveys or employee interviews.

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Rigorous IROs scoring

The most demanding stage of the exercise is scoring issues. Indeed, the CSRD asks for quantify all IROs based on criteria of severity, range, irremediability and probability, and to be able to justify the quantification using data sources.

For each challenge, you must therefore define the sources that can allow you to roughly quantify each criterion, then associate a score (between 1 and 5 for example) to be able to compare the issues to each other.

Once this quotation has been completed, you must define the materiality thresholds specific to your company, and thus obtain a list of material challenges for you.

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The materiality matrix - an outdated representation

The last step of the exercise is to represent the results to make them easily intelligible to the stakeholders who will have access to them.

Representation in a matrix format may be appropriate, with an Impact Materiality axis and a Financial Materiality axis, but is not necessarily the best representation.

Many formats exist - the Cyclone format, the Table format, the Venn Diagram format, all with advantages and disadvantages (good representation of the two materialities, distinction between impacts, risks and opportunities, long-term vision...). It is up to you to choose the best representation according to the type of communication you want to carry out next.

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Conclusion

Ultimately, double materiality is an innovative CSRD concept that requires companies to start thinking about topics that are relevant to them even though they did not initially want to discuss them. This concept is associated with a specific methodology to ensure that the exercise is carried out correctly. Dual materiality analysis is an opportunity for companies to identify their extra-financial risks rigorously, and to become aware of their impact on their ecosystem.

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