Conducting a Double Materiality Assessment – Principles to Get it Right

Today, private-sector players in various countries are subject to a number of regulatory obligations. These relate to their sustainability commitments, particularly in terms of non-financial reporting. A number of tools are available to support companies in their compliance efforts, including double materiality analysis.

Regulations, Requests, and Standards at Play

Drawing up a double materiality matrix is an effective tool for meeting the regulatory obligations to which companies are subject. Here are a few examples of regulatory obligations, and international references, that may influence the production of a non-financial double materiality matrix:

  • International reporting standards

International standards provide guidelines for producing extra-financial reports. Companies can, for example, refer to the GRI (Global Reporting Initiative) Standards and the ISO 26000 Guidelines on Corporate Social Responsibility. These standards often encourage the identification of material issues for the company.

  • Extra-financial questionnaires and European directives

Extra-financial questionnaires such as the DJSI’s require a materiality exercise. This has become standard practice for Fortune 500 companies over the past fifteen years. Companies often feel way too targeted by too many time consuming questionnaires. Materiality helps to streamline and rationalize responses.

Most importantly, European directives such as the NFRD and soon the CSRD impose CSR compliance regulations on companies. Indeed, all European Union countries have introduced directives or laws requiring companies to produce non-financial reports. These reports include several aspects, including social and environmental responsibility. These directives may require the production of a non-financial double materiality matrix. This will help to identify and prioritize relevant social, environmental and governance issues.

  • Sector-specific requirements, different from government directives

Some specific business sectors may have regulatory requirements or voluntary standards that oblige companies to identify and communicate relevant extra-financial issues. In the energy sector, for example, there may be regulations on the transparency and communication of environmental and social issues.

  • Transparency regulations

Financial regulators in some countries are demanding greater transparency on extra-financial risks, particularly in terms of climate change and governance. This can encourage companies to carry out materiality analyses and report transparently on the issues identified.

Over the last few decades, conducting a materiality analysis has become a must. It helps to structure the CSR strategy of companies that are becoming smaller and smaller, and less and less subject to legal obligations. It’s an exercise that’s spreading throughout the business world. Double materiality is based on the conjunction of a financial materiality analysis and an impact materiality analysis. The principles of financial analysis differ little from those of materiality analysis, which has been in use for 15 to 20 years. Impact materiality analysis, on the other hand, draws heavily on due diligence work carried out under OECD and United Nations standards over the past 10 to 15 years. Ultimately, double materiality calls for the convergence of this work, which nevertheless requires a combination of cutting-edge methodologies and robust expertise.

Definition of Materiality Analysis

Materiality analysis is a key exercise in building a company’s sustainability ambition. This tool will guide the structuring of its non-financial reporting. Recommended by the GRI, for example, this analysis consists of identifying and prioritizing sustainable development issues in a coherent manner, involving each of the company’s stakeholders (employees, suppliers, subcontractors, customers, civil society, etc.) throughout the exercise. One of the results is a matrix format, which is the visual and concrete result of prioritizing sustainability issues. The exercise is complex. But it ensures that the company’s priorities are aligned with those of its stakeholders. While the visual result of the matrix is simple, we recommend good governance of this exercise, which should be carried out in several key stages.

Identifying the ESG Criteria Calibrating a Materiality Matrix

Social and climate related developments confirm the role that the private sector can play in helping to limit societal risks. But not every company can commit to every issue. Depending on their business, they need to prioritize areas of action where companies actually have leverage.

Role of International Benchmarks

Conducting a materiality assessment starts by determining a list of ESG (environmental, social and societal, governance) issues, on which the company could work in view of its business. To do this, the materiality analysis is based on the double prioritization of each issue. In other words, the company’s point of view is just as important as that of its internal and external stakeholders.

To remain as relevant and consistent as possible in the identification of issues, it is advisable to refer to international standards such as the GRI or the Sustainability Accounting Standards Board (SASB). The European Financial Reporting Advisory Group (EFRAG) also helps to ensure that the list of ESG issues proposed complies with regulatory expectations and covers environmental, societal and social aspects. Sector-specific issues can be added to the list of topics, such as the Global Real Estate Sustainability Benchmark (GRESB). The GRESB is mainly specific to the real estate sector, for example.

Target Number of ESG Issues in Materiality Matrix

Once an exhaustive list of ESG issues has been drawn up, we recommend refining it as much as possible. A list of approximately 50 issues is recommended. This can be divided into categories the like: climate, human resources, financial risks, ethics, health, innovation, etc. Issues needs to be as specific as possible to the business and how issues can later be activated revamping strategies and operations of the company.

Engaging Stakeholder in Materiality Data Collection Process

A materiality analys is not only enables us to develop a coherent sustainability strategy. This exercise also ensures full transparency of commitments to internal stakeholders (employees, union representatives, works council, etc.) and external stakeholders (suppliers, customers, investors, civil society, etc.). This tool makes it possible to engage in dialogue taking into account stakeholders’ expectations. Information gathering and prioritization can take a variety of forms: questionnaires, 1:1 discussions, group discussions, etc. We generally recommend the combination of several formats, in order to circulate and connect perspectives, and best align stakeholders perspectives.

If a questionnaire is distributed, an increasing number of digital tools offer simple formats and methods for collecting feedback. The questionnaire must be simple, accessible and quick, so that it can be responded efficiently and appropriately. Educational content should instill confidence in the respondent, and can be attached to provide stakeholders with the background information required to properly take position and prioritize issues. It should be noted, however, that EFRAG is not a prescriptive authority when it comes to implementing double materiality. The methodology is therefore left to the discretion of the expert, and it is advisable to explore the various advantages and disadvantages in order to opt for the methodological choices that will ensure the robustness of the process, while obviously meeting the compliance requirements now expected with this exercise.

Conducting Data Analysis

Once data collection has been completed, it’s time to move on to the data analysis stage. This stage ensures that ESG issues are properly prioritized. This will then serve as the basis for defining or confirming a sustainability ambition connected later on with an appropriate action plan.

The calculation methodology is specific to each organization: Which weighting should be chosen? What additional data might be useful to triangulate analysis? Expertise and experience in conducting these exercises is essential in this critical phase. We have experience at Ksapa to have conducted 100+ materiality assessments, hence we know this is more an art than exact science to define the most robust calibration aligned with best market practices.

Designing a Materiality Matrix

The materiality matrix ends up looking like a visual tool prioritizing the ESG issues of an organization. Some visuals can be super creative although its most basic layout can look like a cloud of dots, with one dot equaling one issue. The x-axis generally represents the expectations of external stakeholders. The y-axis represents the expectations of internal stakeholders. Ultimately, it is important to visually organize a relative prioritization of ESG issues. This visual shall help to ensure alignment of internal and external stakeholders regarding the priorities on which the company should focus its sustainability transformation efforts.

Taking Into Account the Concept of Double Materiality

Since 2019 onward, with the introduction of the EU SFRD, the concept of “double materiality” has mainstreamed from the EU markets. Double materiality takes into account the relative importance of the issues at stake, as well as sectoral exposure. This ensures that the company’s transformation effort is commensurate with its sectoral contribution. Ten years ago, if an issue such as decarbonization was material, the company could assign itself an objective. The decarbonization objective could be 20% over 5 years. Double materiality means that material challenges have to be prioritized both from the company’s point of view and from the point of view of sector positioning. So, while decarbonization remains material from the company’s point of view, the theme must be calibrated according to a benchmark prescribed by science and its sectoral prescriptions. It is then possible for the company to impose a double materiality, concluding with a decarbonization of 50% of scope 1 over 3 years. It will justify its choice according to its sector and the scientific knowledge available.

Using a Materiality to Define a Sustainability Strategy

The results of the materiality analysis supports internal alignment building sustainability strategy. It can also be shared with external stakeholders, mainly those who participated. This demonstrates the company’s commitment and enables to collect stakeholders’ input in the sustainability strategy: targets, programs, KPIs, collaborative efforts with other stakeholders.

Going Beyond the Materiality Analysis

To ensure that the sustainability strategy is relevant and reflects the results of the materiality analysis, Ksapa recommends drawing up a three-year roadmap. This is divided into several stages:

  • Articulate 3-year roadmap with milestone and intermediary key performance indicators
  • Engage stakeholders internally and externally on a regular basis, sharing progress and challenges alike
  • Update the materiality matrix every three years

Ksapa provides support and expertise throughout the process. Ksapa provides recommendations on priorities, objectives, actions to be taken and communication strategy.

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Solène part of Ksapa's consulting team, working notably on human rights and sustainability.

With a keen interest for climate issues and circular economy, she has previously worked within Beiersdorf’s Sustainability Team where she tackled issues of responsible sourcing and human rights.

Solène holds a Master's in marketing and communication, as well as a master in creative industries and social innovation from the EDHEC Business School.

She speaks French, English and Spanish.

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