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Double Materiality – Double the effort?

By Marc Bernhardt and Rolf Schwery

 

Many companies will have conducted materiality assessments of the financial impact of ESG risks on their operations, serving mainly the needs of shareholders and investors. All equity and bond ratings, such as MCSI or Sustainalytics are also based on this “outside-inward” view.

 

In “reverse”, many companies have measured their sustainability performance using the standards of the Global Reporting Initiative (GRI). The revised GRI version of 2021 focuses clearly on the “inside-outward” impact, e.g. the impact of the company on the environment, the economy, and people. How to manage the double materiality challenge? Two separate exercises or just one?

Today, standard setters and regulators are moving towards the concept of double materiality. The notion of double materiality responds to increasing stakeholder demand, adding an “inside-outward” view with an eye on the impact a company has on the environment and people. So regardless of the financial impact on the company, it is becoming a company’s obligation to report the impact it has beyond its corporate borders. Double materiality can assist the company in developing an effective management strategy as well as reporting both internal and external issues to various stakeholders in a relevant manner.

How to make the transition or rather, how should a company add impact to its existing financial materiality? Probably the most elaborate path is proposed by the ESRS (European Sustainability Reporting Standard) which seeks to identify the financial and the impact materiality by two separate processes – in essence, a double effort. The financial materiality is derived by rating a company’s 1) ability to continue using resources needed and 2) its reliance on potentially changing relationships with financial institutions, supply chain partners, customers, etc. Whereas the impact materiality is derived from assessing actual and potential negative and positive impacts by the scale, scope, and irremediable character. Can we combine these two approaches with a simple matrix of “financial materiality” vs “impact materiality” and draw the threshold where topics score highest on both scales?

GRI has a clear answer to this: No! In GRI 1: Foundations 2021 it is stated that “material topics cannot be deprioritized on the basis of not being considered financially material by the organization.” Does this mean that we must do two separate exercises? Not really! It just means that you have to define two separate thresholds from an inside-outward and from an outside-inward perspective.

When reading the General Principles of the exposure draft of the ESRS the reader might miss some clear guidance. So, what to do? Wait until the final document is published by EFRAG at the end of this year? Our advice: Do not lose another year! The pathway toward double materiality is logical and based on a broad consensus. We cannot expect much further guidance on this issue from EFRAG either. In addition, there are various efforts to manage the double materiality challenge beyond the European Union. Time to be among the first movers. Join one of our next ESG training and get more guidance to manage the double materiality challenge.

For more information, contact us at +41 32 325 80 80

marc@schwerycade.com

rolf@schwerycade.com