Dual materiality analysis: understanding the basis of CSRD reporting

The entry into force of the Corporate Sustainability Reporting Directive (CSRD) marked a major turning point in the way European companies approach sustainability.

The fundamental challenge of CSRD is to enable companies to precisely identify the sustainability issues they need to prioritize, in order to mobilize the necessary internal and external resources to meet them.

At the heart of this new requirement liesdual materiality analysis, a crucial step in aligning corporate strategies with regulatory and societal expectations.

The aim of this article is to explain the concept in simple terms and guide you through its implementation.

What is dual materiality analysis?

Where does the concept of materiality come from?

Originating in the financial system, the concept of "materiality" is used to sort and identify accounting information likely to have an impact on a company's financial performance. In concrete terms, information is said to be material when it exceeds a "materiality threshold", i.e. an amount beyond which economic decisions, particularly those of investors, are likely to be influenced.

Dual materiality is an approach that considers both :

1. Financial materiality: how environmental, social and governance (ESG) issues affect a company's financial performance.
2. Impact materiality: how a company's activities impact the environment and society.

This dual perspective provides a comprehensive assessment of the risks and opportunities associated with sustainability, offering a 360-degree view of the interactions between the company and its environment.

In practical terms, information is said to be material when it exceeds a "materiality threshold", beyond which it will have an impact on the company's activities or the environment.

This analysis must be documented and justified in sustainability reports, which must comply with the European Sustainability Reporting Standards (ESRS) developed by EFRAG. The ESRS will specify the reporting criteria for each ESG standard, taking into account its financial materiality and/or impact.

Why is it mandatory for CSRD?

The CSRD requires large companies and listed entities to disclose detailed information on hundreds of issues relating to the sustainability of their activities.

Dual materiality analysis is essential for :

• Identify relevant information: determine which ESG topics are most significant for the company and its stakeholders.
• Comply with regulatory requirements: provide transparent reporting in line with European standards.
• Reinforcing investor confidence: demonstrating proactive ESG risk management can reassure investors.

Identify and assess external impacts

Dual materiality analysis aims to measure the positive and negative impacts a company can have on its economic, social and natural environment. These impacts can affect a multitude of areas, such as climate, biodiversity, human rights, health and quality of life, and concern different stakeholders, including customers, suppliers, employees, local communities, NGOs and public authorities.

To identify and assess these impacts, it is essential to map stakeholders, define relevant indicators and collect reliable data. It is also advisable to consult these stakeholders to understand their expectations, needs and perceptions. The main objective is to identify the most significant impacts, those that are most intense, likely or widespread.

Understanding internal risks and opportunities

Assessing the risks and opportunities linked to sustainability issues affecting the company's financial performance is also a component of the dual materiality analysis. These risks and opportunities may be physical, regulatory, reputational or competitive, affecting the company's profitability, liquidity, solvency or value.

A SWOT analysis, combined with scenario definition and quantification of potential financial impacts, is necessary to understand these risks and opportunities. It is crucial to consider time horizons, uncertainties and interdependencies in order to identify major risks and opportunities, those with a high probability, magnitude or materiality.

How do you carry out a dual materiality analysis?

The dual materiality analysis is prepared in several stages:

• Identify the ESRS issues and standards on which to base an analysis.
• Involve stakeholders (not compulsory, but it helps refine the analysis of the most material issues for your company).
• Collect and centralize the data required for analysis.
• Create your double materiality matrix.

Involving stakeholders in the analysis

A successful dual materiality analysis requires the active involvement of the company's stakeholders. Their participation is crucial, as they possess in-depth knowledge of their expectations, needs and perceptions. That's why it's essential to consult, inform and involve them throughout the process. Various methods, such as surveys, interviews, workshops and panels, are used to involve stakeholders. These approaches facilitate the gathering of qualitative and quantitative information, encourage the sharing of different perspectives and generate productive dialogue. The aim is to identify common issues, build trust and secure support for the project.

Examples of indicators and data to be collected

The key to an effective dual materiality analysis lies in the collection and analysis of reliable, relevant and comparable data. This data must be chosen according to the particularities of the company, its sector of activity and its stakeholders. Various sources can be used to gather this information: internal reports, external databases, market studies and competitor reports. From these sources, it is possible to establish key performance indicators, whether financial, social, environmental or governance-related. These indicators include, for example:

• External impacts: CO₂ emissions, water use, workplace accident rates, customer satisfaction, contribution to local development, etc.
• Internal impacts: sales, operating margin, return on investment, cost of capital, reputational risk, innovation, etc.

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Practical tips for implementation

Implementing a dual materiality analysis is a demanding process, requiring meticulous preparation, structured organization and effective communication.

Here are a few recommendations for successful implementation:

• Establish a clear and coherent scope of analysis, including all branches of the company as well as its suppliers and subcontractors.
• Assemble a multi-disciplinary team from various departments within the company, such as finance, CSR, marketing, human resources, etc.
• Opt for adapted tools that simplify data collection, analysis and presentation, such as specific software, spreadsheets, graphs, etc.
• Present results in a clear, concise and educational way, using reports, visual aids and other media.

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