This is the last of the 5 articles dedicated to the topic of double-materiality assessment. If you have no detailed knowledge of this topic or the European CSRD framework, we invite you to consult the articles listed at the bottom of the page.
1. Understand the global economic, social and environmental context to realize its dual-materiality
To make a pertinent analysis, you need to have a global picture not only of the company, but also of the world we live in. This is why it is not advisable to entrust the entire CSRD and double-materiality assessment to a single person, and even less so if that person has very little professional experience. As with any profession structuring itself, experience and local knowledge are key. Indeed, the conclusions of the CSRD must influence the company's overall strategy.
The larger the structure, the more essential the qualifications and expertise of the CSR managers in terms of economics and international relations. Hence the competence of the "big four", operating all over the world. For Rate A Company, it was this international economic expertise that enabled us to anticipate the CSRD framework and the importance of stakeholders consultation as early as 2015.
You will find the graph on page 20 of this document.
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In addition to the macro-economic factor, we need to look at how the organization works (micro). The report mentions the importance of knowing the regulatory framework, including international regulations. In this part of EFRAG's summary, the identification of stakeholders as actors in the value chain is mentioned as being decisive.
This consultation makes it possible to re-evaluate any local risks that might have been identified through knowledge of local legislation, cultural habits or environmental constraints, whether as a result of local knowledge or in-depth research. In terms of economic analysis, information from the French Ministry of Europe and Foreign Affairs, as well as their equivalents in the USA and the UK, can provide some information on the possible developments in the markets in which the structure's main value chain players operate.
Until the sector specific standards are ready, companies need to consider corporate issues as the focal point of reference.
2. Strategic information to be included in the CSRD
ESRS 2 IRO-1: The report must detail the methods used to carry out the materiality analysis; how impacts, risks and opportunities have been estimated.
ESRS 2 SBM-3: It must be clearly explained how the material impacts, risks and opportunities identified will affect the strategy and business model.
ESRS 2 IRO-2: The organization must also detail how it will present the findings of this materiality to stakeholders, including how the severity scales and methodology have been determined.
The note reminds us that ESRS 2 GOV-2 also requires the extra-financial report to detail how the impact measurement, the methodologies used and the strategic redirections will be presented to the organization's managers and administrative executives.
3. What does a double-materiality assessment look like according to the CSRD?
Double-materiality should make it possible to define the significance of the impact. According to the CSRD experts, they have arrived at an absolute scientific method, as can be seen from article 82 of the initial text.
Scale of impact should be measured on the following intensity scale :
5. Absolute
4. High,
3. Medium
2. Low,
1. Minimal
0. None
Scope of impact should be measured on the following scale :
5. Global / total
4. Widespread
3. Medium
2. Concentrated
1. Limited
Finally, Remediability should be measured on the following scale :
5. Non-remediable/irreversible
4. Very difficult to remedy or long-term,
3. difficult to remedy or mid-term,
2. Remediable with effort (time & cost)
1. Relatively easy to remedy short-term
0. Very easy to remedy
Each category must be estimated from 1 to 5 in terms of impact. The calculation method for the preliminary impact materiality is as follows:
Preliminary impact materiality = importance of impact + extent of impact + remediable side of impact = 5+5+5
In red in the table below
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When we saw these tables after reading the hundreds of pages of EFRAG, we couldn't help but think of this:
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Lots of words to say: be sincere, be intelligent, think collectively and use common sense to determine urgency.
On the other hand, we note that while stakeholders consultation was treated unclearly, shareholders consultation to define the presumed financial impact is very clearly formulated in article 136.
To gain in efficiency and precision, stakeholder consultation does indeed seem to be the most effective solution. This approach makes it possible not only to better measure impact, but also to act on the value chain. Notions that seem to lie at the sovereign CSRD texts' heart.
4. The list of CSRD sovereign texts
If you'd like to know more about the issues and methods behind the adoption of the CSRD, you can also refer to the sovereign texts that provide the framework for this European regulation.
Indeed, according to the CSRD instructions, the indicators used in impact measurement must be based on the ESRS and must take into account internationally recognized principles and frameworks, including :
- the United Nations Sustainable Development Goals,
- the UN Guiding Principles on Business and Human Rights,
- the OECD Guidelines on Business and Human Rights.
- United Nations guidelines on business and human rights,
- the OECD Guidelines for Multinational Enterprises, the OECD Guidelines on Due Diligence for Responsible Business Conduct and related sector guidelines,
- the United Nations Global Compact,
- the International Labour Organization's Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy,
- the ISO 26000 standard on social responsibility,
- the UN Principles for Responsible Corporate Governance
- the UN Principles for Responsible Investment.
However, all these standards require consultation with stakeholders.
a. What reference sources can be used for CSRD?
The GRI standards are the global benchmark for impact. Launched in 1997 in Boston, USA, and now headquartered in the Netherlands, this NGO has largely served as the basis for the CSRD. In the 2000s, the GRI established the first guidelines to help organizations improve their environmental and social impact and reduce corruption. These standards are the global benchmark for CSR frameworks.
The GRI standards do not take into account the financial aspect (double materiality), but provide a very good basis for extra-financial reporting. There are similarities between the two standards, notably GRI Universal Standards 2021. The role and participation of stakeholders is central to GRI.
The ISSB, International Sustainability Standards Board was created in 2021-2022 by the IFRS Foundation, with Emmanuel Faber as its first Chairman. The aim of the ISSB is to establish non-financial reporting standards for investors. The idea is to enable investors to understand the financial risks associated with climate change or the income gap.
The due diligence process. This approach comes last in the EFRAG's recommendations, yet it is of decisive importance. Although traditionally less practiced in France than in English-speaking countries, due diligence is a process of research, inquiry or investigation which enables us to assess the quality of the business partner with whom we wish to work or, in some cases, acquire. It is used in FUSACs, but has become a cultural reflex in the purchasing behavior, subsequently all over the world (but in France). The principle of due diligence is to ask customers, industry experts and other stakeholders what they think of the way this business operates. It led the way to “peer review”.
An initial internet search associating the words “scandal” with the company name may bring up press articles that would signal red flags. Only online reputation can be cleaned up easily, and recent reviews remains the most sincere form of feedback.
