Impact materiality - Methodology for defining relevant ESG reporting themes

Having defined double materiality and financial materiality, this article looks at the second aspect of double materiality, impact materiality. This perspective concerns issues that reflect the actual or potential significant impacts on people and the environment of the company's operations and its upstream and downstream value chain. It may also be called "impact outwards".

The object of this materiality is to enable the organization toidentify and assess its impact on the economy, the environment and society. Our GRI-compliant methodology provides organizations with step-by-step guidance on how to determine relevant themes. Relevant themes are those that represent the most significant impacts on the economy, the environment and people, including impacts on human rights, i.e. the themes of its impact materiality.

By way of background, the Double Materiality Matrix, and thus the definition, evaluation and prioritization of relevant themes, is the cornerstone of the new ESG Reporting standard, the CSRD.

Here's how to identify the relevant themes for your ESG reporting:

> STEP 1 - Understanding the organization's context

• The organization's activities
• Business relations
• Sustainability context
• Stakeholders

> STEP 2 Identify actual and potential impacts

• Identifying negative impacts
• Identifying positive impacts

> STEP 3 - Assessing the significance of impacts

• Assessing the significance of negative impacts
• Gravity
• Probability

> STEP 4 - Prioritize the most significant impacts for reporting purposes

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STEP 1 - Understanding the organization's context

In this first step, the organization creates a macro overview of its activities and business relationships, the sustainability context in which it operates, and an understanding of its stakeholders. The aim of this preliminary step is to ensure that all the elements of the organization's context are listed, so that the following steps can be carried out as effectively as possible.

1. The organization's activities

To determine which themes are relevant to your organization, consider the following points:

• Objective, value or mission statements, business model and organizational strategies.
• Types of business activities and corresponding geographical locations.
• The types of products and services offered, and the markets targeted.
• The sectors in which the organization is active and their characteristics.
• The number of employees, their status and demographic characteristics.
• The number of workers not employed by the organization, their contractual relationship and the work they perform.

2. Business relationships

When an organization wants to identify themes relevant to its activities, it needs to take into account the business relationships it maintains. This includes its business partners, the entities in its supply chain and any other entity directly linked to its operations, products or services.

The organization must take into account :

• Types of business relationships
• Types of activities undertaken by our partners
• The nature and duration of relationships
• Geographical locations where these business relationships take place

3. Sustainability context

To understand the sustainability context of its activities and business relationships, an organization needs to consider the following elements:

• Economic, environmental, human rights and other societal challenges related to its business sectors and the geographical location of its operations (e.g. climate change, poverty, political conflicts).
• The organization's responsibility with regard to official intergovernmental instruments with which it is expected to comply, such as: ILO, OECD, UN agreements on climate change, human rights and guidelines for multinational enterprises.
• The GRI sector standards describe the sustainability context by business sector, and can also help at this stage.

4. Stakeholders

The organization must identify its stakeholders across all its activities and business relationships. It must draw up a complete list of individuals and groups whose interests are or could be affected by its activities.

Organizations often think that stakeholders stop at employees, suppliers, customers and shareholders. But for an exhaustive and accurate view of the company's impacts, we need to go further. Common stakeholder categories for organizations are therefore :

• Business partners
• Civil society organizations (NGOs, foundations, trade unions, cooperatives, etc.)
• Consumers
• Our customers
• Employees and other workers
• The governments
• Local communities
• Shareholders and other investors
• Suppliers
• Vulnerable groups

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STEP 2 - Identify actual and potential impacts

In this stage, the organization analyzes the impacts it has already had or could have on the economy, the environment, people and human rights through its activities and business relationships.

Impacts can be :

• Positive or negative
• Short- or long-term
• Intentional or unintentional
• Reversible or irreversible
• Actual (actual impacts are those that have already occurred) or potential (potential impacts are those that could occur in the future)

1. Identifying negative impacts

The first step in due diligence is for the organization to identify the actual and potential negative impacts associated with its activities, products or services, as well as those linked to its business relationships.

In some cases, the organization may find it difficult to identify all the negative impacts, for example, due to the multiplicity of its sites or value chain. In such cases, an initial assessment can be carried out to identify the areas where impacts are most likely to be present and significant.

To carry out the initial assessment, the company can :

• Define the scope of the assessment by identifying the general areas of its activities and business relationships where negative impacts are most likely to be present and significant (e.g. product lines, suppliers located in specific regions).
• Collect and analyze information on actual and potential negative impacts in the general areas identified, using sources such as the OECD Due Diligence Guidelines for Responsible Business Conduct, reports from governments, environmental agencies, international and civil society organizations, workers' and trade union representatives, national human rights institutions, the media or other experts.

It is important to note that the initial assessment should not be seen as an exhaustive evaluation of negative impacts, but rather as a first step in identifying the areas where negative impacts are most likely to be present and significant. The company should then carry out a more detailed assessment to identify specific negative impacts and determine appropriate measures to prevent, mitigate or compensate for them.

2. Identifying positive impacts

By identifying and assessing these potential positive impacts, an organization can strengthen its commitment to sustainable development and find new opportunities to create value for stakeholders.

The first example of positive impact. Imagine a company that develops measures to reduce the cost of renewable energy for its customers. As a result, more customers are able to afford to use renewable energy rather than non-renewable energy, helping to combat climate change. This can include practices such as installing solar panels on customers' roofs or providing financial incentives to encourage the use of renewable energies. These measures are an example of how a company can make a positive contribution to sustainable development while creating value for its customers and the environment.

The second example of positive impact is when a company chooses to open a new facility in an area of high unemployment. By hiring and training local unemployed people, the company can contribute to job creation and community development. This kind of positive impact can also strengthen the relationship between the company and the local community, which can have long-term benefits for both parties.

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STEP 3 - Assessing the significance of impacts

Step 3 involves assessing the significance of the impacts identified by the organization in step 2.

This assessment enables them to be prioritized and measures to be taken to deal with them. Assessing the significance of impacts is relevant when the organization cannot deal with all impacts at once.

This assessment involves both quantitative and qualitative analysis, which may require a subjective decision. The organization needs to consult stakeholders to assess the significance of its impacts, and should also consult relevant internal or external experts. We'll be doing a dedicated article on how to consult stakeholders.

1. Assessing the significance of negative impacts

• The significance of a real negative impact is determined by its severity.
• The significance of a potential negative impact is determined by the severity and probability of the impact. The combination of severity and probability of a negative impact can be called "risk".

2. Severity of impact

The severity of an actual or potential negative impact is determined by the following characteristics:

• Magnitude: the degree of severity of the impact.
• Scope: the extent of the impact, for example, the number of people affected or the extent of environmental damage.
• Irremediable nature: difficulty in counteracting or repairing the resulting damage.

The extent of a negative impact can vary according to the context in which it occurs. For example, the severity of the impact of an organization's water consumption depends on the area where the water is abstracted.

‍Example: If water is abstracted in an area of water stress (an area where water resources are limited), the impact will be considered more severe than if it is abstracted in an area with abundant water resources to meet the demands of users and ecosystems.

3. Probability of impact

The probability of a potential negative impact refers to the chance of this impact occurring.

The probability of an impact can be measured or determined qualitatively or quantitatively.

It can be described in different ways:

• In general terms, e.g. very probable, probable.
• Mathematically using probability, e.g. 10 out of 100 or 10%.
• By frequency over a given period, e.g. once every three years.

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STEP 4 - Prioritize the most significant impacts for reporting purposes

In this stage, an organization prioritizes the impacts of its activities according to their importance, to determine which themes will be included in its reporting.

To do this, the organization ranks its impacts in descending order of importance and sets a threshold to decide which impacts it will focus on. Impacts are grouped into themes to facilitate prioritization and inclusion in the matrix, and to determine the number of themes to be included in ESG reporting.

Last but not least - The selection criterion for determining whether a theme is relevant for reporting is the significance of the impact, not the difficulty of reporting on the theme or the fact that the organization is not yet managing the theme. If the organization does not manage a relevant theme, it must indicate the reasons or plans for managing the theme in order to comply with the requirements of the standard.

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Consult our experts and guides to help you prepare your materiality matrix and identify your relevant themes.