Who takes pleasure in inventing tedious concepts and obscure acronyms to hide the benefits of a responsible growth approach in a 21st-century business? CSRD (Corporate Sustainability Reporting Directive), ESRS (European Sustainability Reporting Standards), and the magnificent “double materiality matrix.” Yet, behind this definition, which evokes memories of high school mathematics, lies the opportunity for a strategic tool that can enhance a company’s competitiveness. So, SME leaders, here’s why you should adopt double materiality!
measuring extra-financial performance: a good idea!
Initially, the goal was to assess a company’s performance using extra-financial criteria. For instance, measuring a company’s impact on its environment is indisputable, particularly in terms of carbon emissions caused by all company activities, including the impact of product use by customers.
These extra-financial criteria have been extended to all dimensions of corporate social responsibility, and a European framework to harmonize and standardize these criteria is under development: the CSRD. Within this framework, standards called ESRS will define these criteria for various aspects of responsibility. Some have been in use for decades. For example, ESRS S1, which addresses the social aspect of businesses, includes a fundamental criterion: the frequency and severity rate of workplace accidents.
and what about the famous “double materiality matrix”?
The principle of double materiality goes beyond the traditional approach of corporate performance measurement, which focuses solely on conventional financial aspects—growth, profitability, cash flow, working capital requirements, etc.—to provide a more comprehensive and integrated view of a company’s responsibilities and impacts using extra-financial criteria.
In this holistic vision, which is translated into a matrix, one axis is well known: the measurement of corporate performance, including key issues, action plans, indicators, and the monitoring of these plans at the management committee level.
However, within all of a company’s challenges, the focus is placed on sustainable and responsible growth, assessing its relative impact on financial performance.
A company interacts with stakeholders in developing its activities: employees, shareholders, customers, suppliers, its ecosystem, and the planet. Each challenge is linked to stakeholders, and its impact—more or less significant—is qualitatively and relatively measured within the set of issues. This forms the x-axis of the matrix.
The classification of issues according to stakeholders remains flexible, as there is no universally defined double materiality matrix structure. Four categories can be used to classify challenges based on their impact on stakeholders: Governance, Social, Societal, and Environmental. A simple example is the frequency rate of workplace accidents, which falls under the “Social” category and has a very significant impact, positioned at the far end of the x-axis. After all, how can a company develop while putting its employees at risk?
It should be noted that an issue’s impact can represent a risk—such as workplace accident rates—or an opportunity, such as considering the carbon footprint of products as a competitive advantage for customers through energy reduction, durability, and end-of-life product management.
This approach to prioritizing corporate challenges is quite conventional, oriented around standard performance criteria of growth and profitability. The only difference is that it identifies and focuses on issues with a direct impact on stakeholders.
The approach becomes more distinctive in defining the y-axis of the matrix: this time, it assesses the impact caused by the company on its stakeholders. Again, the impact varies in significance and represents either a risk or an opportunity.
For instance, consider a plan to source suppliers as close as possible to the company. The impact on the company may be minimal or even negative, especially in terms of profitability, though it may be offset by improved responsiveness to customer demands and lower inventory levels. However, its impact on carbon footprint reduction is significant for the environment, and relying on local suppliers is beneficial for the surrounding business ecosystem.
Ultimately, all considered sustainable and responsible growth challenges are consolidated for the company’s development along the x-axis. They are supplemented, if necessary, with challenges that matter to stakeholders in their relationship with the company, and their relative impact is measured along the y-axis.
By positioning all challenges according to this assessment of their impact on both axes, we obtain a double materiality matrix!
Example of double materiality applied to an SME in the imaging industry
Take the example of i2S, an SME specializing in imaging for the common good—camera-based solutions that generate positive impact for users: heritage digitization, underwater inspection, medical diagnostics, sustainable agriculture, etc.
As part of its corporate social responsibility initiative, the company recently built its first double materiality matrix.
It is evident that the impact of an issue varies depending on the concerned stakeholder. For example, i2S has developed a corporate project based on a purpose: “Imaging for the common good.”
This corporate project is a major issue for the company in terms of its impact on employees. The purpose is designed to be inspiring, attracting and retaining talent. It directly contributes to having an engaged and stable workforce, at 95% in 2024. However, the corporate project is deemed only significant on the y-axis, as employees, like in most companies, prioritize salary and their relationship with their direct manager over the company’s mission.
The corporate project is considered crucial in its societal dimension due to its focus on imaging applications that have a positive impact on the environment and user well-being. Its impact is therefore highly significant for the company’s commercial positioning and for stakeholders through the added value of its applications. Thus, it is positioned at the top-right of the matrix.
Finally, the corporate project is deemed very significant for shareholders, as their adherence to this vision and belief in its ability to support company growth is crucial to maintaining their trust. The relationship with shareholders on this topic is therefore vital, but its immediate impact on the company’s financial performance criteria is not considered significant.
the link to extra-financial performance
The final step in building the matrix, which materializes extra-financial performance measurement, is associating each issue with a performance indicator.
For example, here are the performance indicators for the issues linked to the social dimension of i2S.
Based on these indicators, a dashboard can be created for the company’s corporate social responsibility initiative, integrating the indicators and related challenges into an extra-financial report.
It is worth noting that the first version of the double materiality matrix can be regularly updated as a strategic tool for corporate responsibility discussions within the management team or board of directors, especially as CSRD performance measurements become standardized.
I hope this article has convinced you that behind an unappealing name for a pragmatic SME leader (a redundancy), who only considers continuous improvement through the lens of quick results, lies a strategic reflection tool on corporate responsibility—one that becomes the key driver of its sustainability.
Xavier Datin, i2S CEO