With the upcoming arrival of the Montreal branch of the new International Sustainability Standards Board (ISSB), the holding of the Mtl 2022 Climate Summit this week offers a forum conducive to discussions on the fight against climate change and on the accountability of the actors of the metropolis. But, considering the lack of ambition of political leaders at the moment, this discussion will have to be approached with a free hand and the ambition to change our sustainability paradigm.
The assumed objective of the meeting is to ensure that the actors of the metropolis mobilize to “contribute to reducing GHG emissions by 55% by 2030 and put the metropolis on the path to carbon neutrality. With the upcoming arrival of the Montreal office of the ISSB, the international standardization bureau for sustainable development reporting practices, there is much to hope for from the Montreal summit.
Two questions arise first and foremost: how to measure the real sustainability of our societies? and which repository to use? As Allen White, co-founder of the Global Reporting Initiative, says, “Sustainability requires contextualizing within thresholds,” but our paradigms aren’t there yet. We must therefore make players in all sectors—both companies and financial and other players—responsible for the impact of their actions on society.
To this end, we propose a line of thought that has been maturing for several years now in discussions between specialists, in order to go beyond the limits of the classic ESG sustainability factors (environmental, social and governance) which are struggling to trace the path of a positive societal impact. This idea is that of “double materiality”; an extra-financial concept aimed at modulating the sacrosanct principle of return to shareholders (profitability) by adding to it the notion of the materiality of social and environmental damage.
First, materiality
In a nutshell, the principle of materiality establishes that any investment made on the basis of ESG sustainability (such as SASB or GRI standards) must undergo an analysis allowing consideration and action to be taken on “material” risks, which are therefore tangible. This makes it possible to sort the profitability of various investments according to whether or not the practices of a company are likely to be harmful to the value of the investment. Thus, one can manage the external risks (externalities) of an organization.
However, what is material for one company is not necessarily so for another (for one, it will be waste management; for the other, the health of its workers or its GHG emissions), but above all , nothing forces a company to reduce its negative impact on the societies and ecosystems on which it has an impact. The gaping blind spot of materiality is therefore simple: what the organization’s negative impact on the sustainability of human and ecological ecosystems?
Materiality, here, is only a technical term to speak of risks to shareholders, and not of real impact on human and natural ecosystems.
Double materiality, now
The notion of double materiality depends on the “reasonableness” of the perception of a damage for the stakeholders on which the company depends, and not only on a simple material damage for the shareholders. A company or any actor could see its sustainability be materially at risk (simple materiality) due to its GHG emissions, while still having a very negative impact on a river, a forest or surrounding communities — or even its suppliers — , and still be considered a model of sustainability.
But, with the significant advances in the science of climate change, sustainable development and economics, in particular through the precepts of “Doughnut Economics”, the “sustainability coefficient” or even “sustainability based on the context” , we now know that there are inherent limits to our social and environmental ecosystems. These limits could therefore act as a filter to establish what the “reasonably” foreseeable societal damages are, and thus go beyond the model of simple materiality.
The double materiality makes it possible to really target the social responsibility of private actors and investors, by aligning them with real objectives of net positive impact and real sustainability.
Is it exaggerated to think that the Summit will be the forum where a decision will be made to change the paradigm of materiality? Perhaps the forum will not bring about changes in terms of public policies, but it is by launching a dialogue on the relevance and importance of these concepts that the actors of the metropolis will be able to set in motion a movement towards real durability.
Moreover, these discussions already have at least some anchor points. First of all, dual materiality already appears in the text of Regulation 2019/2088 (Sustainable Finance Disclosure Regulation) of the European Union. Then we tip our hats to initiatives such as the Carbon Bank, certifications such as B Corp and, more generally, the integration of the concept of sustainability thresholds and context within the Impact Management Platform.
As Mark McElroy argues, “The materiality and the reporting must be considered according to what are or should be the impacts of an organization on vital capital, and according to who are its stakeholders who depend on it”. Once the actors courageously agree on the definition of this true sustainability, we can finally answer the question that every organization should ask itself: are we really sustainable?