Why single materiality is not good risk management

Recent news about the Moody’s ESG – MSCI partnership has stirred up an old debate about the sovereignty of US vs EU-based ESG rating agencies as yet another example of consolidation in North American hands. This is mainly due to the stark, almost philosophical differences about how to define sustainability between both sides of the pond, i.e. single vs double materiality.

As demand for ESG data mainly comes from Europe, supply however mainly comes from the US. Europe, due to regulation, typically requires double materiality, while the US leans more towards single materiality.

The partnership, whereas Moody’s will “migrate its existing ESG data and scores (from former Vigeo Eiris and based on double materiality) to offering MSCI’s sustainability content” (based on single or financial materiality), reinforces MSCI’s already leading position on the market, adding 12% market share to its existing 25%. To be fair, MSCI does have a double materiality offering, but we had to dig to find it as it is not integrated into its core solutions such as its flagship ESG rating.

So why does all this matter for Financial Institutions?

With the first CSRD (Corporate Sustainability Reporting Directive) reporting in January 2025, FIs have to perform a double materiality analysis of their operations, including clients and portfolios in order to identify which ESRS (European Sustainability Reporting Standard) to disclose upon, based on a double materiality analysis.

And beyond regulation, a single materiality approach is not as robust in terms of risk management. Take the example of Amazon below, a financial materiality analysis based on SASB, the leading standard, will output 7 material issues: energy consumption, customer privacy and data security, poor labour and working conditions, diversity & inclusion, product or service lifecycle management, anti-competitive practices, critical incidents & systemic risk management, vs 11 for double materiality. This means that things like workers’ health & safety, air pollution, water withdrawal and consumption, or biodiversity are not deemed material ESG issues when taking a single materiality approach.

When you know that Amazon has one of the biggest number of controversies in our coverage (64 ranging from moderate to severe), and that 6 of those are linked to workers’ health and safety, that’s an issue. As Emmanuel Faber from the ISSB argues and as summarized eloquently by Dinah Koehler in this article, these risks will be reflected in financial materiality in time. But not yet, and usually after it’s too late.

Below is Amazon’s impak SDG Alignment (iSA) report, using a double materiality approach.

As an FI, looking at the world with a limited, single materiality lens, leaves potential unmitigated risks on the table. If you extract yourself from the political debate that’s been slightly manufactured (see the recent FT film “Who killed the ESG party”), this is what it comes down to: risk management. This doesn’t mean that those companies are more virtuous however, as all companies should mitigate their material negative impacts (if you’re interested in good and virtuous companies, check out our latest research on positive impacts in the Stoxx 600).

A good Return on Investment

If Financial Institutions fail to conduct a thorough double materiality analysis, two key consequences arise:

At the corporate (portfolio company) level: for example, our analysis of the Stoxx 600 reveals that few companies adequately address water impact, despite its material significance. This oversight can result in substantial costs. An estimated US$301 billion in business value is at risk unless companies improve and innovate their water usage practices, with the cost of necessary responses estimated at US$55 billion.
At the Financial Institution level: these institutions face increasing risks of being accused of greenwashing, as regulations around this issue are tightening globally. In 2023, instances of greenwashing by banks and financial services companies worldwide rose by 70% compared to the previous year, with European financial institutions accounting for most of these instances. Transparent data on adverse impacts is crucial for banks, asset managers, investors, and other market participants to assess a company’s true business conduct and mitigate greenwashing and social washing risks in their portfolios and supply chains.

While there are associated costs that might be higher than what FIs are used to in paying for ESG data, we believe in the medium to long term impact data will almost certainly seem like a good ROI.