Before explaining double materiality, let’s quickly look at what we mean by materiality. In sustainability reporting, environmental, social and governance (ESG) materiality is the process used by organizations to prioritise the sustainability issues most relevant for their management and reporting, considering the changing expectations of their stakeholders and the market.
The methodology for conducting the materiality assessment has evolved in response to new market needs and trends, stakeholder expectations, and the changing context in which business is conducted. An example of that evolution is the concept of double materiality, which aims to ensure that companies provide sufficient and appropriate information about risks and opportunities, as well as impacts on society and the environment.
What double materiality is and why it is important
Double materiality serves as a mechanism to integrate sustainability into overall risk management, helping to identify and understand the company’s short and long-term sustainability risks and opportunities.
The goal is to prioritise ESG issues that are relevant to the company from either an impact or financial perspective or both. In this way, the definition of material ESG issues results from the analysis of impact materiality and financial materiality.
Double materiality in Latin America
Although the application of double materiality methodology is not yet mandatory for industries operating in Latin America, being linked to the value chains of European companies, or the good practice of monitoring trends in sustainability management and reporting, means that companies should start to adopt this approach early when defining their ESG priorities.
This means addressing challenges such as the alignment of financial, strategic and risk visions, in addition to the technical knowledge of sustainability teams that allow for a comprehensive approach to the definition of material issues.
Materiality assessment in Ecopetrol
Taking into consideration this methodology, the materiality assessment of Ecopetrol has been developed in four steps:
- Update of the company's stakeholders. This was carried out with the objective of determining the impact materiality.
- Analysis of the information from internal and external sources to identify the actual or potential impacts that Ecopetrol generates or could generate on the environment and/or society, as well as the risks and opportunities that the environment presents and that have or could have an impact on the company's ability to generate economic value.
- Selection of material issues. Based on the impacts, risks and opportunities identified, 14 ESG issues were selected and defined as potentially material for Ecopetrol (see below), which were validated with different areas of the company.
- Evaluation of the issues that were identified. This evaluation was carried out from the perspectives of financial materiality and impact materiality.
The financial materiality assessment considered the risks and opportunities identified in the exercise. This assessment was conducted in collaboration with Ecopetrol’s Corporate Vice-presidency of Compliance and Corporate Vice-presidency of Finance.
For the impact materiality assessment, various stakeholders were considered to qualify and prioritise each potential ESG element, considering Ecopetrol's impacts on the environment and society.
Once the results were processed and analyzed, the materiality analysis of Ecopetrol allowed the ratification of the ESG elements as follows:
- Climate change
- Biodiversity and ecosystem services
- Water
- Financial sustainability
- Industrial and process safety
- Occupational health and safety
- Ethics and transparency
- Responsible supply chain
- Sustainable territories
- Air quality
- Human talent
- Materials and waste
- Innovation, science and technology
- Cybersecurity and information security
In addition, an analysis was developed to determine the relationship between the identified elements. The exercise presents the type of relationship that exists between the different ESG issues (very strong, strong or medium), in relation to the nature and actions that are developed and managed from each of them. This information highlights the importance of managing the elements in an integrated manner, considering that the actions developed within the framework of one of the issues may have effects on another, achieving, for example, maximising results or reducing efforts.
For more information, check out Ecopetrol’s webpage ‘Generating value through technology, environment, social, and corporate governance TESG’.
