Coline Pavot

What truly counts

Fiduciary duty is at the heart of the trustful relationship we maintain with our clients. It ensures that those who manage other people’s money act in those people’s interests, rather than in their own. For a long time, such interests were purely financial in nature. But in 2005, the Freshfields report for the UN found that ESG issues were, in fact, essential to the reliability of estimated financial performance and hence, fiduciary duty. And yet, an ESG bashing campaign has recently taken hold in the United States. So how do we know what truly counts?

The issue of materiality

These discussions on the contours of fiduciary duty inform our investor research into companies. For several years now, we have incorporated ESG criteria into our research through the prism of financial materiality, in order to study the environment’s impacts on companies. Some investors want to go further and also research companies’ impact on their environment. This is called the materiality impact. Combining these two dimensions into double materiality is the foundation of recent regulations targeted at companies and investors.

Double materiality & companies

Investigating companies’ impact on their environment means looking into their negative externalities[1]. These negative externalities come at a price that is still too often paid by society. However, companies are increasingly being asked to internalise their externalities, such as through the carbon market or the European directive on due diligence requiring major companies to process their negative impacts on human rights and the environment in their value chains. In Europe, the work of EFRAG[2] providing a framework for the Corporate Sustainability Reporting Directive (CSRD[3]) is working towards making double-materiality reporting mandatory. This aggressive stance, which is not shared by English-speaking countries, as seen in the work of the ISSB[4] or the SEC[5], would have the virtue of forcing companies to make public their negative impacts, with the option of limiting such impacts (through regulations, taxes, etc.). This is a way of moving from an economic system built at the expense of the rest of the world to a system built within the limits of this world! This is a timely revolution as resources becoming increasingly scarce.

Double materiality & investors

Driven by regulations such as SFDR, the Sustainable Finance Disclosure Regulation, this revolution is also impacting investors by making them anticipate the societal impact of investment choices, limit their negative externalities, and even maximise their positive impacts. This momentum is sharpening the financial world’s awareness of its responsibility in changing this paradigm. In the field, impact investors are showing the way, aware that while some sustainability factors have no short-term impact or direct cost on their investments, they do have a high cost for society and, ultimately, an indirect cost to companies. Companies’ increased maturity, being driven by CSRD, is likely to speed up the tempo by providing access to better-quality data on which they can base investment decisions.

Double materiality is a societal choice. We must all rally together to build a more sustainable world in which no negative impacts are taken lightly but, rather, are weighed for their costs and benefits to society. Aware of the role it plays, LFDE is working on integrating double materiality more and more into all its investment decisions… so that we can keep in mind what truly counts!


Coline Pavot, Head of Responsible Investment Research at La Financière de l’Echiquier (LFDE)


[1] A situation in which an economic agent’s activity causes adverse societal impacts

[2] European Financial Reporting Advisory Group

[3] Corporate Sustainable Reporting Directive

[4] International Sustainability Standards Board

[5] Securities and Exchange Commission