We frequently deal with the implementation of the CSRD on our website. But let us now have a look at the practice of its application, specifically the key concept of double materiality.
The concept of double materiality recognises that the sustainability impacts of any company are not only relevant to the organisation itself, but also to the wider society and environment in which it operates. In other words, within the framework of double materiality, impacts on the environment and society can also affect its own financial performance. Traditional materiality - also referred to as simple materiality - views environmental, social and governance (ESG) issues solely in terms of their impact on the financial performance and position of the organisation itself.
Thus, from a financial point of view, the issue of sustainability is material if it is likely to have a significant financial impact on the business. This means that it creates or is likely to create significant risks or opportunities that affect (or are likely to affect) future cash flows and thus the value of the business in the short, medium or long term.
In terms of materiality of impacts, on the other hand, sustainability is relevant when it is associated with actual or potentially significant impacts of the company on people or the environment in the short, medium or long term across the value chain. Significant impacts are derived from an assessment of their severity, regardless of how companies control them. This includes impacts directly caused by the company in its own operations, products or services, and impacts that are otherwise directly linked to the company's value chain, not just contractual relationships.
Under the CSRD, companies will therefore be required to disclose information on social and environmental issues that are material to their business and that have an impact on wider society and the environment. This includes reporting on impacts, risks and opportunities related to climate change, environmental, social and employee issues, human rights compliance and anti-corruption and anti-bribery issues.
The EU has established a set of 12 standards (ESRS) for sustainability reporting, including cross-cutting and thematic standards. The cross-cutting standards deal with general ESG reporting provisions such as strategy, business model, or value chain, for example. In addition, sectoral standards are being developed to cover environmental, social, and governance areas of ESG, such as disclosure on climate change, energy consumption, and emissions. Sectoral standards will then logically offer guidance to companies according to the sector in which they operate. The Commission will prepare them through so-called delegated acts. But here comes a big BUT - despite the current availability of sustainability information, it is clear that ESG standards are often insufficient. Companies often omit information that is crucial for investors and other stakeholders.
Focus on what's most important
According to the concept of double materiality, a sustainability issue can be significant in terms of impact and/or in terms of risks and opportunities. Although the CSRD provides some guidance in this regard, ultimately, the organization must determine for itself whether or not the topic is material and justify its decisions.
Assessing which topics are most material and therefore need to be included in its sustainability reporting is a necessary initial step to comply with the requirements of the CSRD. The results of such an assessment determine which reporting standards, disclosures and data points should be included in an organisation's sustainability report and which can legitimately be omitted.
Material topics are also the basis for a (sustainable) strategy. The resulting report and the consequent strategy based on the material topics create more transparency in the first place, also for the management. This contributes, among other things, to better decision-making and ensures that time and resources are focused on the topics that are most important to the organisation, other stakeholders and society as a whole.
We therefore need the best possible evidence on the impacts and opportunities presented by the 12 themes defined in the ESRS. This can be done through interviews, questionnaires, stakeholder workshops or perhaps simply through our Green0meter platform, which helps companies gather information in an automated way using APIs, questionnaires, invoice analysis and public data. And it also automatically recommends what a company should do to reduce its carbon footprint, save on production or increase retention and employee satisfaction. Ultimately, it turns a dreaded bogeyman into a competitive advantage for itself.
The assessment of double materiality includes the following components:
Value chain analysis. It leads to the identification of the most relevant external and internal stakeholders with whom interviews are scheduled.
Stakeholder selection. This involves the selection of key stakeholders or stakeholders for interviews on significant impacts, opportunities and risks (IROs). It seeks to identify stakeholders that affect the organization and those that in turn may affect it. Use stakeholder mapping to determine which groups to involve in the materiality assessment.
Selecting topics and interviewing stakeholders. Before embarking on a dual materiality assessment, you need to collect materials from key stakeholders. Interviews with both qualitative and quantitative responses can be conducted in person or online. They will help to identify significant sub-themes.
Evaluation of topics. This is followed by calculation of quantitative averages and evaluation of qualitative information on internal and external environmental impacts and validation with external sources.
Impact on people and the environment (inside-out view). This is an assessment of the company's impact on society and the environment, for example, potential damage to nature.
Risks and opportunities (outside-in view). The outside-in view assesses how sustainability-related developments and events create risks and opportunities for the organisation, for example, reputational risk or the introduction of new sustainable products.
ESRS impact areas. There must be identification of the most significant ESRS data areas to focus on in the strategy and CSRD ESRS reporting.
Dynamic materiality. The concept of "dynamic materiality" takes into account that the importance of a particular issue may change over time based on societal expectations or regulatory changes.
Outcome Visualization. We're going to the final! This is more of a practical tip here: you can use various charts or detailed tables to find the most important factors in terms of the CSRD.
Need a helping hand with your double materiality analysis?
Comments