In our previous blog posts, we explored the upcoming changes in ESG reporting under the Corporate Sustainability Reporting Directive (CSRD) and identified who needs to comply with these new regulations and when. Now, let's delve into one of the CSRD's most pivotal concepts: double materiality.
At its core, double materiality is an approach that broadens the traditional understanding of materiality in non-financial reporting. Historically, companies assessed materiality based on how issues impacted their financial performance – this is often referred to as financial materiality. However, double materiality adds a second dimension: it also looks at how a company’s activities impact the environment and society.
In simpler terms, it's a two-way street:
1. Financial Materiality: How external sustainability issues affect the company’s financial performance and position.
2. Impact Materiality: How the company’s activities impact the environment, society, and other stakeholders.
This dual perspective ensures a more comprehensive understanding of a company's role in promoting sustainable development.
Regulatory Compliance: By adopting double materiality, companies provide stakeholders with a fuller picture of their sustainability performance. Investors, customers, and regulators gain insights not only into risks and opportunities that ESG issues pose to the company but also into the company's contributions to environmental and social challenges.
Holistic Transparency: The CSRD mandates the use of double materiality in sustainability reporting. Failing to adopt this approach could result in non-compliance with EU regulations, leading to potential legal and reputational risks.
Stakeholder Engagement: Modern stakeholders are increasingly concerned about corporate responsibility. Demonstrating awareness of and action on both financial and impact materiality can enhance a company's reputation and stakeholder relations.
You might wonder, how is double materiality different from existing sustainability frameworks like GRI (Global Reporting Initiative), ISSB (International Sustainability Standards Board) , or SEC (Securities and Exchange Commission) reporting?
GRI Standards: The Global Reporting Initiative (GRI) has a long history of encouraging companies to report on their environmental and social impacts. However, GRI primarily focuses on impact materiality without equally emphasising financial materiality.
ISSB Standards: The International Sustainability Standards Board (ISSB) concentrates on financial materiality, helping investors understand how sustainability issues affect a company's financial prospects.
SEC Regulations: The U.S. Securities and Exchange Commission (SEC) is moving towards requiring disclosures on climate-related financial risks but doesn't currently mandate reporting on a company's environmental and social impacts.
The CSRD Difference: The CSRD's adoption of double materiality sets it apart by requiring companies to report on both how sustainability issues affect them and how they affect the world around them. This comprehensive approach aligns with the EU's commitment to the Sustainable Development Goals and the Paris Agreement.
Materiality Assessment: Companies will need to conduct a double materiality assessment to identify and prioritise ESG issues based on both financial and impact perspectives. This involves:
Identifying Relevant Issues: Consider a broad range of ESG topics that could be material.
Assessing Significance: Evaluate the significance of each issue from both financial and impact standpoints.
Stakeholder Consultation: Engage with stakeholders to understand their concerns and expectations.
Integration into Reporting: The findings from the materiality assessment will guide the content of the sustainability report. Companies must disclose:
Policies and Targets: Outline policies in place to manage material ESG issues and set measurable targets.
Actions and Results: Describe actions taken and report on progress towards targets.
Risks and Opportunities: Discuss both financial risks and opportunities arising from ESG issues and the company's impact on society and the environment.
Data Collection Challenges: Gathering comprehensive data for both financial and impact materiality can be complex. Companies may need to invest in new data management systems or enhance existing ones. For insights on how Business Intelligence systems can aid in this process, revisit our first blog post.
Supply Chain Involvement: The CSRD requires large companies to report not only on their own operations but also on their supply chains. Engaging suppliers and collecting relevant data will be crucial.
Audit Requirements: Sustainability reports under the CSRD must be audited. Ensuring accuracy and reliability in double materiality disclosures is essential to pass these audits.
Double materiality represents a significant shift in sustainability reporting, fostering greater transparency and accountability. By understanding and implementing this approach, companies can not only comply with the CSRD but also strengthen their sustainability strategies and stakeholder relationships.
As the timelines for CSRD compliance approach (see our second blog post. for key dates), now is the time to start integrating double materiality into your reporting processes.
We're here to support you in conducting materiality assessments and preparing CSRD-compliant sustainability reports. Stay tuned for our upcoming posts, where we'll delve deeper into practical steps and tools to ease your reporting journey.
To ensure you’re fully informed and prepared, check out these essential resources:
European Commission's CSRD Page: The definitive source for CSRD updates and official documents.
EFRAG’s Role in CSRD: Learn about the development of the European Sustainability Reporting Standards (ESRS) you'll need to follow.
European Sustainability Reporting Standards (ESRS): The detailed regulation with all 12 reporting standards and how to apply them.