The evolution of sustainability from a preference to a board-level priority reflects the global shift towards ESG disclosure. Legislation has therefore become an ‘enforcement tool’ taking disclosure from commitment to obligation, with the EU's Corporate Sustainability Reporting Directive (CSRD) presenting one of the most urgent deadlines for businesses.
The first businesses in scope will be required to apply the new rules for the 2024 financial year, ready to publish reports in 2025, with an expansion to a broader range of companies in the following years. Yet many businesses still face challenges understanding the specific requirements.
Seeking Clarity
The CSRD aims to help standardize sustainability reporting, ensuring transparency and comparability. However, its implementation includes a pivotal concept: double materiality.
The concept looks to expand financial materiality – significant information relevant to investors and stakeholders – to double materiality which combines financial risks and opportunities of a business with impact materiality. With this, organizations are required to not only assess their financial performance but also their societal and environmental impacts.
Where to Start
The introduction of the CSRD is welcome for a continent looking to decarbonize, but the respective European Sustainability Reporting Standards (ESRS) are complex. As a result, the directive’s requirements are being phased in as a three-step plan. Firstly, large organizations will need to report on 2024 data with a view to submit in 2025, with medium-sized companies required to do so by 2026 and non-EU companies by 2028.
Implementing double materiality assessment practices will therefore lead to large but necessary changes in current company data-gathering processes. Given the historic focus on financial impact reporting, many organizations have well-established accounts and administrative teams set up for this very purpose. The same cannot always be said, however, of teams overseeing sustainable practices.
While the importance of ESG strategies has accelerated, this progress has not been matched in developing workforces to integrate and report on them to the now-required standards. Organizations may therefore lack the capacity to fully implement the non-financial reporting across value chains by next year and beyond. As such, early action is advised, through engaging internal departments from legal to finance and operations to identify reporting scope, requirements and strategic implications of double materiality.
Taking a Structured Approach
Having engaged internal stakeholders, you can collectively navigate the complexities of double materiality according to a structured approach:
- Identify your value chain and customize the list of sustainability matters: Start with mapping the main activities in your value chain (upstream, own operations, downstream) and identify the affected stakeholders. When preparing the list of sustainability matters, build on the list outlined in the ESRS and tailor it to your company’s circumstances.
- Evaluate impacts, risks and opportunities: Based on the list of sustainability matters, identify the impacts of the activities in the value chain and evaluate them with the criteria provided by the ESRS. As a next step, also evaluate the risks and opportunities to the business’s success, both arising from the company’s outward impacts and other drivers. For the evaluation, use both qualitative and whenever possible, quantitative information.
- Consult diverse resources: For the identification and rating of impacts, risks and opportunities, incorporate meaningful stakeholder views. Engage with executives, finance, and risk teams to identify financially material ESG matters. Leverage industry-specific guidance and stakeholder input to refine how you evaluate the impacts of the business activities on environment and people.
- Apply thresholds to identify material matters: After evaluation, apply established thresholds to identify the material matters and cluster them if applicable. The results can then be displayed in a so-called double materiality matrix. Ensure internal alignment and validation through audit functions.
From Compliance to Competitive Edge
As businesses embark on their CSRD compliance journey, embracing the double materiality assessment as a strategic priority is essential. By acting early, engaging internal and external stakeholders, and adopting a structured approach, companies can navigate the complexities of ESG reporting, ensuring compliance and advancing their sustainability agendas in tandem.
The double-materiality assessment is not merely a compliance exercise but a foundational step towards fostering a culture of sustainability and transparency. Leveraging external expertise where needed, companies can establish robust practices to meet regulatory requirements, satisfy investor and stakeholder demands for comprehensive ESG reporting and drive sustainable impact.
Compliance with the CSRD is the starting point to ensure companies are accountable for their impacts on our people and planet, but it is also about unlocking value and demonstrating to investors, consumers and other stakeholders that their proactive risk management strategy is a hallmark of quality. Addressing the risk, being accountable for the impacts on environment and people and unlocking the vast opportunities in the era of Assurance 4.0 – the new era of risk management – should be the new norm in today’s world.
