The Corporate Sustainability Reporting Directive (CSRD) has changed how companies must report their sustainability impacts. A key concept in CSRD is double materiality, which requires businesses to evaluate and report on sustainability matters from both an impact and a financial perspective. This double approach ensures comprehensive transparency and accountability in sustainability reporting.
In this article, we'll explain the principles of double materiality under CSRD and provide practical guidance for compliance.
Understanding double materiality in the context of the CSRD
Double materiality covers two aspects: impact materiality and financial materiality. Impact materiality refers to the actual or potential effects of a company's operations on the environment and society. On the other hand, financial materiality deals with how sustainability affects the company's financial performance, position, and development.
1. Impact materiality
Impact materiality considers the impacts of a company's activities on external stakeholders, including the environment and society. According to the European Sustainability Reporting Standards (ESRS), a sustainability topic is a material from an impact perspective if it has significant actual or potential positive or negative influences over the short, medium, and long term. Impact materiality includes impacts across the company's operations and upstream and downstream value chains.
2. Financial materiality
Financial materiality focuses on sustainability matters that could reasonably influence the company's economic performance. This aspect assesses risks and opportunities that may affect the company's cash flows, cost of capital, access to finance, and overall financial health. Financial materiality is vital for providing relevant information to investors and other economic decision-makers.
Implementing double materiality for CSRD reporting
1. Conducting materiality assessments
To comply with CSRD, companies must undertake comprehensive materiality assessments that identify and evaluate impact and financial materiality. These assessments should consider the following:
- Stakeholder engagement: Engaging stakeholders, including affected communities, investors, and NGOs, to understand their concerns and priorities.
- Quantitative and qualitative data: Using qualitative insights and quantitative data to assess the significance of sustainability matters.
- Time horizons: Evaluating impacts and financial effects over short, medium, and long-term horizons to capture all relevant risks and opportunities.
2. Disclosures and reporting
Once material matters are identified, companies must disclose the processes and outcomes of their materiality assessments. Assessments include reporting material impacts, risks, and opportunities and the methodologies and assumptions used in these assessments. Transparency in reporting helps maintain accountability and build trust with stakeholders.
3. Integration with business strategy
The findings from double materiality assessments should inform the company's business strategy and decision-making processes. Integrating sustainability considerations into core business operations and strategies can enhance long-term resilience and value creation.
Practical guidance for companies
1. Develop a clear framework.
Establish a structured materiality assessment framework that includes stakeholder engagement, data collection, and impact evaluation. This framework should be flexible enough to adapt to changing regulatory requirements and stakeholder expectations.
2. Leverage existing standards and guidelines.
Use established guidelines such as the UN Guiding Principles on Business and Human Rights, OECD Guidelines for Multinational Enterprises, and Global Reporting Initiative (GRI) standards to enhance the robustness of materiality assessments. These frameworks provide valuable insights and methodologies for evaluating impact and financial materiality.
3. Continuous monitoring and updating
Materiality is dynamic and can change due to evolving stakeholder expectations, regulatory landscapes, and business contexts. Regularly review and update materiality assessments to ensure they remain relevant and comprehensive.
Double materiality is a fundamental element of CSRD, driving more thorough and meaningful sustainability reporting. By embracing double materiality, companies can better understand and communicate the full spectrum of their sustainability impacts and the associated financial risks and opportunities. For successful CSRD compliance, companies must integrate rigorous materiality assessments into their core operations, ensuring transparency and accountability in their sustainability disclosures.
Contact Plan A's team to get expert support and tools on CSRD reporting. Schedule a call today to achieve CSRD readiness.
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