Double materiality sits at the core of the new European sustainability reporting standards. The Corporate Sustainability Reporting Directive (CSRD) affects more than 50,000 companies, requiring them to disclose the impacts, risks and opportunities associated with environmental, social and governance issues, as well as what the company is doing to address those issues. For almost three-quarters of these companies, it is the first time they face mandatory reporting in the EU.
Unlike other sustainability reporting initiatives, which look at social and environmental impacts or the influence of sustainability issues on financial performance, companies falling within the scope of CSRD must combine both lenses, looking simultaneously inwards and outwards:
- Impact materiality looks from the inside out to assess the impact of the company’s business activities on stakeholders, society and the environment; and
- Financial materiality looks from the outside in to understand how external sustainability impacts could affect the company’s financial risks, opportunities and future profitability.
An effective and systematic process for assessing sustainability materiality is fundamental to align a company’s impact on society and the environment with strategic choices and financial performance. It ensures CSRD compliance, but also builds resilience, reputation and trust.
1. Understand context and define stakeholder engagement strategy
CSRD requires companies to look at the full value chain from raw material production to product use. The process starts with mapping all activities — upstream and downstream. This helps to define the internal and external stakeholders affected at each stage, as well as identify the groups who may have an impact on the organisation.
The perspectives of all these groups should inform the materiality assessment. However, you need to plan where and how to engage and involve them, and how to bring different groups of stakeholders together to build a holistic picture. For example, some people may be well-placed to identify the issues they think are important, but not to assess their financial impact on the company. Companies will also need to consult a broad group of stakeholders after assessing impacts, risks and opportunities (stage 4) to validate the final list of the most material topics.
2. Identify initial list of material sustainability matters
The next step is to compile a list of issues that are potentially relevant to the company. The European Sustainability Reporting Standards (ESRS) stipulates 10 cross-cutting environmental, social and governance topics that all companies must consider, including climate change, biodiversity loss and workers in the value chain. These include a series of sub-topics, e.g. working conditions, and sub-sub-topics, e.g. health and safety. You also need to take sector- and company-specific issues into account, which may include matters not directly covered by ESRS.
The list will be quite long at this stage. Subsequent steps help to identify those sustainability matters that are material to the organisation. Your company will only have to report on the material issues and not this longer list of issues.
3. Define impacts, risks and opportunities
Next, you need to define each sustainability matter in greater detail and assess it against a range of parameters.
What impact does the sustainability matter have on society or the environment? Is it a positive or negative impact? Over what timescale? Will the impact occur in the next year, next few years or over the longer term? Where does the impact occur, e.g. in the company’s supply chain, its operations or with customers? Is it already an issue (actual), or is it something that could happen if conditions change (potential)? For example, business expansion, such as construction of a new facility or increased raw material use following a new product launch, could lead to biodiversity loss if the move is not considered carefully from the outset.
Similarly, it is important to consider how the sustainability matter will affect your company, including whether it presents a risk or an opportunity, and whether it relates to the company’s direct operations or the wider value chain.
4. Assess impacts, risks and opportunities
Once you have a full understanding of the sustainability matters, impacts, risks and opportunities, you can start to assess their materiality.
Assessing impact materiality includes answering questions such as how many people are affected by an issue, whether the damage can be restored and at what cost. This helps to determine the scale, scope and irremediability of an issue. At this stage, research and industry reports can add supporting evidence. The information gathered could also help to shape future targets, demonstrating how the company is addressing key topics.
You will then need to understand how each issue is likely to affect company financial performance and to what extent (magnitude). Will it increase costs slightly or add significantly to the company’s cost-base, e.g. because key raw materials are less available, or the company will have to find new suppliers? Similarly, opportunities may cause a slight uptick in company fortunes or generate significant new revenues.
When assessing both impact and financial materiality, it is important to consider the likelihood of an issue arising and whether this might change based on future events. For example, could a change in regulation alter the risk profile, making a sustainability matter more important for your company.
5. Produce ranked list of sustainability matters
Now is the time to rank the sustainability matters based on the assessment of the impacts, risks and opportunities and to narrow down the issues that are material to the organisation. Up to now you have assessed each issue’s impacts, risks and opportunities on a range of different parameters. These now need to be combined to create a single view of an issue’s importance. A sustainability matter meets the criteria of double materiality if it is significant in terms of impact materiality, financial materiality, or a combination of both.
You will also need to determine the materiality threshold or cut-off point to split the list into material issues and those that are not material for the company.
It can be helpful at this stage to bring all stakeholders back together to review the list and ensure that issues have come out in the right order. Does it make sense that biodiversity loss sits above climate?
6. Produce materiality matrix and overview
Companies need to report on the prioritised list of material issues. There are no requirements on format within the CSRD; the list can be presented in a traditional materiality matrix or table. That said, it can be helpful to plot the assessment on a materiality matrix, especially to present and explain the material issues to stakeholders.
7. Disclose measures to manage environmental and societal impacts
Under CSRD, your company will be required to report on the outcomes of your double materiality assessment and the process used to create it.
You will also need to explain how you are addressing each of the issues identified. This includes detailing the measures and targets you have put in place to reduce impacts, mitigate risks and capitalise on opportunities, as well as the underlying policies and processes needed to achieve your goals.
Following these clear and logical steps will put you in a good position to report and comply with the requirements.
Context supports companies to assess materiality and develop, communicate and implement effective sustainability strategies. If you’d like to chat about your organisation’s needs, please get in touch via www.contextsustainability.com or helen.fisher@contexteurope.com.
Read our earlier blog on double materiality here.
