CSRD: considerations for materiality and reporting
The new CSRD (Corporate Sustainability Reporting Directive) was passed into law by the EU and came into effect in July 2024. Its criteria requires large and listed companies (initially) to disclose information about their ESG issues and report on environmental and social impact.
Further legislative sustainability reporting requirements are expected to come into force in the UK down the track, which will require all applicable companies to apply ‘double materiality’.
At The Purpose Hub, we have been having conversations with our clients on what this all means for them in practice, and how to best navigate their way through the process, especially when the legislation is new, everyone is trying to find their feet and in cases where it doesn’t immediately apply.
What are the implications of the CSRD for materiality?
The biggest change it signifies for companies is a shift away from assessing their material environmental, social and economic issues based on the subjective perception of ‘importance’, towards assessing their ‘impact’ across two dimensions -
· Impacts inwards - i.e. the degree to which different sustainability issues impact the profitability and performance of the organisation (financial materiality) and
· Impacts outwards i.e. the degree to which the organisation impacts society and the environment (impact materiality)
What does this mean in practice?
For businesses, previously you might have taken a qualitative driven approach to your materiality assessment based on identifying material sustainability issues. The outcome would have been a materiality matrix of sustainability issues showing the importance to a) your business and b) its stakeholders, which you would have used to review strategy and integrate into your reporting.
Work would have centred on undertaking a survey and contributor interviews, both internal and external, using a variety of methodologies.
However, across 2024, and driven by the sustainability reporting frameworks and standard setters, the materiality landscape has evolved significantly and as a result, the new approach has to incorporate the following factors -
/ A focus on grouping topics and sub-topics into sustainability themes with descriptions
/ Closely working cross departmentally to consider where in the value chain the topics and sub-topics are most likely to occur and what business activities might be associated with that topic
/ Liaison with business leaders across departments to validate AOIs (Areas of Impact) associated with their part of the value chain
/ Use of a science and data based sustainable development tool to assess severity of impacts, integrating planetary boundaries, UN SDGs and social foundations
/ Ensuring key stakeholders give input on the results and help determine which impacts are material with assessment of significance of impact based on severity and likelihood (Impact materiality)
/ Collaboration with wider internal stakeholders including Finance, Risk and Legal to discuss, calibrate and list actual and potential financial risks and opportunities rating them on magnitude and likelihood (Financial materiality)
/ Synthesising and analysis of insights, resulting in importance rating from affected stakeholder conversations, impact materiality rating and financial materiality rating.
What are the key activities required?
· Mapping ‘affected stakeholders’ The ESRS standards refer to affected stakeholders as individuals or groups whose interests are affected or could be affected - positively or negatively – by the undertaking’s activities and its direct and indirect business relationships across its value chain.
· Having deeper and more meaningful conversations with these stakeholders to get a range of different viewpoints on why certain sustainability matters are important to them.
· Conducting an assessment into the severity and likelihood of actual, potential, negative and positive impacts, based on data and science based sustainable development tools and frameworks including Planetary Boundaries, the UN SDGs and social foundations (Impact materiality).
· Working with your Risk and Finance team to assess sustainability-related financial risks and opportunities, including those deriving from dependencies on natural, human and social resources (financial materiality), aligning to TCFD and TNFD climate and nature risk analysis work.
The process leads to the generation of a Double Materiality Matrix showing your material sustainability topics, across Environmental, Social and Governance, categorised into outside-in (financially material impacts) and inside-out (material sustainability impacts).
What are the key outcomes you can expect?
Meeting external expectations
1. Undertaking a double materiality assessment will mean you meet the expectations of the International Financial Reporting Standards (IFRS) and the European Sustainability Reporting Standards (part of the CSRD), by addressing future legislative sustainability reporting requirements.
2. Your organisation will meet the requirements of GRI 3 Material Topics which requires companies to determine their most significant social and environmental impacts and then report on them in the company’s annual sustainability report in order to produce a sustainability report in accordance with the GRI Standards.
Delivering internal clarity
3. You will be able to prioritise the social and environmental topics that have significant impact on society and the environment and/ or which present a significant or potential financial risk or opportunity for the business.
This is because the process helps identify and assess material sustainability topics based on an impact focused double materiality assessment.
4. The assessment will help inform and determine sustainability priorities and data collection requirements.
5. By conducting the stakeholder interviews and undertaking the assessment, the process will help shape and prioritize content for your next Sustainability report, ensuring authentic and storytelling and deeper narrative.
6. You will also be able to synthesize all insights and pull them into sustainability communications and thought leadership ideas.
Ultimately it will provide your organisation with a fit for the future approach, ensuring you fall in line with expectations, and regulation where required.
Feel free to get in touch to discuss your materiality and reporting.
