From theory to practice - double materiality assesment in the light of the CSRD

Saturday 21 September 2024
Governance

The CSRD (Corporate Sustainability Reporting Directive), which replaced the previous NFRD (Non-Financial Reporting Directive), introduces a new non-financial reporting requirement for companies, focusing on the examination of so-called double materiality. The aim of this concept is to gain a deeper understanding of how environmental, social and corporate governance issues affect both a company's operations and the wider external environment. Examining double materiality is a key element of reporting in the spirit of the new directive, which emphasises transparency and accountability in sustainability.

What is double materiality?

Double materiality is a principle that requires the assessment of two aspects:

  • Financial materiality, which will help determine how ESG factors affect a company's financial performance and its long-term ability to generate value.

  • Impact materiality, which will assess the impact of the company's activities on the environment, including the environment, society and stakeholders.

Both of these aspects are necessary to understand the full range of risks and opportunities associated with a company's operations and its impact on sustainability.

The importance of double materiality assessment in reporting under the CSRD

As required by the CSRD, companies will be required to comprehensively disclose information about their environmental and social impacts and how these aspects affect their financial activities. The dual materiality screening process allows for a more balanced and responsible assessment of risks and opportunities, which is key in the face of increasing sustainability demands from investors, customers and regulators.

How to approach the double materiality assessment process?

The double materiality analysis requires a structured approach and the involvement of the company's key stakeholders. The following describes the key steps to be taken to effectively conduct a double materiality analysis.

  • Define the business context. In the first step, the context in which the company operates needs to be carefully defined. This includes understanding the business model, the key business areas, the value chain and the industry sector in which the company operates. Changes in regulation and stakeholder expectations regarding ESG issues are also analysed at this point.

  • Stakeholder engagement. A double materiality analysis requires dialogue with a wide range of stakeholders, including employees, suppliers, customers, local communities and investors. Their views can provide valuable information on which ESG issues are most relevant from the perspective of their expectations and how they perceive the company's impact on the environment.

  • ESG risks and opportunities analysis. In this step, risks and opportunities related to ESG issues are analysed, which may affect both the company's operations and the environment and society. This includes climate change, natural resource management, labour standards or diversity and inclusivity issues, among others.

  • Financial materiality assessment. The next step is to assess how ESG issues affect the company's financial performance. This may include an analysis of how regulatory changes, consumer preferences or investor pressures affect revenues, operating costs or asset management risks.

  • Assess the materiality of the impact. At the same time, it is necessary to assess what effects the company's activities have on the environment and society. This is an analysis of the so-called environmental footprint (CO2 emissions, water consumption, waste) and social footprint (impact on local communities, human rights, working conditions).

  • Mapping of results and prioritisation. Based on the information collected, a materiality map is created, which ranks key ESG issues in terms of their impact on the company and its environment. This process allows the company to identify priority areas for action that require special attention in its sustainability strategy.

  • Monitoring and reporting. Once key areas of materiality have been identified, the company should develop mechanisms to monitor progress in these areas and report regularly on its performance. In line with the CSRD, reporting should follow European guidelines, including the new ESRS (European Sustainability Reporting Standards).

Summary

Double materiality assessment is becoming a key element of sustainability management and reporting under the new CSRD. The process requires an integrated approach that will enable companies not only to assess financial risks related to ESG issues, but also to understand their impact on the external environment. Companies that effectively implement a double materiality screening process will be better prepared to meet the challenges of the future, gain stakeholder trust and increase their competitiveness in a sustainable business environment.

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