Lessons on double materiality as part of sustainability reporting

The Corporate Sustainability Reporting Directive (CSRD) has introduced the new concept of double materiality, which we have explored in depth with our clients over the past year. In practice, double materiality means that, in addition to traditional impact assessments, sustainability issues must be examined from the perspective of financial risks and opportunities.

Companies that previously reported according to the GRI framework are accustomed to the idea that sustainability and its reporting should focus on material topics. Under the previous definition, these were the areas most significantly impacted by the company’s operations – either negatively or positively. In addition to the company’s own views, stakeholder perspectives have been taken into account when prioritising material topics. In that respect, the process is familiar to veterans of sustainability reporting. What is new is that, in addition to the company’s own operations, the review must take into account the entire corporate value chain.

The impact assessment dimensions defined in the directive add an extra layer to the impact assessment: first, one must consider whether the impact is real or what the likelihood of its occurrence is. The severity of impacts must be assessed through scale, scope, and irremediable character. These same issues have been assessed intuitively in the past, but the process has now been formalised to facilitate comparability.

The other side of this double materiality, the assessment of sustainability risks, has already been addressed by many companies as part of their corporate risk management and assessment processes. However, new elements are now being added to this assessment as the time horizon expands, and in addition to risks, business opportunities arising from sustainability issues should also be evaluated.

Finally, all these different dimensions of the assessment should be brought together so that the company can focus precisely on the most essential issues. The task is not easy, but a few practical tips can help:

• It is advisable to spend sufficient time at the outset to map out your own value chain and sustainability context, from primary production all the way to the end of the product lifecycle. This helps you better grasp the sustainability impacts and their scope.
• The ESRS reporting standards, along with their sub-themes and sub-sub-themes, provide a comprehensive foundation for assessing materiality and guide the discussion to a sufficiently in-depth level. The list may seem daunting at first, but it is worth dedicating sufficient time and thought to reviewing it so that all perspectives are covered as comprehensively as possible.
• Digital tools can help with navigating and documenting the stages of the process, but they cannot perform the reflection and final evaluation on the company’s behalf. Therefore, the process must involve a broad range of expertise and understanding from across the organisation.

What we find reassuring about this whole process is that not everything needs to be completed all at once. (Double) materiality will be reviewed regularly going forward, and companies’ understanding of sustainability issues will grow as a result. At the same time, companies’ sustainability programs will evolve, companies will spur each other on, and regulation will also drive this development.

If you’re looking for a sparring partner to discuss double materiality or a partner for sustainability reporting, please don’t hesitate to get in touch!