How Double Materiality Assessments Can Go Beyond CSRD Compliance

The European Union (EU)’s Corporate Sustainability Reporting Directive (CSRD) aims to make corporate sustainability reporting more transparent, consistent, and standardized to help drive capital towards sustainable investment as part of the new Green Deal. Companies subject to the CSRD will have to prepare a “sustainability statement” according to the new European Sustainability Reporting Standards (ESRS), with the first set of sector-agnostic standards having been adopted by the European Commission in July 2023. Sector-specific standards as well as standards for small- and medium-sized businesses and non-EU parent companies are still under development. Additionally, specific implementation elements, such as filing deadlines and consequences of non-compliance, are still being finalized, as EU member states are in the process of transposing the directive’s requirements to national law by July 1, 2024.  

The CSRD is expected to significantly increase the number of firms subject to EU sustainability reporting requirements, including up to 3,000 US companies with substantial business in the EU – see if the CSRD might apply to your company:

The CSRD is a new frontier for sustainability regulation that raises the stakes for sustainability reporting. Covered companies will be required to:

• Complete a double materiality assessment to identify material topics and associated impacts, risks, and opportunities (IROs). 
• Collect data and prepare an annual sustainability statement on those material topics and IROs using the new ESRS. 
• Obtain limited assurance on the materiality assessment and sustainability statement. 
• Electronically tag and file the statement (which may form part of their annual management report) with the appropriate EU member state regulatory authority.

One of the key steps on the path to CSRD compliance is a double materiality assessment, which requires companies to identify both their impacts on people, society, and the environment (impact materiality) as well as the risks and opportunities that financially affect them (financial materiality).

Given the CSRD’s specific and detailed guidance and requirements, a CSRD-aligned double materiality assessment is more complex and rigorous than materiality assessments companies may have completed in the past. However, the added effort undertaken, and the level of detailed analysis utilized in a CSRD-aligned double materiality assessment, has the potential to create considerable value for companies, extending beyond compliance with sustainability reporting requirements. Here are a few ways a CSRD-aligned double materiality assessment can drive business value for your organization:

Materiality as a form of due diligence

In a CSRD impact materiality assessment, a company must score its actual or potential, positive or negative impacts on people, society, and the environment across the dimensions of severity (includes scale, scope, and irremediability) and likelihood of impacts. This level of granularity helps companies identify, assess, monitor, and mitigate potential impacts based on actual data. This due diligence work can also help to minimize a company’s most likely and severe impacts on people, society, and the environment—impacts that could become financially material risks down the line. It dovetails with emerging due diligence requirements around the world, including the Corporate Sustainability Due Diligence Directive (CSDDD), which is currently under consideration in the EU.

Using data to drive decision-making

Unlike previous ESG materiality assessments, a CSRD financial materiality assessment digs deeper than the topic or “sustainability matter” level. Companies will have to identify and assess specific risks and opportunities based on the likelihood of occurrence and the magnitude of the financial effects over the short-, medium-, and long-term. This type of analysis will naturally augment a company’s standard financial planning and analysis processes — and may even help produce additional insights into new financial risks and opportunities by bringing together a multitude of dimensions and stakeholder perspectives. These insights can be used to strengthen risk management practices, better inform capital allocation and budgeting decisions, and build stronger businesses cases for implementing and investing in sustainability initiatives.

Linking mandated reporting to voluntary disclosures

In developing the structure and content of the ESRS, the EU collaborated with other standard setters. Consequently, companies that have been voluntarily reporting using the Global Reporting Initiative’s (GRI) standards and the International Sustainability Standards Board (ISSB)’s SASB industry standards and IFRS S1 and S2 have a head start in CSRD compliance, as the ESRS requires similar (and sometimes the same) data and information. Like the GRI standards, the comprehensiveness of the ESRS’ topics could enhance a company’s sustainability disclosures beyond compliance to be useful for communications with key stakeholders, like investors, customers, and news media.

Digging deeper with more granular data

Finally, CSRD requires a company to consider its entire value chain (including stakeholders, activities, and IROs both upstream and downstream) and to consider materiality by location (e.g., all places where an entity has operations, subsidiaries, and significant assets), and time horizon (e.g., short-, medium-, and long-term). The level of disaggregation required in the materiality assessment process produces granular data points for companies, which can help drive deeper strategic insights. For instance, in analyzing results by region, companies may find that only a subset of its facilities have water-related risks and opportunities. The company can use this insight to tailor its water policy and better direct its water conservation efforts. 

Conducting a double materiality assessment is an important first step on the path to CSRD compliance. Once a company has identified its material sustainability topics, it can leverage the insights to: 

• Assess gaps between its current sustainability reporting practices and the ESRS disclosure requirements
• Update policies, develop data infrastructure, implement actions, and establish targets to close identified gaps
• Deploy software solutions for auditable data collection and reporting

These interim steps can help a company reach the ultimately goal—preparing and filing their first CSRD sustainability statement, depending on the applicable disclosure timeline.

Are you ready to get started?

Sodali & Co can help you complete your CSRD-aligned double materiality assessment and leverage the insights and outcomes identified to further catalyze action within your organization.