The Corporate Sustainability Reporting Directive (CSRD) will soon require large companies to base their sustainability report on the principle of double materiality. But how do you start with this? This summer, EFRAG published the technical reporting standards (known as the ESRS) that outline the CSRD’s mandatory disclosures by theme. However, they do not detail the approach to the double materiality analysis; instead, it is up to individual companies to work out their own approach and document this within their sustainability report.
With a 50-page guidance document – which is for guidance purposes, and not mandatory – EFRAG offers a helping hand to reporting companies. But what are the main points of those guidelines?
Double materiality takes two perspectives into account: the company’s impact on people and the environment (impact materiality) – also called the ‘inside-out’ perspective – and the impact of sustainability topics on the company’s cash flow and value (financial materiality) – also called the ‘outside-in’ perspective. These two perspectives together determine whether a topic is ‘material’ for a company. A topic can be material from either one or both perspectives. When we examine the impact materiality of a topic, we identify the impacts; financial materiality is about risks and opportunities.
Impact materiality and financial materiality are closely linked. For example, a chemical company will have a stake in global warming with its CO2 emissions (impact), while experiencing financial consequences: costs of implementing new, sustainable technologies, a rising CO2 cost and, in the long term, even reputational damage if the company fails to become climate neutral. These are all potential risks. If the company succeeds in transforming itself and, for example, switching to renewable energy, engaging in carbon capture, becoming climate-neutral faster than competitors, this could represent an opportunity.
Your materiality analysis is a decisive step for multiple reasons:
However, this is about more than simply ticking the boxes. The materiality analysis lays the foundation for your ESG strategy, and is thus necessary to make the shift and continue to create value in a future where sustainability will be central.
In its draft guidance document, EFRAG proposes the following steps:
The roadmap above is a summary. The EFRAG document describes these steps in more detail. In practice, we at Pantarein always work out an approach that follows these principles, but likewise offers the freedom to take a company’s individuality into account.
Another aspect that is also important when outlining a tailor-made approach: the maturity of a company. Is it the first time an organisation is investigating materiality, or does it have years of accumulated experience with stakeholder processes?
Materiality is mainly a matter of further refining your strategy year after year and gaining more in-depth insights into which topics and concerns your stakeholders have, or which new risks or opportunities are arising as a result of new developments in society.
An update of your materiality review is necessary when there is a change in your organisation (e.g. an acquisition) or as the result of an external factor (such as a shift in customer expectations).
EFRAG recommends performing a new materiality analysis every two to three years and keeping a close watch in between. You can do this by, for example, interviewing a number of key stakeholders to monitor the dynamics of materiality and detect new topics.
One thing should be clear: the whole process of determining materiality requires the involvement of your stakeholders. EFRAG does not impose specific methods for stakeholder research. However, there are several tried-and-tested methods you can choose from, such as online surveys, interviews, focus groups, or using data from or talking to proxies if you find it difficult to reach the target group yourself, and so on.
Stakeholder engagement is best built throughout your ESG journey. You can start by informing your stakeholders about your approach and interviewing them during your materiality study. In a subsequent phase, participation may be possible, for example by allowing stakeholders to chair a focus group. In our experience, stakeholders truly appreciate being involved in your company’s strategy development. So if you handle a materiality study well, you build a solid relationship with your stakeholders at the same time.
Executing a materiality study well is a form of art. Looking for guidance on your materiality analysis? Our experts are at your service!
