Strategic Sustainability with Double Materiality in Corporate Reporting

Introduction 

The European Union’s Corporate Sustainability Reporting Directive (CSRD) is an important regulation that is revolutionizing how companies disclose sustainability information. Aiming to elevate sustainability reporting to the same level of rigor as financial reporting, the CSRD mandates the disclosure of specific environmental, social, and governance (ESG) topics from large companies and listed small and medium-sized enterprises (SMEs) operating within the European Union (EU), as well as for third-country companies with significant operations in the EU. Even if your company has previously reported nonfinancial data, the CSRD will likely require a significant expansion in the nature and extent of your disclosures. This blog builds on an earlier ALL4 blog on Double Materiality to provide updated information on the topic, including insights and pitfalls of the methodology. 

Understanding Double Materiality 

A cornerstone of the CSRD is the concept of “double materiality.” This broadens the traditional view of materiality, which focuses solely on financial impacts, to include a company’s impact on stakeholders and society. For CSRD compliance, companies must assess materiality from two perspectives: 

• Financial Materiality: This “outside-in” view examines how sustainability matters might pose material risks or opportunities affecting a company’s financial performance in the short, medium, and long term. 

• Impact Materiality: This “inside-out” perspective evaluates the short, medium, and long-term impacts on people and the environment linked to a company’s operations and value chain. These impacts can be positive or negative. 

Material risks and opportunities often arise from a company’s dependencies on natural, human, and social resources. Therefore, an effective materiality assessment requires viewing these factors from both financial and impact perspectives. Double materiality is a concept that acknowledges the interconnectedness of a company’s financial performance with its impacts on society and the environment. It requires companies to disclose how their operations and activities affect society and the environment, as well as how sustainability issues affect them. 

Timelines and Urgency 

The deadline for complying with the European Union’s (EU) CSRD is fast-approaching. Companies in the United States (U.S.) that are listed on EU exchanges or large EU subsidiaries of U.S. companies must report on 2025 data starting in January 2026. These companies need to be ready to start collecting relevant data on January 1, 2025. Non-EU based companies with revenues exceeding €150m annually for the past two years and meeting certain other requirements will report on 2028 data and file in 2029. While this may seem distant, the comprehensive nature of the required double-materiality assessment and relevant data means that companies should start preparing now. Early preparation is crucial and starting the process early allows companies to engage multiple internal departments, such as legal, audit, finance, and operations, fostering a shared understanding of the CSRD’s strategic implications. 

Steps for Conducting a Double Materiality Assessment 

1. Identifying Material Sustainability Impacts, Risks, and Opportunities: To comply with the CSRD, your company must conduct a thorough double materiality assessment. This involves identifying and evaluating both financial and impact materiality for various sustainability matters. 

2. Refining a List of Material Matters: Start by reviewing which ESG topics are most pertinent to your company. This involves: 

• Reviewing any previously conducted materiality assessments. 

• Digging into the European Sustainability Reporting Standard (ESRS). The ESRS is the reporting standard used to meet the CSRD reporting requirements. ESRS includes 12 topical standards covering environment, social, governance, general requirements and general disclosures. Sector specific guidance is under development by the European Financial Reporting Advisory Group (EFRAG). 

• Consulting with executives, the head of investor relations, and internal finance and risk teams. 

• Assessing potential ESG impacts on supply chain partners. 

• Consulting industry-specific materiality guidance from the International Financial Reporting Standards (IFRS) Foundation and the International Sustainability Standards Board (ISSB), which now has oversight over the Sustainability Accounting Standards Board (SASB) Standards. 

• Engaging a wide array of stakeholders, including customers, employees, shareholders, regulators, civil society, community organizations, and suppliers, is also crucial. This helps compile a comprehensive list of material matters and their relative importance from both financial and impact perspectives. 

3. Scoring the Matters: Companies must score the shortlisted matters on both financial and impact materiality. This involves analyzing the scale, scope, irremediability, and likelihood of the company’s impacts on each issue, as well as assessing the actual or potential effects of each issue on the company’s financial performance. It’s important to note that while companies currently rely on qualitative scales, there is an expectation to quantify these material risks and opportunities over time.  

4. Developing a Double Materiality Matrix: Once all ESG matters have been scored, they need to be mapped against each other to determine what is and isn’t a material issue, informed by a set materiality threshold. The matrix should guide business strategy and sustainability reporting, with matters deemed material triggering mandatory disclosure under the CSRD. Companies have the leeway to develop their own thresholds for both impact and financial materiality, but it is essential to engage audit functions to ensure these thresholds are validated internally. 

Common Pitfalls and Key Insights 

A common mistake companies make is rushing the materiality assessment without adequately documenting the process. This oversight can lead to compliance risks and challenges in report preparation. Thorough documentation can save time and resources in the long run. Another pitfall is analyzing sustainability matters only at the topic level without defining impacts, risks, and opportunities, and where they occur in the value chain. It is crucial to consider subtopics and map specific components of the value chain to improve the accuracy of the materiality assessment. Many companies have not fully integrated sustainability matters into their strategic planning, reporting frameworks, and risk management, so the materiality assessment can take longer for these companies. Using tools such as scoring mechanisms, web scraping, interviews, workshops, and peer benchmarking can help evaluate impacts and the level of risk and opportunity. 

Running the materiality assessment in a siloed manner can lead to incomplete reporting outputs and long-term issues. Engaging both enterprise and subsidiary legal entity stakeholders ensures that critical components of the value chain are included, and that the assessment is aligned across the organization. Robust documentation of the materiality assessment is critical, including policies, procedures, tools, key assumptions, and governance levels used to identify and apply applicable criteria. Involving your assurance practitioner early in the process can help align expectations and address potential concerns before the start of the assurance engagement. 

Benefits of Embracing Double Materiality 

Embracing double materiality yields numerous benefits, from meeting sustainability-conscious consumer demands and attracting responsible investments to spurring innovation and ensuring compliance. Here’s a breakdown of how double materiality shapes the future of businesses: 

• Holistic Risk Management: Companies can proactively address environmental and social risks, enhancing overall resilience. 

• Elevated Sustainability Significance: Demonstrating a commitment to sustainable practices builds trust and loyalty among stakeholders. 

• Stringent Regulation Compliance: Integrating double materiality helps companies stay ahead of global regulations. 

• Catalyzing Innovation and Relevance: Spurring eco-friendly innovation aligns products and processes with environmental and social impact. 

• Resilient Supply Chains: Assessing suppliers’ sustainability challenges helps forge robust, responsible, and efficient supply chains. 

In an ever-evolving business landscape, sustainability is paramount for achieving success. Companies that integrate both financial and impact materiality into their decision-making processes can effectively manage risks, build trust among stakeholders, and pave the way for sustainable growth. Embracing double materiality is not only ethically crucial but also a prudent approach to thriving in a world demanding sustainable practices. The time to start is now, ensuring that your company is prepared to meet the CSRD requirements and lead in sustainable corporate governance. 

ALL4 Can Help Your Company Navigate Double Materiality and CSRD Compliance 

As the deadline approaches for companies to conduct double materiality assessments and comply with the EU’s CSRD, staying ahead of evolving climate regulations and expectations is crucial. Not sure if you are obligated under CSRD? The second installment of our CSRD coverage will detail who is obligated and the timeline of the reporting requirements. If you want to explore your obligations right away, please reach out to ALL4. ALL4 provides the expertise and resources your company needs to navigate these complexities. We specialize in guiding businesses through the intricate landscape of sustainability reporting, ensuring compliance with federal guidelines, and enhancing overall resilience. 

With ALL4’s support, your company can build a sustainable, resilient future and seamlessly navigate the complexities of CSRD compliance. ALL4 can assist your business in the following ways: 

• Materiality Assessments: We help you identify key environmental, social, and governance impacts to prioritize your sustainability efforts, ensuring you meet CSRD requirements with a thorough and strategic approach. 

• GHG Accounting Procedures: Our experts have more than 15 years of experience developing Scope 1, 2, and 3 GHG inventories following the GHG Protocol and other procedures to ensure accurate GHG reporting and providing third-party verification services, critical for meeting CSRD standards. 

• ESG Reporting Strategies: Enhance transparency and accountability through comprehensive ESG reporting. We provide tailored strategies that align with CSRD mandates, ensuring your disclosures are both compliant and impactful. 

• Carbon Reduction Targets: Establish and pursue net-zero goals to mitigate your carbon footprint. Our team helps you set realistic and ambitious carbon reduction targets, supporting long-term sustainability and regulatory compliance. 

• Climate Initiatives: Develop and implement comprehensive strategies for climate adaptation and resilience. We ensure your initiatives are robust and aligned with both current and future regulatory requirements. 

• Supply Chain Risk Assessments: Identify exposure to disruption across your facilities, suppliers, customers, and resources. Utilizing ALL4’s Risk Visualization tool, we clarify hotspots and plan for resilience, ensuring your supply chain is secure and compliant. 

• Physical and Transition Risk Assessments: Align your assessments with the Task Force on Climate-related Financial Disclosures (TCFD) methodology. Our experts ensure you are prepared for both physical and transition risks, critical for comprehensive CSRD compliance. 

For inquiries on whether your company is required to report via the CSRD, or about ALL4’s services, or questions regarding how our climate adaptation strategies can enhance your operations, please contact one of ALL4’s ESG and Sustainability Practice leaders: Practice Director, Connie Prostko-Bell, at cprostko-bell@all4inc.com; Technical Director, Daryl Whitt, P.E., C.E.M., at dwhitt@all4inc.com; or Managing Consultant, James Giannantonio, PMP, LEED AP, at jgiannantonio@all4inc.com.