As the deadline looms for companies to conduct double-materiality assessments in compliance with the EU’s CSRD, it's crucial to recognize the multifaceted nature of this process, which demands careful consideration and meticulous planning. With the timeline for compliance with the European Union’s Corporate Sustainability Reporting Directive (CSRD) rapidly approaching, non-EU-based companies operating significantly within the EU must prepare to report on 2025 data by January 2026.
While this deadline may seem distant, industry experts and sustainability leaders emphasize the importance of early action. Notably, Cassandra Garber, VP of Corporate Sustainability & ESG at Dell Technologies, commenced the company’s double-materiality assessment as early as 2023. This proactive approach underscores the complexity and time-intensive nature of the process. Initiating the double-materiality assessment well in advance allows companies to engage various internal departments—such as legal, audit, finance, and operations—in understanding the intricacies of CSRD requirements.
By fostering collaboration across these functions, organizations can develop a cohesive understanding of the legislation's strategic implications and streamline compliance efforts. A central tenet of the CSRD is its emphasis on double materiality—a concept wherein companies must evaluate both their outward impacts on environmental and social matters and the interconnectedness of sustainability issues with financial outcomes. This mandates a comprehensive assessment to discern and disclose only material matters, as law requires.
Navigating the Steps of Double-Materiality Assessment
Undertaking a double-materiality assessment may appear daunting to companies, especially given its novelty. However, recent guidance from the European Financial Reporting Advisory Group (EFRAG) aims to facilitate a structured and comprehensive assessment process. Despite its newness, the essence of assessing sustainability matters through a double-materiality lens mirrors historical stakeholder engagement practices.
Refining the List of Material Matters:
To commence, Kevin Fertig, a climate and sustainability strategy expert at Agendi Inc., advises companies to evaluate which Environmental, Social & Governance (ESG) topics are most relevant to their operations. This initial step aims to refine a concise list of ESG topics that have demonstrated or possess the potential for materiality. Given the context-specific nature of this process, customization for each company is essential.
- Fertig underscores the importance of leveraging diverse resources to identify pertinent ESG issues, including:
- Reviewing previous materiality assessments.
- Engaging with executives, investor relations heads, and internal finance and risk teams to highlight financially material ESG concerns.
- Assessing potential ESG impacts on supply chain partners in line with EFRAG guidelines.
- Consulting industry-specific materiality guidance from authoritative bodies like the International Financial Reporting Standards Foundation and the Sustainability Accounting Standards Board.
Furthermore, broad stakeholder engagement is crucial for compiling a comprehensive list of material matters, understanding their relative importance from both financial and impact perspectives, and identifying key impacts, risks, or opportunities. While CSRD doesn't prescribe specific stakeholder engagement approaches, companies are encouraged to involve diverse stakeholders, such as customers, employees, shareholders, regulators, civil society, community organizations, and suppliers.
Scoring the Matters
Sophisticated companies often possess a robust understanding of financial material matters. However, CSRD mandates a similar assessment of matters from an impact perspective, considering their severity and likelihood of impact on society and the environment. Fertig emphasizes the need to score shortlisted matters based on both financial and impact materiality, integrating objective quantitative data wherever feasible. While qualitative feedback complements this process, companies should anticipate the eventual need to quantify material risks and opportunities, integrating them into future iterations of the double-materiality assessment.
Determining Materiality Thresholds
Before proceeding, it's essential to establish clear thresholds to delineate material from non-material issues. While CSRD offers flexibility in setting these thresholds, companies must exercise judgment and provide appropriate justifications, as emphasized by Fertig. Typically, companies rely on pre-established definitions of financial materiality and engage their audit functions to ensure alignment and internal validation.
Once established, these thresholds dictate which ESG matters are deemed material from both impact and financial perspectives. Matters surpassing the impact threshold are considered material from an impact perspective, while those exceeding the financial threshold are regarded as financially material. However, some matters may meet both criteria, underscoring their significant relevance. Notably, disclosure obligations under CSRD are triggered by meeting either perspective's materiality threshold.