Reporting in accordance with the EU’s new Corporate Sustainability Reporting Directive – CSRD – which comes into force for the financial year 2024, requires a solid materiality analysis based on a dual materiality perspective.
Reporting in accordance with the EU’s new Corporate Sustainability Reporting Directive – CSRD – which comes into force for the financial year 2024, requires a solid materiality analysis based on a dual materiality perspective.
For all companies covered by CSRD (Corporate Sustainability Reporting Directive) and associated reporting standards ESRS (European Sustainability Reporting Standards), the double materiality analysis is fundamental. Its purpose is to ensure that the company issues fair and high-quality sustainability reporting that meets the information needs of the intended users. But what exactly is a double materiality analysis, and how does it differ from the materiality analyses many companies have conducted in the past?
The dual materiality analysis, as required by CSRD and ESRS, takes into account both the impact the company has on people and the environment (x-axis) and the impact sustainability issues can have on the company’s financial position (y-axis). Companies that report in accordance with GRI Standards probably feel comfortable with the materiality analysis as a concept and may think that they have already conducted a dual materiality analysis since they had both an x-axis and a y-axis in their matrix. However, the question is, what did the y-axis actually show?
What is new about the materiality analysis according to CSRD and ESRS is that the y-axis now refers to financial effect, which many companies have not considered before. The financial perspective was first introduced in the recommendations from the TCFD (Task Force on Climate-related Financial Disclosures), which were issued in 2017 and focused on the financial effects of climate change. Previously, and also currently in the GRI Standards, the y-axis has been about the impact of the sustainability issue on stakeholders’ decision-making. Their decision-making, whether to invest or not, may indeed result in a financial effect, but it has not been explicitly stated that this is the intended focus.
For companies, conducting a solid dual materiality analysis where a sustainability issue is considered material from both an impact and a financial perspective will be both challenging and time-consuming. A sustainability issue may not necessarily be essential from both
perspectives, but it can be. What ultimately determines whether the sustainability issue is significant enough to be included in the sustainability report is the extent and severity of its impact on people and the environment, or the size of its financial effect. To assess this, each company must apply threshold values. These thresholds will be unique to each company, depending on its size, location, and financial conditions, and are not predefined in the ESRS. There are significant opportunities to leverage the same reasoning about thresholds and material financial impact that are used in other processes, such as risk management and financial reporting.
”What has become clear now with CSRD and ESRS is that the purpose of the materiality analysis is to identify and report on the sustainability issues that can affect the company’s survival and avoid stranded assets. Sustainability reporting should enable the allocation of capital to companies that are sustainable over time, which aligns with the EU’s green commitment with the goal of achieving climate neutrality by 2050,” says Jenny Fransson, responsible for Sustainability Affairs at Hallvarsson & Halvarsson.