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The Corporate Sustainability Reporting Directive (CSRD) is a pivotal regulation that mandates standardized sustainability reporting across companies in the EU. Aimed at increasing transparency and accountability, CSRD requires companies to disclose more detailed information about the impacts of their activities on the environment, society, and governance.
Double materiality is a core concept within CSRD reporting. It integrates two perspectives:
Each CSRD journey begins with identifying material impacts, risks, and opportunities (IROs) related to sustainability. These are assessed across environmental, social, and governance (ESG) dimensions.
This involves evaluating the actual or potential effects of the company's activities on the environment and society. These impacts can arise from the company’s operations, products, services, and business relationships, including its upstream and downstream value chain.
Here, the focus is on identifying risks and opportunities that significantly influence the company’s financial performance. This includes potential changes in costs, revenues, or asset values that could impact the company over the short, medium, and long term.
A Double Materiality Matrix is a visual tool used to map and prioritize material issues based on their impact and financial significance. This matrix helps companies in aligning their sustainability strategies with stakeholder expectations and regulatory requirements.
The European Financial Reporting Advisory Group (EFRAG) plays a critical role in providing guidance and standards for double materiality assessments. EFRAG's guidelines assist companies in implementing comprehensive materiality assessments, ensuring consistency and compliance with ESRS (European Sustainability Reporting Standards).
At Karomia, we follow a structured five-step process for conducting double materiality assessments:
Begin by identifying and listing all possible impacts, risks, and opportunities (IROs) related to sustainability matters. This involves evaluating the broader environmental, social, and governance landscape to understand potential material issues. Key steps include:
Karomia’s AI leverages an extensive knowledge base, including environmental and social impacts, industry-specific insights, and company-specific information. By contextualizing your operations, the AI evaluates your business activities against all European Sustainability Reporting Standards (ESRS) subtopics, ensuring no significant sustainability issues are overlooked.
Following the crucial step of selecting the most important IROs, the focus shifts to identifying stakeholders who will contribute essential insights for a comprehensive assessment.
Stakeholders can be identified in various groups including customers, suppliers, shareholders, management, and employees, the latter possibly subdivided based on organizational structure and requirements.
Aim to identify stakeholders whose interests are or could be affected by your company's activities. These stakeholders, termed 'affected stakeholders' by EFRAG, are defined as: "Individuals or groups whose interests are affected or could be affected – positively or negatively – by the undertaking’s activities and its direct and indirect business relationships across its value chain."
Even when the degree of impact isn't immediately clear, it's essential to include these stakeholders to ascertain their potential influence.
Efforts should be focused by merging similar stakeholder groups unless specific criteria necessitate splitting, such as differing sets of questions, different engagement methods, and relative importance in the materiality calculations.
Engage these identified stakeholders to assess the materiality of identified IROs from both impact and financial perspectives by both scoring the IROs by criteria such as scale, scope, and likelihood and capturing qualitative input.
Make use of the right mix of engagement methods, such as surveys, individual interviews, and focus groups. Which ones you will use depends on factors such as stakeholder relevance and expertise level.
Aim for representative samples from each stakeholder group, calculated based on population size. Document stakeholder engagement and incorporate their input in the assessment.
Now it's time to assess the materiality of the IROs. This step involves:
Disclose the assessment process, outcomes, and their integration into your company’s strategy and business model by:
Effective reporting builds trust with stakeholders and demonstrates compliance with regulatory requirements, showcasing your commitment to sustainability.
An effective double materiality assessment can benefit from aligning with established frameworks such as the Global Reporting Initiative (GRI) and the International Sustainability Standards Board (ISSB). While the GRI focuses on impact materiality, its principles can be adapted to meet the dual requirements of ESRS by incorporating financial materiality aspects.
Engagement with affected stakeholders is crucial. The process outlined aboveinvolves consulting with employees, investors, customers, and community members to gather insights into how they are impacted by the company’s activities. This feedback helps in assessing the severity and likelihood of impacts, ensuring that the materiality assessment is comprehensive and inclusive.
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Maintaining detailed documentation of the materiality assessment process is essential. This includes the methodologies and assumptions used, the criteria for determining materiality, and the inputs from various stakeholders. Transparent reporting of these elements not only aids in compliance but also builds trust with stakeholders.
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CSRD requires more detailed and standardized sustainability reporting, impacting how companies disclose their sustainability practices and performance. This can affect investor relations, compliance, and overall corporate reputation.
A double materiality assessment helps companies identify significant sustainability issues that can affect their operations and financial performance. It ensures that companies are better prepared for regulatory compliance and can enhance their sustainability strategies.
Under CSRD, companies are required to conduct annual assessments. However, companies should update their assessments whenever there are significant changes in their operations, business environment, or stakeholder expectations.
In a Double Materiality Assessment, engaging stakeholders is crucial for gaining a comprehensive understanding of the material sustainability topics that matter to your organization. It goes beyond merely filling data gaps; it signifies a dedication to thorough and meaningful discussions.
A thorough materiality assessment should consider the impacts on all stakeholders, not just limited to user needs. This encompasses those directly affected by a business' activities and value chain, as well as stakeholders interested in its sustainability reporting, such as public authorities, business partners, investors, and civil society organizations.
Double Materiality Assessment audits prioritize accuracy, completeness, and reliability, with stakeholder validation playing a crucial role in confirming the accurate interpretation of inputs.
Discover how Karomia can help simplify your double materiality assessment.
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