Double materiality – From CSRD to strategy

On the 13th of April 2023, Finch and Beak, part of SLR, hosted a discussion about the novel approach of double materiality that has the potential to accelerate an organisation’s sustainability strategy and stakeholder engagement, while identifying an organisation's most significant ESG impacts. During the session, Bas Nuijten, director consultant at Finch and Beak, and Clodagh Connolly, Global Director at Business for Societal Impact (B4SI), discussed the practical applications of the CSRD requirements for double materiality and how it can help organisations further strengthen their sustainability approach. This article summarises the highlights of our Double Materiality webinar which you can watch below.

Since the adoption of the corporate sustainability reporting directive (CSRD) by the EU parliament and council and the first draft of the European Sustainability Reporting Standard (ESRS) in April 2022, the final ESRS draft has now been released to the European commission. The changes incorporate more explicit obligatory disclosures on general disclosures, climate change and workforce, as well as a reduction of the topical standards from 11 to 10.

The application of the regulation will take place and become mandatory for the financial years starting:

1. 2024: for companies within scope of NFRD, to report in 2025
2. 2025: for large companies, not subject to the NFRD, with +250 employees/40M€ turnover, to report in 2026
3. 2026: for listed small and medium sized enterprises to report in 2027
4. 2028: third country undertakings with net turnover of >150M in the EU/at least one EU subsidiary, to report in 2029.

From single to double materiality

Applying the double materiality approach, has become mandatory under CSRD. Therefore, Bas Nuijten touches upon how to navigate 3 key challenges, when upgrading from single to double materiality.

1. Stakeholder Selection, Business Model & Value Chain perspective
Initially identifying and engaging with the right stakeholders (internal and external) and incorporating their insights is crucial to assess business impact. Applying weighted factors to each stakeholder group will support in determining the most material topics based on their importance to the business. A forward-looking approach, considering future (new) business segments and potentially changing geographical focus is of high importance as those elements can have consequences on the current selection of ESG topics.

2. Assessing business impact, what is material?
The ESRS has described a clear assessment methodology to quantify the impact materiality (e.g. the impact an organisations activities and value chain have on society and environment) and the financial materiality (e.g., the financial impact of ESG issues on the organisation itself). In the case of impact materiality, the methodology examines scale and scope of selected positive impact topics and additionally the “irremediability character” when it comes to negative impact topics. On the flipside, when quantifying financial materialities, these will be assessed on their likelihood of occurrence and potential size of financial effect, after categorising whether impacts cause a financial risk or opportunity. Based on organisations predefined thresholds, the resulting scores and quantitative data is consolidated, to finally help determine if a topic is material to an organisation.

3. Creating value beyond reporting and compliance
Looking at double materiality from a strategic angle, conducting a driver analysis will help answering the question: where, within both the value chain and the organisation, companies should focus their efforts to maximise ESG performance. By defining SMART targets and appropriate key performance indicators, progress can be measured. Closing the loop back to our first key challenge above, it is important to reengage with organisations’ most salient stakeholders to collect relevant ESG Data and further streamline the process.

Demonstrating impact on material issues

Focusing on the S of ESG, Clodagh Connolly, global director of business for societal impact (B4SI) shares valuable insights into overcoming the challenge of measuring and managing social impact by using the B4SI Framework.

During the webinar she explained that within CSRD, the Social topics are specified quite clearly into four categories, which are then divided into specific issues and matters. CSRD demands the following disclosures in regards to those topics are:

1. Clear and articulate reporting around relating policies.
2. Engagement with groups involved.
3. Remediation actions taken.
4. Actions on impact and approaches to mitigating risks and pursuing opportunities.
5. Targets

With the latter two being the most challenging requirements for many organisations working within the S.

Three routes to credible impact

The B4SI Framework presents three categories of social impact activity:

1. Community Investment Route: donations to and partnerships with community organisations.
2. Business Innovation for Social Impact Route: Developing or adapting core business activities for defined social impact.
3. Procurement for Social Impact Route: diverting procurement spend to suppliers that aim to have a social impact.

These activities will then be evaluated by breaking them down into: Committed inputs (like contributions and investments), committed outputs (like social output, business output and leverage), and achieved impacts (like social or business impact and commercial return).

Through this Framework organisations can manage their impact on material issues, by identifying achieved results for their stakeholders and the organisation. Improving social program deliveries and their articulation to a key audience.

Would you like practical tips to accelerate your double materiality approach?
Check our 3 ESG Acceleration Tips for 2023.

Materiality support for your organisation

We provide organisations with materiality support to prepare for compliance with ESRS through:

• CSRD-Readiness Assessment – Ask us about our summer package.
• Materiality Assessments including double materiality.
• Impact Measurement and Valuation.
• Activation of Materiality through business case development.

If your organisation requires support on its materiality journey, please get in touch to discuss how we can support you in meeting your ambitions.