Double materiality assessments, now a mandatory component of corporate sustainability reporting, mark a significant shift in regulatory requirements. How is your organisation preparing to meet this requirement? Understanding the new regulations, identifying key reporting elements, and assessing the impacts on your team, processes, and systems are essential steps.
Previously, there was no clear consensus on the definition of materiality, with at least 16 different definitions and five reputable global reporting frameworks to navigate. The mandatory requirements of the European Corporate Sustainability Reporting Directive (CSRD) provide a clear framework for conducting materiality assessments. However, while the CSRD offers guidelines, companies must determine what is material and substantiate their decisions accordingly.
The CSRD has been effective since January 2024 for entities already covered by the Non-Financial Reporting Directive. Subsequent phases will extend these requirements to larger entities by 2025, SMEs by 2026, and non-EU parent companies by 2028. Companies increasingly view the new reporting requirements as a compliance issue and a valuable tool for enhancing financial performance. However, meeting these requirements is a significant task.
So, how do you conduct a double materiality assessment?
Garst, Maas, and Suijs (2022), in their paper ‘Materiality Assessment Is an Art, Not a Science: Selecting ESG Topics for Sustainability Reports’, examined over 400 corporate reports and conducted 20 interviews to devise six foundational steps for conducting materiality assessments. These steps will serve as a reliable roadmap for your assessment process:
- Choosing the Materiality Perspective: Decide what makes an ESG topic material to your organisation. The business case perspective defines materiality based on its influence on financial performance, while the societal impact perspective considers its broader economic, environmental, or social impact on society.
- Specifying the Topics: Define which topics to include, often adapting terminology from reporting standards and aligning it with your organisational context. This ensures clarity and relevance when identifying material issues that resonate with stakeholders.
- Determining Information Sources: From the business case perspective, consult internal management teams and external consultants to assess financial risks and opportunities. The societal impact perspective requires engaging diverse external stakeholders to capture societal impacts comprehensively. Challenges include ensuring representativeness and avoiding selection bias in data collection.
- Assigning Materiality Scores: Use data from chosen sources to assign materiality scores to ESG topics. Primary and secondary data sources, such as surveys and text analysis, gauge stakeholder perceptions and impacts. Ensuring data reliability and validity is essential amidst the complexity and uncertainty inherent in sustainability issues.
- Selecting Material Topics: Integrate insights from materiality scores to rank and choose the most critical ESG topics for reporting. This involves balancing financial impacts with societal contributions and addressing tensions between short-term profitability and long-term sustainability goals.
- Deciding the Materiality Cycle: Due to the dynamic nature of sustainability issues, materiality assessments should be conducted periodically. Establishing a regular assessment cycle allows companies to adapt to evolving stakeholder expectations and regulatory requirements, ensuring relevance and responsiveness over time.
Additional Tips and Tricks
- Start Early: Initiating the assessment process ahead of time is a proactive step that allows sufficient time for data collection, analysis, and stakeholder engagement. Early planning helps identify challenges and ensures a smooth and well-prepared execution.
- Allocate Resources: Designate dedicated personnel and ensure adequate resources, such as budget, tools, and training support, to enhance the quality of reporting.
- Engage Stakeholders: Select stakeholders based on their relevance and expertise. Engaging diverse internal teams and external experts ensures comprehensive insights and strengthens buy-in.
- Document Methodologies: Maintain detailed documentation of methodologies, data sources, and decision-making processes. This aids transparency, facilitates auditability, and supports continuous improvement.
- Adaptability and Iteration: Recognise that materiality assessments are dynamic. Regularly review and update methodologies to reflect evolving sustainability priorities and stakeholder expectations.
- Continuous Improvement: Foster a culture of continuous improvement by learning from past assessments. Incorporate feedback to refine methodologies and enhance accuracy.
As businesses navigate regulatory complexities and societal expectations, robust materiality assessments enhance transparency and facilitate meaningful integration of environmental, social, and governance (ESG) factors. By viewing materiality assessments as strategic imperatives rather than mere compliance tasks, companies can align their operations with sustainable practices, fostering long-term value creation and cultivating stakeholder trust. Taking proactive steps now will ensure readiness and enhance resilience in meeting future sustainability challenges. The time to take action is now.
For more on ESG topics, check out my previous pieces in my sustainability series. If anything piqued your interest, let’s chat! Reach out, and let’s explore how I can support you.