The EU’s new Corporate Sustainability Reporting Directive (CSRD) has made the concept of Double Materiality a timely topic of discussion. Due to this directive, new reporting obligations will affect hundreds of Finnish companies in the coming years. This blog post outlines what needs to be considered when conducting a double materiality assessment as part of sustainability reporting.
Companies Required to Start Sustainability Reporting
Currently, sustainability reporting is required from large companies, but over the next few years, an estimated 800–1,000 new Finnish companies will be included in mandatory reporting. A company must start reporting in accordance with the CSRD from 2025 if it meets two of the following criteria:
- Over 250 employees
- Over €40 million turnover
- Over €20 million balance sheet total
Investing in Reporting is Worthwhile
The requirements for sustainability reporting have increased significantly due to the EU’s CSRD directive. This means, among other things, that the result of the reporting must be verified and included in the board’s activity report and financial statements. Ample time should be allocated to conducting a materiality analysis, as it determines the most important sustainability themes for the company, its operations, and its stakeholders. At the same time, it lays the foundation for future sustainability work.
Identify Your Company's Double Materiality
There is both an internal as well as an external perspective of assessing your business’s sustainability and impacts to understand your company’s double materiality:
- “Inside out”: ESG impacts (Environment, Social, and Governance)
- “Outside in”: economic impacts: assessing the external risks and opportunities affecting your business.
When evaluating the internal dimension, examine the company’s operations and their ESG impacts (Environment, Social, and Governance). Consider the impacts of operations on the surrounding society and environment. When assessing the external dimension, look at potential impacts the other way round and consider the effect on your company. This includes external risks and opportunities affecting the business.
Assess the Materiality of Impacts
Review the list for assessing the materiality of impacts and reflect your company’s operations against its content. Also, consider where the impact occurs: is it at the beginning of the value chain, in the company’s own operations, or possibly at the end of the value chain? For example, if your company outsources transportation, the transport emissions occur in the value chain, not in the company’s own operations. Once the relevant topics, subtopics, and sub-subtopics for your company have been reviewed, you’ll know where to start reporting.
Use the List Below to Assess the Materiality of Impacts:
- Is the impact positive or negative?
- Example A: The company has a product or service that pollutes the climate. The impact is negative.
- Example B: The company has a product or service that positively contributes to climate change mitigation. The impact is positive.
- Is the impact real or potential?
- Example: The company uses fossil fuels in its production. The resulting emissions are real, meaning the impacts inevitably occur.
- Does the impact occur in the short, medium, or long term?*
- What is the likelihood of the impact?**
- What is the scale of the impact?
- What is the extent of the impact?
- What is the irreversible nature of the impact?***
*Short term refers to a period of about a year, while long term refers to five years or more.
**Consider this question if the second point on the list indicated the impact was potential.
***Consider this question if the first point on the list indicated the impact was negative.
Score the Relevant Matters
The evaluation phase involves deciding which matters are deemed relevant to the company. To achieve this, the company reviews the ESR standards related to environmental, social, and governance issues included in the disclosure requirements. As a result of the evaluation, some of the ESR standards – including their topics, subtopics, and sub-subtopics – are selected as relevant to the company, while some are not. After the materiality assessment, the company should proceed to fulfil the disclosure requirements, where the number of relevant sustainability indicators (data points) for each standard is indicated. Although there are a huge number of data points (1,187), the materiality assessment usually leaves significantly fewer to be examined.
Do you want to ensure that your organisation raises its ESG profile to a new level, promoting sustainable business and strengthening stakeholder trust
Explore the CSRD Double Materiality Tool here!