Understanding Double Materiality in CSRD: A Key to Sustainable Success

Find out how you can optimize your sustainability strategy with dual materiality in the CSRD and targeted materiality analyses. Learn how to effectively align your company’s strategy with emerging regulations and best practices in sustainability reporting.

Table of contents

Introduction to the CSRD materiality analysis

The materiality analysis is part of the CSRD (Corporate Sustainability Reporting Directive) and a crucial tool for companies to prioritize their sustainability efforts and publish their long-term sustainability strategy. This analysis enables companies to identify the relevant issues that are important to both the company and its stakeholders. By conducting a CSRD materiality analysis, companies can ensure that their sustainability efforts are focused on the most important areas, leading to a more effective use of resources and a stronger positive impact.

The analysis refers to the concept of dual materiality, which emphasizes two aspects of materiality in sustainability reporting:

1. Financial materiality: this relates to information on sustainability aspects that can have a material impact on a company's financial performance. The aim is to understand how environmental, social and governance (ESG) criteria can influence the company's financial situation and performance.

2. Environmental and social materiality: This is about the impact of the company's business activities on the environment and society. This aspect looks at the extent to which a company's activities have a negative or positive impact on the environment and society and emphasizes the importance of reporting on these impacts.

The concept of dual materiality underlines the need for companies to comprehensively consider and transparently present both the financial impact of sustainability aspects and the impact of their business activities on the environment and society in their sustainability reports.

Background: What is the CSRD?

The CSRD is an EU directive that regulates the disclosure of non-financial and often material information by certain large companies and groups of companies. This directive aims to increase the transparency and accountability of companies with regard to environmental, social and employee matters, respect for human rights and the fight against corruption and bribery. The CSRD requires companies to disclose non-financial information that is relevant to understanding the company, its development, performance, position and the impact of its activities. By complying with the CSRD, companies can help build stakeholder trust and promote sustainability in their business operations. Other initiatives such as SBTi can also serve as a beneficial starting point, as discussed in this article: Understanding SBTi: A Comprehensive Guide to Scope 3 Emissions, Carbon Credits, and Getting Started.

The CSRD reporting requirements will be introduced gradually. From January 1, 2024, they will initially apply to public interest entities with more than 500 employees. From January 1, 2025, all other large companies under accounting law will be included, followed by capital market-oriented SMEs from January 1, 2026, unless they make use of the option to defer reporting until 2028.

Regardless of their size, it makes sense for companies that want to focus on the future and shape it to publish at least a slimmed-down CSRD report now, provided they are not obliged to do so.

Importance of the CSRD materiality analysis for companies

The CSRD materiality analysis is of crucial importance as it enables companies to focus their resources on the areas that have the greatest impact on the company's sustainability performance and the interests of its stakeholders. By identifying and prioritizing the material sustainability issues, companies can ensure that their efforts and investments have maximum positive impact. In addition, the CSRD materiality analysis helps to improve sustainability reporting and disclosure of information in accordance with EU directives.

Why is prioritizing sustainability efforts important?

Prioritizing sustainability efforts is important because it helps companies to use their limited resources effectively while ensuring that they meet the expectations and needs of their stakeholders. By focusing on the material sustainability issues, companies can create long-term value, minimize risks and strengthen their competitiveness. In addition, prioritizing sustainability efforts helps to build stakeholder trust and improve the company's reputation.

Steps for conducting a CSRD materiality analysis

Conducting a materiality analysis requires a structured process that includes the following steps:

Step 1: Defining the scope of the analysis

At the beginning, it is important to define the scope of the materiality analysis. This includes determining the relevant business areas, products, services and geographical locations to be included in the analysis.

Step 2: Stakeholder engagement and analysis

Stakeholder engagement is a crucial aspect of the materiality analysis and the one that takes the most time. Companies should identify relevant internal and external stakeholders and gather their expectations, concerns and suggestions to gain a comprehensive understanding of the risks and opportunities in the area of climate impacts.

Step 3: Materiality analysis

The materiality analysis involves assessing the information collected to identify the material sustainability issues that are highly relevant to both the company and its stakeholders. These topics should take into account the company's ability to create value and its impact on the environment and society.

Step 4: Evaluation and prioritization of sustainability topics

In this step, the topics that have the greatest impact on sustainable action should be prioritized. With its presentation, the materiality matrix ensures that the focal points are easy to identify and that resources are used efficiently in processing.

Frequency of a materiality analysis

A good frequency is every two years. It is important to find a balance between changes and the effort required for a materiality matrix.

Implementation of sustainability efforts based on the materiality analysis

Once the materiality analysis has been carried out, it is crucial to translate the results into concrete measures to improve the company's sustainability performance. This includes identifying areas for action and integrating the results into the corporate strategy. In addition, transparent communication of the results to stakeholders is an important step in strengthening the company's trust and credibility.

Example of the Ford materiality matrix

Source: https://corporate.ford.com/social-impact/sustainability.html

The materiality matrix shows the ratings of each topic. The x-axis represents the impact that economic, environmental and social issues have on our business, while the y-axis represents the impact of the company (in this case Ford) on the environment, people and the economy. Topics located in the upper right corner of the matrix have a higher impact on the environment, people and sales. The topics in each section are listed alphabetically.

Software for the materiality matrix

No special software solution is required for the materiality matrix. This can be done comprehensively with Excel and related survey tools such as Google Forms and other free solutions. The value-add of software is very low. For neighboring fields within CSRD, such as CO2 accounting or CBAM, specialized software might be more beneficial. However, the beauty of the materiality matrix is that it is technically simple.

Conclusion and outlook

The materiality analysis is an indispensable tool for companies to prioritize their sustainability efforts and strengthen their long-term sustainability strategy. By conducting this analysis in a structured way, companies can ensure that their resources are used effectively to achieve maximum positive impact. It is important to continuously review and update the results of the materiality analysis to ensure that they are in line with changing business and sustainability requirements.

In addition to the direct results of the materiality analysis, there are often the following positive side effects:

• It's a fantastic conversation starter for top management. Since executives are expected to actively participate in identifying and prioritizing material issues and stakeholders, the materiality matrix provides a great opportunity to get their attention and support for these issues. This is particularly relevant in the case of SMEs, where the lack of relevant expertise and resources often puts sustainability on the back burner. Materiality assessment can be a crucial tool to bring this topic to the forefront of conversations.
  
  
• As the materiality assessment exercise relies on multiple sources including a peer assessment to create a comprehensive matrix, this process naturally allows companies the opportunity to actively understand what peers in the industry are doing and what best practices are already being applied.
  
  
• This process also offers companies the opportunity to identify issues facing the industry and add real value with creative solutions. If done in the right spirit, it could also provide an opportunity for organizations within the same industry to collaborate on the most pressing common, material issues, such as supplier sustainability. Just as Hamburger Hochbahn and Berliner Verkehrsbetriebe are doing with the procurement of electric buses: Berlin and Hamburg had set a nationwide impulse for the decarbonization of inner-city mobility in 2017 with the jointly launched electric bus initiative, which was followed by more than 20 transport companies.
  
  
• With stakeholder engagement forming the backbone of this entire process, the materiality matrix provides a great opportunity to meaningfully engage with key stakeholders beyond traditional modes of engagement. Many companies report improved employee and supplier engagement following a materiality assessment.

As the current legal framework is not sufficient to effectively mitigate the climate crisis, it is also likely that measures will be tightened in the future.

How I can help

Together, we go through the requirements of the materiality analysis step by step in order to identify the company's environmental impacts and risks. We then evaluate the results and work out together in which areas further key figures need to be collected. Based on a gap analysis, we identify the next steps for preparing a sustainability report and draw up a priority list for fulfilling the CSRD.

Please get in touch with me.