Materiality is all about prioritization!

Sep 28, 2022

Materiality is all about prioritization!

The Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) will require many new companies to report on sustainability ( → CSRD, EFRAG & ESRS - Frequently Asked Questions Vol. 1). We present reporting topics and explain how companies can comply with them and create value from them.Let's start with materiality.

There are many sustainability topics:
, resources, biodiversity, water, pollution, own workforce, value chain, community or end consumer with hundreds of subtopics. Materiality is all about prioritization.

1️⃣ What is materiality?
Companies must report on topics that are material to the company, e.g., energy companies must report on climate topics, indicating the energy sector's impact on CO2.

2️⃣ Why materiality?
Regulators and investors want companies to report on material topics that are relevant to regulation, risk assessment, investment decisions, and stakeholder interests. Companies should not be able to disregard material issues in their reporting.

‍3️⃣ What are the reporting requirements?
CSRD & ESRS will partially expand materiality reporting requirements.

‍➡️ Process:: The company must describe the materiality analysis process and how material topics are identified.

➡️ Dual materiality:
the company must analyze two perspectives - is a topic material to the company (financial materiality) and what impact does a company have on the topic (impact materiality).

➡️ Sector topics
: ESRS newly prescribes material topics by sector. The company must analyze impacts, risks and opportunities in connection with sector topics. A free choice of topics is no longer possible.

➡️ takeholder topics
: Although not yet mentioned as part of materiality, stakeholder topics are planned to be reported in other sections of the ESRS. Therefore, companies should include them in the materiality analysis.

➡️ Result:
The company must report the results of the materiality analysis by material topic in terms of impacts, risks and opportunities for both the industry topics and other own topics analyzed, e.g. come from stakeholders.

How to do it
A company can pragmatically analyze the two dimensions of materiality - financial vs. impact materiality - and involve internal stakeholders and, if possible, key external stakeholders who can make judgments specifically on the impact axis. All topics need to be commented on in terms of impact, opportunities and risks.

‍5️⃣ How to use materiality for value
The results of the materiality analysis fit directly with your sustainability and business strategy - given the game-changer factor of topics such as climate or circular economy, the results should be used directly to shape the future of the company.

→ Medium-sized companies can use various methods for dual material analysis, such as the materiality matrix or the N-compass method.

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