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 introduce reporting topics and comment on how companies can comply and generate value out of those.
Let’s start with materiality.
Many sustainability topics exist: climate, resources, biodiversity, water, pollution, own workforce, value chain, community, or end-consumers with hundreds of sub-topics. Materiality is all about prioritization.
1️⃣ What is Materiality?
Companies must report on topics, which are material for the company, e.g. energy companies must report on climate topics giving the impact of the energy sector on CO2.
2️⃣ Why Materiality?
Regulators and investors want companies to report on important topics relevant to regulation, risk assessment, investment decisions, and stakeholder interest. Companies should not be able to ignore material topics in reporting.
3️⃣ What are the reporting requirements?
CSRD & ESRS will partly extend reporting requirements for materiality.
➡️ Process: the company needs to describe the materiality analysis process and how material topics are determined.
➡️ Double Materiality: the company needs to analyze two perspectives – is a topic material for the business (financial materiality) and which impact has a company on the topic (impact materiality).
➡️ Sector Topics: ESRS newly prescribe material topics by sector. The company must analyze impacts, risks, and opportunities related to sector topics. It’s no longer possible to choose the topics freely.
➡️ Stakeholder Topics: although they are not yet mentioned as part of materiality, stakeholder topics are planned to be reported in other sections of ESRS. Thus, companies should include them in the materiality analysis.
➡️ Outcome: the company needs to report materiality analysis outcomes by material topic with respect to impacts, risks, and opportunities for both – the sector topics and for further own topics analyzed, e.g. coming from stakeholders.
4️⃣ How to do it
A company can pragmatically analyze the two dimensions of materiality – financial vs. impact materiality – involve internal stakeholders and if possible, key external stakeholders who can judge specifically on the impact axis. All topics need to be commented on with respect to impact, opportunities, and risks.
5️⃣ How to use Materiality for Value
Materiality analysis results directly fit your sustainability and business strategy – given the game changer factor of topics like climate or circular economy, outcomes should be directly used to shape the future of the company.
→ Mid-sized companies can use various methods for the double material analysis such as materiality matrix or the N-Kompass method.