Blog Post | April 18th 2023 | Lorenzo Roveda
One of the biggest challenges for sustainability managers is identifying relevant topics for their company and prioritizing them in their sustainability strategy. During its activity, every organization impacts people and the environment and is exposed to financial risks and opportunities related to sustainability. A materiality assessment is a method to identify and prioritize the relevant sustainability topics related to an organization's impacts, risks, and opportunities.
This article will focus on double-materiality which is the way the EU regulation is defining it. Check out our previous article to find out what CSRD is about.
Part of setting up your sustainability strategy from scratch is to conduct a materiality assessment, which aims at identifying the material (=relevant) topics for your business and ranking them by priority.
Material = relevant/of importance
The CSRD went a level deeper than previous standards (e.g. GRI) requiring companies to report all the material topics under a Double Materiality perspective - which is the union of two concepts: impact materiality and financial materiality. A sustainability issue meets the criteria of double materiality if it is material from either the impact perspective or the financial perspective or both.
Impact materiality is about understanding how a company's actions can create significant effects on people and the environment (inside-out perspective), both now and in the future. This includes the impacts a company causes directly, as well as those connected to its entire value chain. The importance of these impacts is determined by their severity and likelihood, with more severe impacts taking precedence.
➡️So in other simple words, it's how a business impacts or touches in any way the Environment or Society.
Impact Materiality CSRD Definition: A sustainability matter is material from an impact perspective when it pertains to the company’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium- and long-term time horizons.
Example: Let's say a company makes phones using magnets sourced from mines that use child labor. In that case, the adverse impact (child labor) is directly linked to the products (the phone) and therefore child labor is material from an “impact perspective”.
Financial materiality looks at how sustainability matters can lead to significant financial effects on a company (outside-in perspective). These matters (e.g. Pollution, Employee Diversity) can create risks or opportunities that may impact the company's future cash flows and overall value.
Financial Materiality CSRD Definition: A sustainability matter is material from a financial perspective if it triggers or may trigger significant financial effects on undertakings.
Example: A ski resort faces financial risk from climate change due to rising temperatures and decreasing snowfall. As a result, "climate change" is material from a financial perspective, as climate change will likely generate losses in future cash flows.
💡Double Materiality is the starting point of sustainability reporting as under the CSRD companies will have to report for each material topic:
➡️So you are not losing any time, on the contrary, it's a stepping stone into any sustainability strategy.
Don't miss our next piece of content: the Double Materiality Assessment Guide
On the ROSE Platform, through our Double Materiality Assessment companies identify their material topics. This is just the beginning: on the platform, each company can plan its sustainability strategy with targets, actions, goals, and policies all in one place! We have been working with more than 40 companies and we’d be happy to discuss how we can help you tackle the increasing complexity of sustainability requirements and even have some fun in the process! 😉
Align your sustainability strategy with the CSRD.