Advancements in Corporate Reporting
by: Kamayani Barshilia | December 6, 2023
In the evolving lexicon of corporate sustainability, the Corporate Sustainability Reporting Directive (CSRD) and double materiality are gaining traction, influencing how organizations approach their reporting and strategic planning. This blog explores the interconnectedness between CSRD and double materiality and what it means for businesses moving forward.
CSRD came into effect in the European Union (EU) on January 5, 2023, superseding the former NFRD (Non-Financial Reporting Directive). CSRD updates and bolsters the rules regarding reporting social and environmental information by companies through the adoption of European Sustainability Reporting Standards (ESRS) [1]. A broader set of large companies, including non-EU companies and listed SMEs (Small and Midsize Enterprises), will now be required to report on sustainability.
At the heart of CSRD lies the concept of double materiality, a union of impact materiality and financial materiality. Double materiality is an extension of the traditional Environmental, Social, and Governance (ESG) materiality concept, examining climate-related impacts on the company and the company’s influence on climate and other social matters.
“Article 19a(1) and Article 29a(1) of Directive 2013/34/EU require undertakings to report both on the impacts of the activities of the undertaking on people and the environment and on how sustainability matters affect the undertaking. That is referred to as the double materiality perspective, in which the risks to the undertaking and the impacts of the undertaking each represent one materiality perspective.”
– Directive (EU) 2022/2464 Of The European Parliament And Of The Council [2]
Impact Materiality (Inside-out Lens): A company’s positive and negative effects on people or the environment directly linked to their upstream and downstream value chain.
Financial Materiality (Outside-in Lens): The influence of risks or opportunities on a company’s financials that are not detailed in financial reports, such as cash flow or enterprise value.
A sustainability topic aligns with the criteria of double materiality when it is considered material from an impact perspective, a financial perspective, or both perspectives simultaneously. [3]
*Responsibility for the Integrated Reporting Framework is jointly held by the International Sustainability Standards Board (ISSB) and the International Accounting Standards Board (IASB). International Financial Reporting Standards (IFRS) S1 builds on the concept of resources and relationships found in the Integrated Reporting Framework to describe how sustainability can affect a company’s prospects. [4]
**Sustainability Accounting Standards Board (SASB) Standards were a resource for IFRS in setting up ISSB Standards. The use of SASB Standards, therefore, will be a good preparation for the implementation of the ISSB Standards. Responsibility for the SASB Standards now sits with the ISSB. The ISSB Standards build upon the SASB Standards.
***The Task Force on Climate-Related Financial Disclosures (TCFD) recommendations have also served as a foundational resource for ISSB Standards and have been fully incorporated into the standards. ISSB will assume TCFD monitoring responsibilities starting in 2024.
CSRD Requirements
1. Phase-In Reporting
The reporting regulation* takes effect in four phases:
- Large companies already subject to the NFRD begin reporting in 2025 on their FY (Fiscal Year) 2024
- Large companies not currently subject to the NFRD begin reporting in 2026 on their FY 2025
- European stock exchange-listed SMEs (except micro undertakings) must begin reporting in 2027 on their FY 2026
- Non-EU companies with net turnover above 150€ million in the EU must begin reporting at a consolidated level in 2029 on their FY 2028
*The directive applies to all EU entities, including subsidiaries of non-EU parents, that meet any of the above conditions.
Criteria for a large company (meets any two out of three criteria):
- Over 250 employees
- More than 40€ million net turnover
- More than 25€ million balance sheet total
2. ESRS-Based Reporting
CSRD reporting must be submitted in a compliant electronic reporting format specified in Article 3 of Commission Delegated Regulation (EU) 2019/815 no later than 12 months after a company’s balance sheet date.
The ESRS apply to all companies falling under the scope of CSRD. ESRS package includes the European Commission’s Delegated Act [5], which outlines two cross-cutting standards and ten additional sustainability standards governing the disclosure of ESG information [6]. These standards will collectively be enforced as law in the EU starting January 1, 2024.
Ten sector-specific standards are expected in 2024 that will require companies in high-impact sectors (such as energy production, road transport, food/beverages, etc.) to disclose more information.
Besides adhering to ESRS reporting requirements, CSRD reporting must also be submitted using an electronic reporting format as outlined in Article 3 of Commission Delegated Regulation (EU) 2019/815 [7], and should be submitted within a maximum of 12 months following the company’s balance sheet date.
3. Double Materiality Assessment
The foundation of sustainability reporting within ESRS lies in the double materiality assessment.
ESRS 2 outlines general disclosure requirements concerning how a company identifies impacts, risks, and opportunities and evaluates their materiality. Furthermore, the ESRS provides direction on the evaluation of double materiality. This assessment hinges on analyzing both impacts and dependencies. Companies are required to identify and evaluate their existing and potential impacts, as well as the associated risks and opportunities, across the entirety of their value chain. This examination extends to short, medium, and long-term timeframes.
If a company determines that a subject is not material and, as a result, chooses to exclude the disclosure requirements in a topical ESRS, they’re asked to provide a concise explanation of the findings from the materiality assessment of that topic.
4. Third-Party Assurance
Limited assurance of sustainability information is mandatory from the first report onward, with the potential for transitioning to reasonable assurance requirements over time. This assurance encompasses adherence to ESRS and the procedure for identifying reported sustainability information.
Double Click Into the Double Materiality Assessment Process
Double materiality goes beyond mere reporting— it represents a strategic necessity that harmonizes a company’s financial achievements with its impact on society and the environment. In an era where businesses are under growing scrutiny to disclose their sustainability endeavors, embracing double materiality can cultivate trust, spark innovation, and generate value that extends to the company and the broader society.
Step-by-Step Guide
Appendix B of ESRS 1 General Requirements provides comprehensive instructions on conducting a double materiality assessment. Broadly, the steps are as follows:
Step 1: Map Out and Engage Key Stakeholders
ESRS provides guidance on types of stakeholders to engage — affected groups and users of sustainability information. Stakeholder engagement aims to gain insights into how the organization may affect external and internal individuals and to gather input and feedback on sustainability matters that are considered material.
Step 2: Shortlist Relevant Sustainability Matters
The ESRS outlines a set of sector-agnostic sustainability matters (topics, subtopics, and sub-subtopics) that organizations should consider during their materiality assessment. Additionally, organizations are expected to pinpoint sustainability matters specific to their operations that may not be explicitly covered in the ESRS.
To identify potentially relevant sustainability issues, organizations must consult experts and stakeholders and consider factors such as their operational sectors, geographical areas of activity, and various stages within their value chains.
Step 3: Define Impacts, Risks, and Opportunities
Define sustainability matters in terms of their impacts and the risks and opportunities they present. Impacts associated with any topic can manifest as positive or negative, whether actual or potential. These impacts, associated risks, and opportunities can manifest in the short-, medium, or long-term time horizon spanning the entire value chain.
Step 4: Assess the Severity of Impact
After sustainability matters have been categorized in terms of their impacts, risks, and opportunities, the subsequent steps involve quantifying these aspects. For assessing impact, consider its severity – scale, scope, and how irremediable it is [8]. The organization must establish severity thresholds to decide which impacts will be included in its sustainability statements.
To gather data for these quantitative assessments, organizations should engage with stakeholders and experts internally and externally through interviews, surveys, and workshops. In addition to this bottom-up approach, conducting a holistic, top-down review of the results is advisable.
Step 5: Evaluate the Financial Opportunities and Risk
The initial step in assessing financial materiality involves identifying risks and opportunities that influence the organization’s financial growth, performance, and position. After the organization has identified its risks and opportunities, it should ascertain which ones are considered material for reporting, considering both the likelihood of their occurrence and the potential magnitude of their financial impact. CSRD asks companies to evaluate triggers of financial effects from two viewpoints: the ability to use or obtain resources and rely on existing relationships.
Step 6: Consolidate Findings and Develop a Double Materiality Matrix
Codify inputs from stakeholders and assign scores to each topic. By applying a threshold or cut-off point, these topics can be ranked and split into material topics— eligible for sustainability reporting— and not material topics.
Step 7: Strategic Reporting
For every sustainability matter deemed as material, ESRS requires information related to its governance, impact, risk and opportunity management, policies, targets and actions, and metrics.
How to Get Started
- Conduct a boundary assessment to understand the scope and implications of CSRD on your organization.
- Start with a double materiality assessment to identify material sustainability topics and align with CSRD’s double materiality requirements.
- Perform CSRD readiness assessment to evaluate the organizational maturity level associated with each material topic.
- Consider appropriate data processes and internal controls and begin collecting the sustainability data required by ESRS.
Companies are likely to encounter issues related to data and knowledge, emphasizing the need to reflect on the impacts of CSRD to be adequately prepared for future reporting obligations.
ClimeCo supports companies in aligning with CSRD and other sustainability reporting regulations and frameworks. To learn more, please contact us.
[1] European Financial Reporting Advisory Group (EFRAG) – First Set of draft ESRS
[2] Official Journal of the European Union – Directive (EU) 2022/2464
[3] Ecobe – Double Materiality
[4] International Financial Reporting Standards (IFRS) – About the ISSB
[5] European Commission – Corporate sustainability reporting
[6] European Financial Reporting Advisory Group (EFRAG) – European Sustainability Reporting Standards
[7] Official Journal of the European Union – Commission Delegated Regulation
[8] European Financial Reporting Advisory Group (EFRAG) – Double materiality conceptual guidelines
Glossary
Corporate Sustainability Reporting Directive (CSRD)
Non-Financial Reporting Directive (NFRD)
European Sustainability Reporting Standards (ESRS)
Small and Midsize Enterprises (SME)
Environmental, Social, and Governance (ESG)
International Sustainability Standards Board (ISSB)
International Accounting Standards Board (IASB)
International Financial Reporting Standards (IFRS)
Sustainability Accounting Standards Board (SASB)
Task Force on Climate-Related Financial Disclosures (TCFD)
About the Author
Kamayani Barshilia is a Senior Manager on ClimeCo’s Sustainability, Policy and Advisory team. Her background is in helping businesses with their sustainability strategy from ideation to identifying priorities (materiality assessments) to target setting to reporting. She has worked with various industries, across different geographies.
