No CSRD obligation? Why the double materiality analysis is still important
For public organisations, the Corporate Sustainability Reporting Directive (CSRD) is not mandatory. Nevertheless, the double materiality analysis is a good way for organisations to understand their sustainability impact, opportunities and risks, says Leon Stokman, senior manager at Deloitte Audit & Assurance.
When it comes to sustainable business practices, there is currently a lot going on around the idea of 'double materiality', and for good reason. In fact, carrying out a double materiality analysis is the first crucial step to comply with the new European Sustainability Reporting Standards (ESRS) that take effect from 2024.
In other words, understanding what the impact, opportunities and risks of this are ánd how to apply it in your organisation has never been more important. This is also relevant for public organisations, as they will likely need to report on their sustainability performance in the near future, even though the obligation doesn't apply to them just yet.
Two perspectives
The double materiality analysis requires organisations to consider both how their actions affect people and the planet (the inside-out perspective) and how sustainability issues can affect their financial well-being (the outside-in perspective). It's about looking at the broader picture from two different perspectives.
Inside-out An organization's actions can have both positive and negative impacts on people and the planet. For instance, damaging natural environments leads to negative outcomes, whereas contributing to initiatives like the energy transition has a positive effect. Similarly, while human rights violations exemplify a harmful impact on society, an organization can also foster equality of opportunity, reducing poverty. This, in turn, can lessen the strain on livelihood sec systems and boost tax revenues for (local) governments.
Outside-in This focuses on how sustainability and climate-related factors impact your organization, including aspects like growth, performance, and cost of capital over the short, medium, and long term. Examples include statutory CO2 taxes and the development of circular products. While this perspective has traditionally been important to investors, there is now widespread interest in how organizations manage sustainability risks and opportunities.
In the double materiality analysis, these two perspectives are combined, so that you as an organisation can find out which sustainability risks and opportunities are specific to your organisation and should therefore be included in your reporting. It's a big task, but it also offers your organisation advantages. The key value lies in providing the tools to direct organizational resources toward what truly matters, aligning strategy with sustainability goals. Moreover, actively involving stakeholders contributes to the social support of your organisation and the strategic choices you make.
First steps
The logical first steps are:
- Taking stock of your value chain
- Evaluate where your organisation has a significant impact within the supply chain.
- Identifying and approaching those involved: who are the relevant stakeholders?
Also keep the two perspectives in mind and consider who your activities have a direct impact on and who has an interest in your reporting. Then enter into a dialogue with these stakeholders (from service buyers to financiers and social partners) and together make a list of the possible relevant sustainability topics. Recording the way in which your materiality analysis was carried out is useful in this regard, because it makes the process verifiable.
Engaging and collaborating with experts
Sustainability is a broad concept, leading to widely varying opinions among stakeholders. In such situations, it can be beneficial to involve both internal and external experts to help structure the conversations with stakeholders.
Assessing impacts, risks and opportunities, for example, requires expertise in the areas of strategy, finance and risk management. It's advisable to involve an external auditor early in this phase, as they will eventually conduct the audit. Engaging the auditor at this stage helps ensure that no important topics, which are material from their perspective, are overlooked. This approach helps narrow down the list of sustainability issues to those that are truly material and must be reported. Additionally, it's essential to demonstrate how these matters are integrated into your organisation's risk management system.
When taking stock of relevant sustainability topics, collaboration is key. In the public sector, you can already observe organisations coming together, inspiring one another, and conducting peer reviews for this purpose. Various trade associations, such as Aedes, ActiZ, and the VNG, are also stepping up to the challenge.
Once the list of relevantly assessed topics is in place, it is time for the next step: the impact of each topic must be described and the risks and opportunities it poses. That's not easy. Some topics influence each other and the time frame of the impact may differ from the time frame in which an opportunity or risk occurs. Attention must also be paid to cases where the risk of them occurring is small, while the impact would be enormous.
Consider the recent global covid pandemic. The size and scope of each topic must therefore be assessed. It should include an indication of the negative or positive impact of an activity and the cost of mitigating the negative effects. In fact, the financial effects that have not been included in the financial statements must be assessed. This requires an understanding of the value chain.
Start on time
While the CSRD won't be mandatory for public organizations (except for NVs and BVs), we recommend staying ahead of the curve and adopting its principles. Start in time, as it is necessary to gain experience. Achieving a balanced materiality assessment is, in fact, an iterative and time-consuming process. A thorough assessment only comes about after building, improving, and refining in several steps. There is another reason why starting today is beneficial: the double materiality analysis impacts your organisation's strategy. Public organizations should serve as role models in managing their impact on people and the planet responsibly. We already see in private organisations that the materiality analysis leads to the recognition of new themes that are integrated with the strategy - a win-win situation.
