While companies have long been exposed to financial materiality and managing business risks for shareholders, the upcoming CSRD will put non-financial materiality on the forefront of businesses’ reporting standards.
Typically, materiality has been a tool to judge the impact that a given business risk or opportunity can have on a company and its shareholders, focusing almost exclusively on financial terms in order to write down company reports.
The upcoming Corporate Sustainability Reporting Directive (CSRD) aims to go a step further and align materiality with sustainability. This is, companies will have to assess risks and opportunities derived from things such as the vulnerability of the business to climate change or, on the opposite side, the organization’s contribution to it.
Guide to conduct a materiality analysis
And while for some companies non-financial materiality and the premises laid out in Europe’s latests effort for creating a sustainable business environment are not new, for many others, these new rules have important new implications, so let’s dive in.
What is non-financial materiality?
As we explained before, non-financial materiality is not a new concept, and many companies are already familiar with it. It refers to the risks and opportunities related to sustainability which businesses choose to include in their corporate reports based upon the impact they have on users’ decisions.
However, organizations that do so, work on a voluntary basis following reporting standards such us GRI (Global Reporting Initiative). But EU regulators are turning the tables to make non-financial materiality and the assessment of sustainability risks compulsory.
In fact, the latest Sustainable Finance Disclosure Regulation (SFDR) already enforces investors to consider material sustainability risks, which in turn makes companies more eager to offer such information.
What about double materiality?
One of the main characteristics defining CSRD, and one which sets it apart from previous sustainability reporting efforts, is precisely the inclusion of double materiality.
Double materiality implies a double assessment where companies not only look into the sustainability or non-financial issues that might create risks for their activities, but also look into the impact the company in itself has on society and the environment.
Engage employees in the sustainability strategy
Non-financial materiality, including double materiality, is the means by which companies can recognize the reach of the impact of their activities beyond financial or monetary terms, which traditionally and primarily concern investors.
In this regard, double materiality takes into account stakeholders from employees to suppliers, customers and the broader community in which they operate in.
How can companies approach non-financial materiality?
Corporate reporting has long been compulsory in some regards, but never has it been more relevant to asses non-financial and sustainability risks for investors, governments, society and a wide variety of internal and external stakeholders.
Non-financial or sustainability risks can go anywhere from the company’s strategy to its reputation and performance. But how can companies approach such an ambitious endeavor? Here are some key steps to take into account when approaching double materiality and non-financial reporting aligned with CSRD:
- Open, direct and regular communication with stakeholders. One of the key aspects of materiality analyses is that of assessing which risks stakeholders find more relevant and contrast them with business priorities.
- Look into the long-term. One of the most prominent topics in non-financial assessments is climate change and its effects, therefore, to be able to properly analyze the impacts of climate risks for and because of the company activities is necessary to look into the short, medium and long-term.
- Look for ways to generate relevant data. One of the biggest problems companies face when assessing non-financial reporting is a lack of relevant data on issues such as employee management, human rights or governance factors. All of which are crucial to understanding stakeholders material risks.
Engage employees in the sustainability strategy
Employee management is part of assessing non-financial materiality efficiently, and moreover, they should be an active and central part of companies’ efforts to improve sustainability strategies overtime and, consequently, sustainability reports.
It is in this context that we believe sustainability cannot be a one department or one policy thing, it is only ever effective and productive when we integrate it throughout the company, at the heart of employees and other relevant stakeholders.
With our technology we help companies establish ESG impact objectives for employees in regards to the sustainability strategy of the company. We are able to activate and track employees’ impact, creating engagement that translates into improved ESG metrics, reputational value and an overall positive impact for the environment and society.