The new dimensions of the materiality assessment – how CSRD helps to adopt a more strategic approach to sustainability

The EU’s new corporate sustainability reporting directive (CSRD) aims to ensure that companies report relevant and comparable sustainability information. One of the changes to sustainability reporting brought on by the CSRD is the requirement of a double materiality assessment to determine which sustainability topics the company should report on. This means examining both how the company impacts people and the environment as well as the financial risks and opportunities related to sustainability topics.  Hence, double materiality assessment combines the outside-in and inside-out views resulting in a comprehensive assessment of relevant sustainability topics for the company.

A comprehensive materiality assessment can bring companies considerable benefits beyond relevant and transparent reporting. Understanding which sustainability themes are material to your business, stakeholders and society as well as identifying the risks, opportunities and impacts linked to each topic can help form a more strategic approach to sustainability and improve resilience.

At Gaia, we believe that to determine which topics are truly relevant, a materiality assessment should include the following elements:

1. Understanding impacts throughout the value chain helps reveal potential risks and new opportunities
   Looking beyond the primary activities of the value chain is essential. To gain a comprehensive view of environmental, social, and economic impacts, companies should evaluate which sustainability topics may be relevant in different steps of the value chain. This can help deepen the understanding of risks and dependencies, such as those related to raw materials or workers in the value chain. For example, a company purchasing wood as raw material or wood products will ultimately be affected by the impacts of biodiversity loss and its mitigation through availability or pricing.

On the other hand, a value chain assessment can provide a new perspective on business opportunities. It can, for instance, offer insight into what challenges customers are or will be faced with and what the company can do to support them.

2. Continuous input from stakeholders enables a swift response to changes
   A company should engage with stakeholders and experts on an ongoing basis to ensure extensive and continuous insight on sustainability topics both now and in the future. Companies that put effort into engaging with relevant stakeholder representatives along the entire value chain can gain a 360° view of expectations and impacts related to the sustainability topics.

According to the new reporting guidelines, gathering input from internal and external stakeholders should happen through ongoing dialogue. Rather than organizing an extensive stakeholder study every few years, companies integrating discussions on sustainability topics into everyday activities have their finger on the pulse and can react to changes in their operating environment more quickly.

3. Thoroughly evaluating both actual and potential impacts along the entire value chain is key for identifying new opportunities
   A key step of a CSRD-compliant materiality assessment is evaluating the actual and potential impacts that the company has on people and the environment. A thorough impact assessment helps companies recognize the environmental and social effects of each action in their value chain. This includes evaluating each impact’s scale and scope, remediability for negative impacts, and likelihood for potential impacts.
   
4. Systematically assessing financial risks and opportunities helps to integrate sustainability into the core of the business
   In addition to looking at impacts from the inside out, the CSRD requires an outside-in view of material sustainability topics. Based on this double materiality principle, companies need to evaluate the risks and opportunities associated with different sustainability matters. Financial materiality is determined by assessing mid-term negative and positive impacts from the point-of-view of sales and costs, investments, and access to financing.
   
   Importantly, financial materiality can be harnessed to benefit wider business development. The risks and opportunities related to many sustainability issues, such as biodiversity loss and climate change, are no longer in the distant future but can already have significant impacts on businesses. Assessing these regularly is critical for developing a resilient strategy and business model.
   
5. Management’s commitment to the process and outcomes ensures a strategic approach to sustainability
   Material topics are those that a company has a significant impact on, those that can create considerable financial risks or opportunities for the company, or both. These are the topics that the company should systematically develop, measure and report on. The forerunners also recognize which topics can help them create value and differentiate from competitors, and which should be monitored to mitigate risks.
   
   To maximize the value of the materiality assessment, companies need to involve both management and the wider organization in the process. The management’s participation and commitment in particular are vital for ensuring that material sustainability topics are truly integrated into the core of the business and annual planning processes.
   
   Although the changes in reporting practices required by the CSRD may seem daunting, a well-planned and executed materiality assessment can enable the adoption of a more strategic approach to sustainability and unlock new areas for business.

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