Materiality. Double, please!

The climate crisis, the vulnerability of human rights, social inequalities, or the concerning situation of poverty that some countries still sometimes experience because of environmental damage and social injustice, are at the focus of major global institutions such as the United Nations or the European Union.

Although there are mechanisms to combat this situation, such as the Sustainable Development Goals (SDGs) and regulations like the new European Corporate Sustainability Reporting Directive (CSRD), there is an aspect that many companies have not yet addressed: the identification of real or potential impacts on the environment, before quantifying and addressing them. To approach any sustainability strategy or report, it is necessary to have previously conducted a Materiality Analysis.

Understanding Materiality

The “impact materiality analysis” is used to identify the relevant issues for the company and its stakeholders, thus allowing to prioritize which ESG aspects (environmental, social, and governance) should be addressed at a strategic and reporting level. This analysis consists of:

1. Identifying internal and external stakeholders, including affected parties and users of sustainability information, along the value chain.
2. Engaging stakeholders - this exercise is key - and management through surveys or other consultation mechanisms on ESG aspects.
3. Analysing the results to assess which aspects are more or less material.
4. Developing the Materiality Matrix, where the results are often presented on two axes (importance to stakeholders and importance to the company).

This exercise allows understanding the importance of certain aspects by stakeholders and the company, to devise a strategy for managing impacts and focus the organization's resources on crucial issues for business sustainability.

Evolution towards Double Materiality

As we approach 2030, the pressure from countries to achieve sustainable goals, such as reducing emissions, makes regulations and requirements more demanding. In this sense, with the CSRD, which will modify the current NFRD Directive, the scope of impacted companies is expanded, the standards for presenting information become more complex, and materiality becomes double, allowing a dual perspective of impact (the company's impact on the environment, and the environment's impact on financial value).

While the NFRD does consider the concept of double materiality, many companies do not address it with the depth it requires.

The 3 Key Steps of Double Materiality

Although the CSRD will require this type of analysis, it does not establish a single procedure to follow, so it is advisable to have the support of experts to assess the opportunities and/or risks that arise from any of the identified material issues.

To guide you in the process, we propose 3 key steps to successfully address Double Materiality:

1. Exhaustive identification of internal and external stakeholders. It is necessary to also consider the users of the information (those who will consult the sustainability report), as well as the affected parties, which are all those that can be impacted by the company's activity (such as communities or ecosystems) along the entire value chain and that are often not contemplated or consulted. Starting from this list, their needs can be considered and involved in the analysis process.
2. Establishment of mechanisms to engage and consult stakeholders and company management on ESG issues. This will allow gathering the necessary information to develop the impact materiality matrix. For the information to be valid, it is important that, in addition to asking questions or consulting on generic sustainability issues or aligned with legal requirements, the real needs of the different groups are heard.
3. Conducting a climate risk analysis for the assessment of risks and opportunities derived from climate change. This will serve as a basis for understanding the impacts of the environment on the financial value of the company.

It should be noted that these three steps must contemplate, not only the company's activities but the entire value chain ("upstream" and "downstream"). In addition, the process must be documented so that the information can be supported and verified in accordance with the new Directive.

Finally, it is important that the results of Double Materiality are reflected in the corporate strategy to ensure its alignment with the sustainability strategy.

Entry into force and implications of the new regulation

The new Directive, which requires the analysis of double materiality, will come into force in January 2024 for companies already subject to the NFRD, who in 2025 must present the sustainability report according to the 2024 ESRS. Subsequently, companies that meet two of these three circumstances - more than 250 employees, more than 25M€ of total assets, and more than 50M€ of net annual business turnover - must adapt from January 2025 to present their sustainability report in 2026.

In conclusion, addressing the analysis of double materiality is not a simple task. It requires a deep understanding of what stakeholders need and exhaustive documentation of the entire process. Moreover, it is a key piece for understanding and managing sustainability, as well as for regulatory compliance. Knowing the imminent entry into force of the CSRD, it is a priority to start developing the necessary mechanisms to facilitate this process.