From Theory to Action: Moving sustainability into the boardroom with CSRD and Double Materiality

A recent report by BCG, INSEAD and Heidrick & Struggles found that more than two-thirds of directors (68%) feel that sustainability has little impact on financial performance today, and only 10% believe sustainability will negatively affect medium- to long-term financial results.

The result may seem surprising to some but how can board directors understand the risks and opportunities associated with sustainability if they lack the knowledge to do so?

The same report – interestingly – also found that only 29% of global board directors feel knowledgeable enough to challenge or monitor execution on sustainability, and 89% rely only on management updates to stay informed on the topic of ESG.

Moreover, a combined 48% of respondents declared that knowledge or experience with sustainability is either “not at all” or just “slightly” part of the competency matrix for their board selection.

Luckily, new legislation is going to move sustainability from being a practitioner, specialistic topic to being a boardroom matter.

Starting from 2025, all large and listed European companies will be asked to disclose information on the impact that their activities have on society and the environment and on risks and opportunities related to their Environmental, Social, and Governance (ESG) practices. Importantly, the new legislation will progressively broaden who must report (e.g., even large non-EU companies with significant business in EU will have to comply), standardize what and how companies report, and increase visibility and accountability over the entire value chain.

Reporting according to the CSRD framework will require companies to conduct a double materiality assessment, provide information on strategy and business model, disclose the governance system in place to address sustainability and set targets and action plans and report on progress against those.

Finally, reporting and the double materiality assessment have to be conducted using the CSRD’s technical rules known as the ESRS. ESRS are a set of 12 standards made up of two cross-cutting standards, which apply to all sustainability matters, and ten topical standards covering a wide range of environmental, social and governance matters.

The interesting and important aspect of Double Materiality is that it is replacing Single Materiality approaches as shown in Figure 2. Double materiality requires to assess materiality with two different perspectives: impact materiality whose main stakeholders are society and the environment, and financial materiality whose main stakeholders are shareholders and investors.

Impact materiality is related to significant impacts – negative and positive – that the organization can have on the environment, people, or society in the short, medium and long term.

Financial materiality refers to the financial risks and opportunities that sustainability matters can have on the organization in the short, medium or long term.

This is not a trivial aspect because Double Materiality ensures that all relevant stakeholders’ groups are included in the assessment and that impact and financial aspects are equally weighted in.

Double materiality is a strategic tool. The exercise helps companies understand the risks and opportunities associated to ESG issues but equally identify how to create more value for society, the environment and the business itself.

Overall, it provides a variety of benefits:

- Understand the business context and how it will evolve over time

- Gain insights that are crucial to define a solid Sustainability Strategy for the business

- Engage all key stakeholders to build trust and inclusion

- Collect input for risk management and other risk assessments

- Seize new business opportunities

- Inform the company’s overall Business Strategy

And, of course, move Sustainability into the boardroom!

If you are interested to know more about our robust materiality process, feel free to contact us at hello@wearefuterra.com