According to the CSRD, the content of ESG reports must comply with the requirements of the European Sustainability Reporting Standards (ESRS), which European Financial Reporting Advisory Group (EFRAG) is currently developing based on the following architecture.
It includes reporting on three areas:
Corporate strategy (the strategy and business model, governance, and an analysis of the main impacts, risks, and opportunities),
Implementation of the strategy (policies, objectives, concrete actions, and resources allocated),
Performance (KPIs, including those related to monitoring whether objectives are met).
It covers three topics and companies must report on:
Environmental matters
Social matters
Governance matters
There are three levels of information:
First set: Cross-cutting standards, which are mandatory for all companies subject to the CSRD. They will apply from the 2024 reporting year. These 13 standards will cover the following topics:
General information: General principles, general strategy, governance, and materiality assessment
Environmental information: Climate change, pollution, water and marine resources, biodiversity, resource use, and circular economy
Social information: Own workforce (working conditions, equal treatment, respect for human rights), workers in the value chain, affected communities, as well as consumers and end-users
Governance information: Governance, risk management, internal control, and business conduct
Materiality in Information
Materiality, as a criterion for including specific information in sustainability reports, encompasses the importance of the information in depicting or explaining a phenomenon and its ability to meet stakeholders' needs for proper decision-making. This includes transparency needs for the European public good. The application of materiality involves the use of thresholds and/or criteria.
Stakeholders
Stakeholders, those who can influence or be influenced by the undertaking's decisions and actions, fall into two main groups as identified by the undertaking:
(a) Affected stakeholders: Individuals or groups whose interests are or could be positively or negatively affected by the undertaking's activities and value chain.
(b) Users of sustainability reporting: Stakeholders with an interest in the undertaking, including existing and potential investors, lenders, creditors, business partners, trade unions, social partners, civil society organizations, and non-governmental organizations.
Some stakeholders may belong to both groups, and the materiality assessment should consider the impact on all affected stakeholders, not just the needs of users.
Double Materiality
Double materiality is a concept which provides criteria for the determination of whether a sustainability matter has to be included in the undertaking’s sustainability report. Double materiality is the union (in mathematical terms, i.e., union of two sets, not intersection) of impact materiality and financial materiality. A sustainability matter meets therefore the criteria of double materiality if it is material from either the impact perspective or the financial perspective or both perspectives.
Impact materiality and financial materiality assessments are interconnected, considering the interdependencies between the two dimensions. The assessment generally starts with impact materiality, as sustainability impacts may become financially material in the short-, medium-, or long-term. Additionally, the undertaking must consider how external sustainability matters affect its activities.
The identification of principal impacts, risks, and opportunities references double materiality, with "significant" and "material" having the same meaning in ESRS when referring to impacts, risks, and opportunities.
Impact Materiality
Impact materiality, a characteristic of sustainability matters in relation to an undertaking, is determined by the connection to actual or potential significant impacts on people or the environment. This includes impacts directly caused or contributed to by the undertaking, as well as those directly linked to the undertaking's value chain.
The materiality of an actual impact is determined by its severity, while the significance of a potential negative impact is determined by severity and likelihood. In potential human rights impacts, severity takes precedence over likelihood.
Financial Materiality
Financial materiality, distinct from materiality in financial statements, relates to sustainability reporting. It is a characteristic of sustainability matters triggering significant financial effects on undertakings, influencing future cash flows, and enterprise value. Financial materiality considers risks or opportunities not fully captured by financial reporting at the reporting date and relies on the availability of economic, natural, and social resources at appropriate prices and quality.
Dependencies on these resources are sources of financial risks or opportunities, affecting the undertaking's ability to use or obtain necessary resources and rely on relationships in business processes. Sustainability-related financial risks or opportunities are measured by the probability of occurrence and the magnitude of financial effects.
Double Materiality Assessment Checklist
1) Identify and engage stakeholders
2) Establish a list of potentially relevant sustainability matters
3) Define impact, risks and opportunities
4) Assess impacts
5) Assess financial risks and opportunities
6) Apply thresholds
7) Adapt strategy
Actions, and action plans
Actions refer to activities that are undertaken to ensure that the undertaking delivers against targets set. An action plan is a structured group of actions that are considered necessary to achieve a specific policy objective or a target, to manage principal impacts, risks and opportunities.
Double materiality
Double materiality provides criteria for the determination of whether information on a sustainability matter has to be included in the undertaking’s sustainability report. A sustainability matter meets the criteria of double materiality if it is material from the impact perspective or the financial perspective or both two perspectives. Impact materiality and financial materiality assessments are intertwined and interdependencies between the two dimensions should be considered in the assessments. In general, the starting point is assumed to be the impact materiality assessment, as a sustainability impact is likely to translate into financial effects in the short-, medium-, or long-term. However, beyond the actual and potential financial consequences for the undertaking of its material impacts, the undertaking shall consider how it is affected by sustainability matters which are external to its activities.
Downstream entity(s)
An entity is considered downstream from the undertaking (e.g., distributors, customers) when it receives products or services from the undertaking (GRI).
Due diligence
Process(es) that the undertaking carries out to identify, assess, prevent, mitigate and remediate the material actual and potential adverse impacts connected with its operations, products or services through its own activities and its business relationships.
Financial materiality
A sustainability matter is material from a financial perspective if it triggers or may trigger financial effects on undertakings, i.e., it generates or may generate risks or opportunities that influence or are likely to influence the future cash flows and therefore the enterprise value of the undertaking in the short-, medium- or long-term, but it is not captured or not yet fully captured by financial reporting at the reporting date. The undertaking relies on the availability of economic, natural and social resources of appropriate pricing and quality. Such dependencies are sources of financial risks or opportunities.
Impact materiality
A sustainability matter is material from an impact perspective if the undertaking is connected to actual or potential significant impacts related to the matter on people or the environment over the short-, medium- or long-term. This includes impacts directly caused or contributed to by the undertaking in its own operations, products or services and impacts which are otherwise directly linked to the undertaking’s upstream and downstream value chain, not limited to direct contractual relationships.
Policy
A policy is a set or framework of general objectives and management principles that the undertaking uses for decision-making. A policy implements the undertaking’s strategy or management decisions related to a material sustainability matter. Each policy is under the responsibility of defined person(s), specifies its perimeter of application, and includes one or more objectives (linked when applicable to measurable targets). A policy is validated and reviewed following the undertakings’ applicable governance rules. A policy is implemented through actions or action plans.
Policy objectives
Objectives are specific, direction setting, outcome-based statements. Objectives are defined in the policies translating the undertaking’s strategy.
Sustainability matters
Sustainability factors as defined in Article 2, point (24) of Regulation (EU) 2019/2088 of the European Parliament and the Council, that is environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters; and governance factors.
Sustainability statements
A separately identifiable section or the parts of the management report that contain the sustainability information required by the applicable ESRS.
Transition plan
A transition plan is a specific type of action plan that is adopted by the undertaking in relation to a strategic decision and that addresses: a public policy objective; and/ or an entity-specific action plan that the undertaking decides to organise as a structured set of targets and actions and is associated to: a key strategic decision, a major change in business model; and/or a particularly important action plan in terms of objectives or allocation of resources.
