Impact Materiality - The first steps of CSRD reporting

After defining the key concepts of the European CSRD directive, double materiality and financial materiality, in this article we look at the second part of double materiality, the impact materiality.

This perspective concerns questions that reflect the real or potential significant consequences on people and the environment of a company's operations and its value chain both upstream and downstream.

The purpose of this materiality is to allow the organization toidentify and assess its influence on the economy, the environment and society, for the reporting of the European CSRD directive, which replaces the NFRD.

Our GRI compliant CSRD reporting methodology provides businesses with step-by-step advice on how to determine relevant topics.

To recall the context, The Double Materiality Matrix, and therefore, the definition, evaluation and prioritization of relevant themes, is the keystone of the new ESG Reporting Standard, the European CSRD Directive.

Here are the first steps to identify the topics that are relevant to your company for its CSRD reporting:

• Step 1 - Understand the context of the organization, describe the activities of the organization or company, business relationships, sustainability context, and stakeholders
• Step 2 - Identify real and potential impacts, negative and positive
• Step 3 - Assess their importance, their severity and probability
• Step 4 - Prioritize the most significant for reporting in accordance with the CSRD directive

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Reminder: what is the European CSRD directive?

The CSRD (Corporate Sustainability Reporting Directive) is a European directive that requires companies to publish detailed information on their sustainability performance, covering environmental, social and governance (ESG) aspects. It aims to improve transparency and harmonize extra-financial reporting to avoid greenwashing.

The CSRD concerns large companies, those with more than 250 employees, a turnover greater than 40 million euros or a balance sheet greater than 20 million euros. Listed companies, including some listed small and medium-sized enterprises (SMEs), are also subject to this directive, as well as certain subsidiaries of international groups.

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Why CSRD and its advantages?

The CSRD (Corporate Sustainability Reporting Directive) was created by the European Union to strengthen the transparency and sustainability of companies in terms of extra-financial relationships. Before this directive, European companies did not have clear obligations regarding the publication of information on their environmental, social and governance (ESG) impact. The CSRD came to fill this void by establishing harmonized standards for the communication of these data.

Why the CSRD was created:

• Strengthen transparency: The directive aims to ensure that companies provide comprehensive, reliable and comparable information on their sustainability performance.
• Harmonizing practices: By introducing common standards, it facilitates the comparison of business performance at European level.
• Meeting the expectations of stakeholders: Investors, customers and regulators are demanding more and more transparency on the sustainable practices of companies.

The advantages for businesses:

• Access to finance: Businesses that meet CSRD obligations can attract investors who care about sustainability.
• Reputation building: Compliance with CSRD standards can improve the image of companies with customers and partners.
• Better risk management: By analyzing and publishing accurate information, businesses can better anticipate and manage sustainability risks.

CSRD encourages European companies to incorporate sustainable practices into their activities, while offering them advantages in terms of reputation, financing and risk management.

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STEP 1 - Understand the context of the organization

In this first step, the company creates a macro overview of its activities and business relationships, the sustainability context in which it operates, and the understanding of its stakeholders.

The objective of this preliminary stage is to ensure that all the elements of the organization's context are listed in order to best carry out the following steps of CSRD reporting.

1. The activities of the organization

To know which themes are relevant to the organization, the following elements must be considered:

• The statements of objectives, values or missions, the economic model and the strategies of the organization.
• The types of activities carried out and the corresponding geographical locations.
• The types of products and services offered as well as the target markets.
• The sectors in which the organization is active and their characteristics.
• The number of employees, their status, and demographics.
• The number of workers who are not employed by the organization, their contractual relationship, and the work they do.

2. Business relationships

When an organization wants to identify themes that are relevant to its activities, it must take into account the business relationships it maintains. This includes its business partners, supply chain entities, and any other entities directly related to its operations, products, or services.

The organization should take into account:

• The types of business relationships
• The types of activities undertaken by its partners
• The nature and duration of relationships
• The geographic locations where these business relationships take place

3. The sustainability context

To understand the context of sustainability of its activities and business relationships, an organization must consider the following elements:

• Economic, environmental, human rights and other societal challenges related to its business sectors and the geographic location of its operations (e.g. climate change, poverty, political conflicts).
• The organization's responsibility for the official intergovernmental instruments with which it is expected to comply, such as: ILO, OECD, UN agreements on climate change, human rights, and guidelines for multinational enterprises.
• GRI sector standards describe the sustainability context by business sector and can also help in this step.

4. Stakeholders

The organization must identify its stakeholders across all of its activities and business relationships. It should draw up a comprehensive list of individuals and groups whose interests are affected or could be affected by its activities.

Organizations often think that stakeholders stop at employees, suppliers, customers, and shareholders. But for an exhaustive and accurate vision, we need to go further. So the common categories of stakeholders for organizations are:

• Business partners
• Civil society organizations (NGOs, foundations, foundations, unions, cooperatives, etc.)
• The consumers
• The customers
• Employees and other workers
• The governments
• Local communities
• Shareholders and other investors
• The suppliers
• Vulnerable groups

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STEP 2 - Identify real and potential impacts

In this stage, the organization analyzes the impacts it has already had or could have on the economy, the environment, people and human rights through its activities and business relationships.

They can be:

• Positive or negative
• Short or long term
• Intentional or unintentional
• Reversible or irreversible
• Real (those that have already happened) or potential (those that could happen in the future)

1. Identifications of negative impacts

The first step in due diligence is for the organization to identify the real and potential negative impacts related to its activities, products or services as well as those related to its business relationships.

In some cases, the organization may have difficulty identifying all the negative consequences, for example, due to the multiplicity of its sites or its value chain. In this case, it can conduct an initial assessment to identify areas where they are most likely to be present and significant.

To carry out the initial assessment, the company can:

• Define the scope of the assessment by identifying the general areas of its activities and business relationships where negative impacts are most likely to be present and significant (for example, product lines, suppliers located in specific regions).
• Collect and analyze information on real and potential negative impacts in the general areas identified using sources such as the OECD Guidelines for Due Diligence in Responsible Business Conduct, reports from governments, environmental agencies, international organizations and civil society organizations, international organizations and civil society organizations, representatives of workers and civil society organizations, representatives of workers and trade unions, national human rights institutions, the media, or other experts.

It is important to note that the initial assessment should not be considered as a comprehensive assessment, but rather as a first step in identifying areas where negative effects are most likely to be present and significant. The company will then need to conduct a more detailed assessment to identify specific negative impacts and determine appropriate measures to prevent, mitigate, or offset them.

2. Identifying positive impacts

By identifying and evaluating these potential positive effects, an organization can strengthen its commitment to sustainable development and find new opportunities to create value for stakeholders.

The first example of a positive impact. Let's imagine a company that develops measures to reduce renewable energy costs for its customers. As a result, more customers are able to afford to use renewable energy rather than non-renewable energy, which contributes to the fight against climate change. This may include practices such as installing solar panels on customer roofs or providing financial incentives to encourage the use of renewable energy. These measures are an example of how a company can contribute positively to sustainable development while creating value for its customers and the environment.

The second example of a positive impact is a company that chooses to open a new facility in an area with a high unemployment rate. By hiring and training local unemployed people, the company can contribute to job creation and community development. This type of positive impact can also strengthen the relationship between the business and the local community, which can have long-term benefits for both parties.

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STEP 3 - Assess the importance of the impacts

Step 3 is to assess the importance of the impacts that the organization identified in step 2.

This assessment makes it possible to prioritize them and to take action to deal with them. Assessing the importance of impacts is relevant when the organization cannot deal with them all at once.

This assessment involves quantitative and qualitative analysis, which may require a subjective decision. The organization should consult with stakeholders to assess the importance of its impacts and should also consult relevant internal or external experts. We will be doing a dedicated article on how to consult stakeholders.

1. Assessing the importance of negative impacts

• The extent of a real negative impact is determined by its severity.
• The extent of a potential negative impact is determined by the severity And the probability of the impact. The combination of severity and probability can be called “risk.”

2. Severity of the impact

The severity of an actual or potential negative impact is determined by the following characteristics:

• Magnitude : the degree of severity.
• Ported : the extent, for example, the number of people affected or the extent of environmental damage.
• Irremediable character : difficulty in counteracting or repairing the resulting harm.

The extent of a negative impact can vary depending on the context in which it occurs. For example, the severity of the impact of an organization's water consumption depends on the area where the water is taken.

‍Example: If water is taken from an area of water stress (an area where water resources are limited), the impact will be considered to be more severe than if it is taken from an area with abundant water resources to meet the demand of users and ecosystems.

3. Probability of impact

The probability of a potential negative impact refers to the chance of that impact occurring.

The probability of an impact can be measured or determined qualitatively or quantitatively.

It can be described in different ways:

• In general terms, example: very likely, likely.
• Mathematically using probability, example: 10 out of 100 or 10%.
• Depending on the frequency over a given period of time, example: once every three years.

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STEP 4 - Prioritize the most significant impacts for CSRD reporting

In this step, an organization prioritizes the impacts of its activities according to their importance in order to determine the themes that will be included in its reporting.

To do this, the organization ranks them in descending order of importance and sets a threshold for deciding which ones it will focus on. Impacts are grouped into themes to facilitate prioritization, integration into the matrix and to determine the number of themes that will be included in its ESG reporting

Last but not least -The selection criterion for determining whether a theme is relevant for reporting is the importance of the impact, not the difficulty of reporting on the theme or the fact that the organization is not yet managing the theme. If the organization does not manage a relevant theme, it should indicate the reasons or plans to manage the theme to comply with the requirements of the standard.

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All of these steps guide you to the matrix of double materiality.

The dual materiality matrix, within the framework of the CSRD (Corporate Sustainability Reporting Directive), is a key tool for companies to identify and prioritize the most relevant sustainability themes. It takes into account two major aspects:

• Financial materiality : focuses on ESG (environmental, social and governance) factors that can influence a company's financial performance, such as risks related to climate change or resource management.
• Impact materiality : looks at the effects of company activities on the environment, society, stakeholders, and human rights.

This matrix is based on the ESRS (European Sustainability Reporting Standards), which provide a normative framework for structuring the publication of sustainability reports based on these two perspectives. The ESRS help companies comply with CSRD obligations by integrating both financial issues and CSR impacts into their report.

In conclusion, the dual materiality matrix, guided by the ESRS, allows companies to select the most relevant ESG topics for their sustainability report and publication, while ensuring compliance with regulatory obligations.

Consult our experts and guides to help you prepare your materiality matrix and identify your relevant themes.

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What is an ESRS?

The ESRS (European Sustainability Reporting Standards) are European standards that define the criteria to be met for the publication of corporate sustainability reports, in accordance with the CSRD. They cover a wide range of topics, such as carbon emissions data, environmental, social, and governance (ESG) performance.

ESRs help businesses structure their information in a clear and consistent manner, ensuring that the data collected meets transparency requirements. These standards make it possible to produce comprehensive and standardized reports that include environmental issues, such as carbon emissions, but also social and governance aspects.

In short, the ESRS set the rules that companies must follow to establish sustainability reports in accordance with European standards, guaranteeing the reliability and comparability of the information published.

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Conclusion

In conclusion, the implementation of the CSRD marks an important step in the evolution of CSR disclosure obligations for companies. Now, businesses need to produce reports that are no longer limited to financial performance alone, but that also incorporate data on their environmental, social, and governance impacts. The dual materiality matrix, based on ESRS (European Sustainability Reporting Standards), is a central tool to help companies prioritize the most relevant ESG issues.

This normative framework not only makes it possible to meet the increasing expectations of stakeholders in terms of sustainability, but also to comply with the CSRD's transparency requirements. Businesses must now carefully assess both the financial impacts of sustainability factors (such as climate-related risks) and the effects of their activities on society and the environment.

The application of ESRS standards ensures that the information published in these reports is comparable and meets European regulatory expectations, while reflecting the sustainable management of activities. By relying on these standards, companies can not only meet their publication obligations, but also strengthen their commitment to sustainable development, thus ensuring their long-term resilience in a changing economic and social context.

Thus, the transition to sustainable compliance becomes a strategic lever for all companies subject to these new regulatory requirements.