A credible materiality assessment is above all based on direct engagement of the stakeholders of the organisation. This means internal and external stakeholders: so, for example, employees and management, shareholders and investors, suppliers, banks, clients, local communities and third sector organisations, and the media. The outcome of their engagement is a clear, informed and balanced vision of priority issues which the company will need to focus on along its journey to sustainability.

 

In a ‘traditional materiality’ the focus is on the impact (“impact materiality”). From this perspective, a sustainability issue or topic is material if it has a significant impact on the environment, individuals and society. This is an “inside-out” perspective because it looks from the inside outwards, meaning that it takes into account the effects the business has on outside (people, society and planet). It can be represented in various ways though its is generally plotted on a matrix with two axes (‘materiality matrix’).

 

The CSRD Directive and new ESRS Standards make “double materiality” a key concept. In a double materiality, the inside-out (impact materiality) perspective is broadened with the other side of coin, outside-in (financial materiality). From the latter perspective, a sustainability issue is deemed relevant if it has or could have significant financial effects on the organisation. Generally speaking, it is relevant if it creates or can create value, if it destroys or can destroy corporate value. It is the sum of these two perspectives combined (inside-out and outside-in) which determine the materiality or otherwise of a topic within the context of CSRD.

 

In conclusion, new ESRS standards require that any topic deemed material from this double perspective must not only be addressed with clear actions in the company’s sustainability strategy but also must necessarily be disclosed in the Sustainability Report.