Impact Materiality - The first steps in CSRD reporting

Having defined the key concepts of the European CSRD directive, i.e. double materiality and financial materiality, this article looks at the second aspect of double materiality, i.e. impact materiality. 

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

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

Our GRI-compliant CSRD reporting methodology provides companies with step-by-step guidance on how to identify relevant themes.

By way of background, the Double Materiality Matrix, and thus 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 in identifying the relevant themes for your company's CSRD reporting:

• Step 1 - Understand the organization's context, describe the organization's or company's activities, business relationships, sustainability context and stakeholders.
• Step 2 - Identify actual and potential negative and positive impacts
• Step 3 - Assess their significance, severity and probability
• Step 4 - Prioritize the most significant for CSRD-compliant reporting

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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 CSRS applies to large companies, i.e. those with more than 250 employees, sales in excess of 40 million euros or a balance sheet in excess of 20 million euros. Listed companies, including certain listed small and medium-sized enterprises (SMEs), are also subject to this directive, as are certain subsidiaries of international groups.

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Why CSRD and its benefits?

The CSRD(Corporate Sustainability Reporting Directive) was created by the European Union to strengthen corporate transparency and sustainability in extra-financial reporting. Prior to this directive, European companies had no clear obligations regarding the publication of information on their environmental, social and governance (ESG) impact. The CSRD fills this gap by establishing harmonized standards for the communication of such data.

Why CSRD was created :

• Enhancing transparency: The directive aims to ensure that companies provide complete, reliable and comparable information on their sustainability performance.
• Harmonizing practices: By introducing common standards, it makes it easier to compare company performance at European level.
• Meeting stakeholder expectations: Investors, customers and regulators are increasingly demanding transparency on companies' sustainable practices.

Benefits for companies :

• Access to finance: Companies that comply with CSRD obligations can attract sustainability-minded investors.
• Enhanced reputation: Compliance with CSRD standards can improve a company's image with customers and partners.
• Better risk management: By analyzing and publishing accurate information, companies can better anticipate and manage sustainability-related risks.

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

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STEP 1 - Understanding the organization's context

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

The aim of this preliminary stage is to ensure that all the elements of the organization's context are listed, so that the following stages of CSRD reporting can be carried out as effectively as possible.

1. The organization's activities

To determine which themes are relevant to your organization, consider the following points:

• Objective, value or mission statements, business model and organizational strategies.
• Types of business activities and corresponding geographical locations.
• The types of products and services offered, and the markets targeted.
• The sectors in which the organization is active and their characteristics.
• The number of employees, their status and demographic characteristics.
• The number of workers not employed by the organization, their contractual relationship and the work they perform.

2. Business relationships

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

The organization must take into account :

• Types of business relationships
• Types of activities undertaken by our partners
• The nature and duration of relationships
• Geographical locations where these business relationships take place

3. Sustainability context

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

• Economic, environmental, human rights and other societal challenges related to its business sectors and the geographical location of its operations (e.g. climate change, poverty, political conflicts).
• The organization's responsibility with regard to 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.
• The GRI sector standards describe the sustainability context by business sector, and can also help at this stage.

4. Stakeholders

The organization must identify its stakeholders across all its activities and business relationships. It must draw up a complete list of individuals and groups whose interests are 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. Common stakeholder categories for organizations are therefore :

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

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STEP 2 - Identify actual 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
• Actual (those that have already occurred) or potential (those that could occur in the future)

1. Identifying negative impacts

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

In some cases, it may be difficult for the organization to identify all the negative consequences, for example, due to the multiplicity of its sites or value chain. In this case, it can carry out an initial assessment to identify the 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 (e.g. product lines, suppliers located in specific regions).
• Collect and analyze information on actual and potential negative impacts in the general areas identified, using sources such as the OECD Due Diligence Guidelines for Responsible Business Conduct, reports from governments, environmental agencies, international and civil society organizations, workers' and trade union representatives, national human rights institutions, the media or other experts.

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

2. Identifying positive impacts

By identifying and assessing 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 positive impact. Imagine a company that develops measures to reduce the cost of renewable energy for its customers. As a result, more customers are able to afford to use renewable energy rather than non-renewable energy, helping to combat climate change. This can include practices such as installing solar panels on customers' roofs or providing financial incentives to encourage the use of renewable energies. These measures are an example of how a company can make a positive contribution to sustainable development while creating value for its customers and the environment.

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

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STEP 3 - Assessing the significance of impacts

Step 3 involves assessing the significance of the impacts identified by the organization in step 2.

This assessment enables them to be prioritized and measures to be taken to deal with them. Assessing the significance of impacts is relevant when the organization cannot deal with them all at once.

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

1. Assessing the significance of negative impacts

• The significance of a real negative impact is determined by its severity.
• The significance of a potential negative impact is determined by the severity and probability of the impact. The combination of severity and probability can be called the "risk".

2. Severity of impact

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

• Magnitude: the degree of severity.
• Scope: the extent, e.g. the number of people affected or the extent of environmental damage.
• Irremediable nature: difficulty in counteracting or repairing the resulting damage.

The extent of a negative impact can vary according to 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 abstracted.

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

3. Probability of impact

The probability of a potential negative impact refers to the chance of this 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, e.g. very probable, probable.
• Mathematically using probability, e.g. 10 out of 100 or 10%.
• By frequency over a given period, e.g. once every three years.

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STEP 4 - Prioritize the most significant impacts for CSRD reporting

In this stage, an organization prioritizes the impacts of its activities according to their importance, to determine which themes 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 to focus on. Impacts are grouped into themes to facilitate prioritization and inclusion in the matrix, and to determine the number of themes to be included in its ESG reporting.

Last but not least - The selection criterion for determining whether a theme is relevant for reporting is the significance 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 must indicate the reasons or plans for managing the theme in order to comply with the requirements of the standard.

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All these steps lead you to the double materiality matrix

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

• Financial materiality 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: examines the effects of the company's 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 sustainability reporting based on these two perspectives. The ESRS help companies to comply with CSRD obligations by integrating both financial and CSR impacts into their reporting.

In conclusion, the ESRS-guided double materiality matrix enables 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? 

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, and environmental, social and governance (ESG) performance.

ESRS help companies to structure their information in a clear and consistent way, ensuring that the data collected meets transparency requirements. These standards enable the production of comprehensive, standardized reports that include not only environmental issues such as carbon emissions, but also social and governance aspects.

In short, the ESRS lay down the rules that companies must follow to produce sustainability reports that comply 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 milestone in the evolution of CSR reporting obligations for companies. From now on, companies must produce reports that are no longer limited to financial performance alone, but also include data on their environmental, social and governance impacts. The double 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 growing sustainability expectations of stakeholders, but also to comply with the CSRD's transparency requirements. Companies 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 sustainable business management. By relying on these standards, companies can not only meet their disclosure obligations, but also reinforce their commitment to sustainable development, ensuring their long-term resilience in a changing economic and social context.

This makes the transition to sustainable compliance a strategic lever for all companies subject to these new regulatory requirements.