CSRD compliance introduces many challenges and opportunities for companies. In order to improve transparency, avoid greenwashing and share comparable non-financial information, companies are required to carry out an initial exercise to identify their environmental, social and governance priorities. This initial exercise is the cornerstone of the whole approach the company will subsequently adopt and publish. It is based on a double materiality analysis. This articles details the steps to be followed as part of a series. This first article helps dealing with this: identifying sustainability matters and their respective impacts, risks and opportunities (IROs).
Stage 1: Review of business model and value chain
The double materiality analysis makes it possible to identify sustainability issues and assess them according to a dual prioritization exploring both impact and financial perspectives. Before proceeding with this step, it is crucial to determine the sustainability issues that are relevant to the company’s activities.
This first step consists of an analysis of the company’s activities, its business model, its commercial relationships and its value chain (upstream and/or downstream) (linked to the SBM-1 ESRS), which includes the following elements, among others:
- Analysis of the business plan, strategy, financial statements and, where relevant, investor information;
- Mapping of the company’s activities, products/services and geographical locations;
- Mapping the company’s business relationships and the upstream and/or downstream value chain, including the type and nature of business relationships; and
- Identifying the scope of the information to be reported (its own activities and the upstream/downstream value chain) for the materiality assessment.
Once the value chain and the business model have been clarified and validated, the company is in a better position to identify sustainability issues appropriate to its activities and the economic climate.
Step 2: Identifying sustainability issues on the basis of the ESRS
The company must always take into account its own specific circumstances when determining the list of sustainability issues to be analysed during the double materiality exercise. This is why it is important to have analysed the business model and value chain beforehand.
The list of sustainability issues is based on EFRAG‘s international standards: the ESRS (European Sustainability Reporting Standards) aligned with the TCFD and the ISSB to ensure that all the important ESG topics are covered. Indeed, when a company determines its list of sustainability issues, it must consider the 12 ESRS (environmental, social and governance cross-cutting standards). Each ESRS is divided into several sub-topics, and it is up to the company to analyse which ones are relevant to its analysis. The list of ESRS is a tool to support the company’s materiality assessment. However, the company can also identify sectoral sustainability issues, in other words issues that are specific to its activities beyond the universe covered by the ESRS. To do this, the company can refer to other international standards to help it identify these issues, such as GRESB, GRI or SASB, for example.
For each sustainability issue identified, the company will have to assess its level of importance, in other words its materiality, in order to define the structure of its extra-financial report. Indeed, the CSRD approach requires the company to publish information on the sustainability issues that it has analysed as material during its double materiality analysis.
Finally, step 2 involves identifying the issues that are potentially material/important for the company. This identification may be supported by the involvement of internal or external stakeholders such as customers, employees and suppliers, but this is not compulsory under the CSRD.
Stage 3: Identifying the impacts, risks and opportunities of sustainability issues
In order to determine the materiality of the sustainability issues, the company must carry out an analysis based on the impacts, risks and opportunities (IRO) of each sustainability issue. It is important to note that an issue does not necessarily have one impact, one risk and one opportunity; it may have several or none at all. As a reminder:
- Impacts are used to identify the materiality of the impact of sustainability issues. In other words, they are the significant impacts on the environmental, social and governance dimensions.
- Opportunities and risks determine the financial materiality of sustainability issues. Risks and opportunities are those that affect or could reasonably affect the company’s financial position, financial performance, cash flows, access to financing or cost of capital in the short, medium or long term, and are the starting point for assessing financial materiality.
When identifying and assessing the impacts, risks and opportunities in the company’s value chain to determine materiality, the company focuses on those areas where impacts, risks and opportunities are considered likely to occur based on the nature of the activities, business relationships, geographies or other factors involved.
Stakeholder engagement can be a tool for strengthening the identification of IROs. In fact, the double materiality analysis helps to reinforce the company’s CSR strategy, but also to ensure that its commitments are fully transparent to its internal and external stakeholders. It is therefore important to involve stakeholders throughout the double materiality exercise, particularly in the identification of IROs.
Conclusion
The steps described in this article outline the initial stages to be adopted when carrying out a materiality analysis. This is how we work with companies working with Ksapa to comply with CSRD. By following the same procedure, the company can ensure that it complies with the CSRD and defines a CSR strategy that is relevant to its activities and the current situation. To continue the double materiality exercise, it is important to analyse the double importance of the issues by identifying the IROs. This assessment stage is described in the next article, ‘Setting up the CSRD – Blog 2 – Assessing impact and financial materiality’.
Solène part of Ksapa's consulting team, working notably on human rights and sustainability.
With a keen interest for climate issues and circular economy, she has previously worked within Beiersdorf’s Sustainability Team where she tackled issues of responsible sourcing and human rights.
Solène holds a Master's in marketing and communication, as well as a master in creative industries and social innovation from the EDHEC Business School.
She speaks French, English and Spanish.
