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CSRD: Mastering Financial Materiality

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Words by Alex Wilson
Date 2024-10-28

The Corporate Sustainability Reporting Directive (CSRD) deadline is looming, and the pressure is on for many companies to achieve full compliance. One of the key concerns surrounding the CSRD is this concept of double materiality, specifically identifying those ESG issues that are financially material to your business.

Our work with clients and an analysis of reports from early adopters of CSRD reporting reveals several hurdles companies are facing when looking at financial materiality. This article addresses these regulatory challenges, offering practical advice, best-practice examples, and highlighting common reporting pitfalls to help you navigate the complexities of CSRD compliance.

Key pressure points

Our CSRD reporting review unearthed three core challenges. These are outlined below alongside the CSRD guidance that aims to alleviate some of the reporting burden.

Data availability: Meeting the CSRD’s stringent data requirements can be daunting. Many companies lack sufficient data to cover the metrics and targets linked to each material topic. In fact, 59% of respondents to PwC’s 2024 Global CSRD survey cited data availability and quality as the most significant hurdle for CSRD reporting.

Fortunately, the CSRD acknowledges this and encourages reporters to be transparent in their data capabilities, disclosing limitations and identifying time frames in which they can meet their reporting obligations.

Subjectivity: Limited data and evolving methodologies often necessitate the use of estimates and subjective judgements, particularly when quantifying sustainability metrics. This inherent subjectivity can create uncertainty.

However, the CSRD recognises the role of estimates and assumptions in sustainability reporting, emphasising that their use does not compromise the report’s integrity provided these estimations are clearly documented and auditable.

Value chain reporting: Understanding the impact of material topics across complex supply chains can be a significant obstacle. Many companies struggle to determine how their material ESG issues will impact different elements of the value chain.

The CSRD offers flexibility here, acknowledging data collection limitations and allowing for the use of sector-averages and other proxies. Furthermore, for the first 3 years of reporting the CSRD offers leniency, allowing companies to explain their efforts to obtain value chain information and their implementation for improving data collecting.

The above is demonstrative of the evolutionary approach the CSRD expects companies to take in their journey to full regulatory compliance. The flexibility baked into the guidance allows companies the time to develop ESG databases and foster stronger information-sharing networks across value chains.

Addressing common reporting gaps

Many companies have embarked on their CSRD reporting journey early. However, our analysis of these early adopters has revealed some recurring reporting gaps, including ambiguous timelines, vague materiality thresholds, opaque reporting around double materiality methodologies and a lack of distinction between financial opportunities and risks.

Leading the way in best practice financial materiality reporting are companies like Arla and Ørsted, who successfully manage to avoid some of these common pitfalls. Arla transparently identifies the limitations of its financial materiality assessment, acknowledging its use of qualitative rather than quantitative thresholds for assessing financial impact.

Likewise, Ørsted showcases a high degree of transparency by specifying the financial accounts used to determine its financially material topics. It also uses an engaging and informative infographic to present its complex value chain, identifying clearly where each of the material issues has an impact along the value chain.

Recommendations for best practice

To assist you in your journeys towards full CSRD compliance we have outlined our three top recommendations for best practice reporting, aimed at helping you to avoid some of the recurring reporting gaps identified above.

Embrace transparency: Openly acknowledge areas where subjective judgements or estimates were used and outline plans for improvement.

Detailed methodology: Clearly describe your methodology, including the financial accounts considered, quantitative thresholds employed, and expertise involved in the decision-making process.

Cross-Functional Collaboration: Foster collaboration between business teams to break down silos, optimise knowledge sharing, and build a robust reporting network.

In conclusion, navigating the complexities of CSRD requires a proactive and transparent approach. By addressing the challenges of data availability, subjectivity, and value chain reporting, companies can ensure their financial materiality reporting aligns with CSRD requirements and effectively communicates their commitment to a sustainable future. Embracing our best practice recommendations and learning from leading examples will pave the way for clear, confident and compelling financial materiality disclosures.

Click here to read our full guidance on CSRD: a focus on financial materiality.

To learn more about our Corporate & Sustainability Communications expertise, please contact Selabe Kute, Sustainability & Corporate Communications Director, selabe.kute@designbridge.com.

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