Material #3: Double materiality
Earlier this month, Europe’s “Corporate Sustainability Reporting Directive” came into effect. It requires European companies, and non-EU companies with a significant presence in the region, to report on sustainability impacts. The breadth of companies covered will expand through to 2028.
The CSRD is particularly significant for requiring a “double materiality” approach. The European Commission’s website puts it more simply than much of the commentary about it. It says that companies are required to:
“Publish regular reports on the social and environmental risks they face, and on how their activities impact people and the environment.”
These two dimensions have also been described as reporting “outside in”, on financial materiality - the ways that social and environmental considerations affect the company’s bottom line. And reporting “inside out”, on impact materiality - the significant impacts of their operations on the environment and society.
Early in my career I worked in corporate sustainability reporting. I still see its value, recognizing that what gets measured gets managed (though immeasurables need managing too). However an over-emphasis on reporting requirements as a starting point can risk generating large amounts of information - and the related processes around that reporting – which can actually divert attention and resources from the strategic business model considerations that could align company operations more effectively with social, environmental and economic outcomes.
In addition, there is a recurrent tension when investor requirements for quarterly financial reports demonstrating high returns can exacerbate the environmental and social risks that sustainability reporting seeks to reduce in the first place.
While the concept of double-materiality gains steam, in the United States an “anti-ESG” push-back is making some firms more resistant to disclosure. Handled thoughtfully, both dynamics can be harnessed to hone corporate strategy towards more focused impact. Towards an approach that considers a companies’ goals, its people, the communities where it operates, its supply chains, and interactions with policy-makers and governments in a joined-up way.
This will mean three shifts:
Towards board-room consideration of social and environmental context, embedding the strategy through and across all functions
Towards a more integrated approach to materiality rather than a topic-by-topic approach. Recognizing, for example, that all action on climate change has social consequences, so the two need to be considered together
And towards innovation in business models themselves, with the related shifts in finance to help that innovation happen.
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