Exploring context-based sustainability for CSRD’s Double Materiality Assessment - KPMG Netherlands (2024)

Sustainability reporting and the CSRD

In an effort to curb negative impacts and increase positive impacts from companies, by mandating transparency on sustainability performance, the EU implemented the CSRD. It is estimated that from 2024 and onwards, around 49,000 EU-based companies have to comply with this reporting framework. The fundamental starting point of the CSRD is the Double Materiality Assessment (hereafter DMA), which involves a process in which a company has to assess the importance of ESG (Environmental, Social & Governance) matters based on impact and financial materiality. The purpose of the DMA is to determine which sustainability matters (topics) are material for an organization. Based on the identified material matters, a company determinesits material information (disclosure requirements) that will make up the sustainability statements to be presented in the management report.

Expectations of an impact materiality assessment

For now, we will focus on the assessment of the severity of an impact. In the ESRS, there is no prescribed scale or methodology to assess this. This leaves room for flexibility for organizations to apply their own operational context. A common practice is a 5-point scale on which an impact is scored. Even though the most objective evidence for the assessment of materiality would be based upon quantitative measures⁷, this is not mandatory and would still leave room for subjectivity or discussion. But even quantitative information does not by definition result in an objective assessment of the impact. For example, a company could comply with its permit/legal obligations by consuming water or having emissions below the legal thresholds and therefore conclude their impact to be a 3 on a 5-point scale. The question is however, how do these thresholds relate to the environment the company is operating in. How much water could the company consume without exceeding the supply or how much emissions could be emitted without surpassing safe environmental limits. As stated in the EFRAG Implementation guidance IG 1 Materiality Assessment the level of comfort sought by a company from quantitative information depends on whether there is scientific validated data and on whether consensus is reached on the given impact⁸. Making the link with the already defined planetary boundaries (e.g. GHG emission and water use) and societal boundaries (e.g. living wage and gender equality) will give context to the organization’s impact and help to objectively assess the severity of an impact. Context can therefore bring more objectivity to a DMA.

The definition of sustainable development in the report Our Common Future¹⁰(commonly known as the Brundtland Report) also reflects the importance of context.

"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs"

Following this, the importance of context in reporting was introduced in 2002 by the GRI, which presented sustainability context as one of its reporting content principles. Sustainability context means that an organization should seek to place its performance in the larger context of ecological, social or other limits or constraints, where such context adds significant meaning to the reported information¹¹. However obvious the importance and relevance of context might seem, a Danish study (2017)¹² of more than 40,000 sustainability reports showed that only 5% of companies report on ecological boundaries and only 0.3% mention context when it concerns product development or business strategy. The importance of science-based objectives is also stressed by the European Securities and Markets Authority¹³ (hereafter ESMA):

"ESMA stresses the importance of clarifying how the climate-related targets are linked and instrumental to meeting any preset entity-specific or public policy objectives and whether they are science-based"

Sustainable Development Performance Indicators

In November 2022, the UNRISD published a user manual for the Sustainable Development Performance Indicators (hereafter SDPI)¹⁵and set the scene for what they call Authentic Sustainability Assessment. During the SDPI project UNRISD found out that current conventional environmental, social and governance reporting are insufficient to effectively measure progress toward sustainability¹⁶. In the May 2023 research and policy brief they state¹⁷:

"Greenwashing – or social washing – today has taken on a new dimension: it no longer simply is about misinformation and obfuscation to hide another reality, but rather, it is about crafting a system of sustainability accounting and disclosure that is not fit for purpose"

The SDPI’s could be the starting point to bring about the relationship between planetary boundaries and societal boundaries with individual companies. This perspective and the underlying information can be used for more objectivity in DMAs.