The European Union’s Corporate Sustainability Reporting Directive (CSRD) now requires companies to conduct a ‘double materiality’ assessment.
This dual approach integrates both the financial impacts and societal impacts a company has on the environment. Torolf Hamm, senior director in the Climate Practice at WTW, highlighted the significance of this directive during a discussion with Environmental Finance.
Hamm noted that this would drive organisations to consider more deeply how their operations impact the climate and, conversely, how these environmental factors affect their financial health.
According to Hamm, this mandate from the EU will apply to an estimated 40,000 firms globally, including many outside the Union. The directive is expected to bring a substantial increase in the number of companies that report on climate-related risks within their financial statements. Currently, data from Carbon Tracker indicates that only 37% of the world’s most polluting companies report climate-related financial risks in their financial statements.
Hamm shared insights from a poll conducted during a June conference hosted by WTW, revealing that about 19% of companies had already started conducting materiality assessments. This move is part of a broader push to provide investors and stakeholders with more comprehensive information on how climate-related issues are being integrated into corporate financial strategies.
Furthermore, Hamm discussed the challenges of quantifying the impact of a company’s operations on the environment but suggested that integrating sustainability into investment planning could provide a clearer picture. He proposed that companies consider the potential sustainability impacts when planning significant projects, such as the construction of large facilities, to enhance local communities.
The conversation around materiality assessments extends to measuring impacts on biodiversity, a topic that Hamm mentioned is of increasing concern among corporations. He suggested starting with the identification of regions with high biodiversity intactness as a baseline for measuring environmental impact.
In summary, the implementation of the double materiality assessment is set to change the landscape of financial reporting, making environmental considerations an integral part of the financial statements for thousands of companies worldwide. This regulatory push is aimed at enhancing transparency and promoting a more sustainable global business practice.
WTW senior director in the Climate Practice Torolf Hamm said, “Clients now are arguably more incentivised to look at these topics because of this push from regulators for disclosures – but with the caveat that there is also a big question mark for many clients that we are engaging with, who say: ‘There is a lot that we need to consider, we’re a bit lost. Can you help us perhaps with a shortlist of the key things to focus on?”
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