In this series, we explore several under-the-radar EU Corporate Sustainability Reporting Directive resources published over the summer. U.S.-based multinationals will find these resources helpful as they prepare for CSRD compliance.
The last post in this series discussed EFRAG's study entitled Implementation of ESRS: Initial Observed Practices from Selected Companies. For that post, see here.
Ten Waypoints for CSRD Compliance
In this post, we discuss 10 Waypoints for CSRD – double materiality, published in July by the Dutch Authority for the Financial Markets. The AFM has supervisory responsibility for the operation of the Dutch financial markets.
In its report, the AFM provides ten "waypoints" that can support companies in implementing the double materiality analysis in their reporting. The waypoints are based on both the European Sustainability Reporting Standards developed pursuant to the CSRD and good practices that the AFM already is seeing in annual reporting from Dutch listed companies. The report takes into account research into 2023 annual sustainability reporting by 29 large listed issuers, with a focus on disclosure themes relating to double materiality.
In contrast to the prior posts in this series, the AFM's report is focused primarily on disclosure, as a roadmap for Dutch public companies that will be reporting under CSRD for fiscal 2024. However, the report provides useful insights that will inform the CSRD compliance approach and disclosure of companies that do not come under the AFM's supervision (most readers of this post). Most helpful for many companies will be the examples of fiscal 2023 reporting practices, which are intended to provide guidance on approaches already being seen in the market.
The ten waypoints which, as noted above are based on the ESRS, are summarized below. In some respects, the good practices discussed in the report go beyond the requirements of the ESRS.
Stakeholder engagement: Show the manner in which stakeholders are engaged
- Be transparent on the representativeness of stakeholder
engagement.
- Companies should disclose the selection process of represented stakeholders, including the selection criteria, the communication process and the information sources used.
- Stakeholder input should be expanded with literature from interest groups and science.
- Disclose inputs received from stakeholders.
- Clearly explain inputs and disclose how they are subsequently used.
- When reporting on stakeholder input, disclose the matters covered, the priorities put forward by stakeholders and the underlying motivations. Link feedback to impacts, risks and opportunities.
Due diligence: Identify the sustainability matters
- Use due diligence to identify sustainability matters.
- Due diligence identifies both the main positive and adverse impacts, as well as risks and opportunities.
- It is important that due diligence covers the entire value chain, including a company's products, services and business relationships.
- Use international frameworks, such as the OECD Guidelines.
- The UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct and the OECD Due Diligence Guidance for Responsible Business Conduct are noted. The frameworks used should be disclosed.
- Disclose the relationship between due diligence and the double
materiality analysis.
- Disclose how decisions and outcomes of the due diligence process are related to the double materiality analysis.
- Disclose the expected timeframe for implementing actions both internally and externally.
Double materiality analysis: disclose the analysis in a transparent manner
- Disclose the role of the value chain.
- Value chains are inherently complex, with material impacts often occurring both upstream and downstream in the value chain.
- Users of annual reporting need a thorough understanding of the value chain's role in the double materiality analysis and the company's business model.
- Connect the business activities to identified material topics.
- Provide context on the relationship between disclosure topics and business operations. Explain how the topics are relevant for business operations and, where needed, for particular geographic regions.
- Provide insight into the materiality assessment of
sustainability topics.
- Provide a clear and understandable explanation of both the positive and negative effects of sustainability topics and their timeframes, as well as the process, methods, weighting and criteria applied for establishing materiality thresholds.
- Indicate how uncertainties have been addressed in assessing materiality. This could include uncertainties about the future, the availability and reliability of data, estimates or using proxies. Companies also can make use of scenarios to give users insight into the different uncertainties and outcomes. For a further discussion of some of these concepts, see this Ropes & Gray post.
- Identify the scale, scope and irremediability of impacts. These concepts are further discussed in this Ropes & Gray post.
- Report transparently about excluded sustainability topics.
- Disclose the materiality of impacts, risks and opportunities.
- Sufficiently highlight the financial impacts of double materiality.
- Provide a visualization of the most important sustainability topics, such as in matrices or bar charts. The AFM report notes that EFRAG's materiality assessment implementation guidance provides guidelines for visualizing financial materiality. EFRAG's Materiality Assessment Implementation Guidance (IG 1) is discussed in this Ropes & Gray post.
- Report on the relationship between impact and risk in the
short- and long-term.
- Impact and risk may be directly or indirectly correlated in certain time periods.
- It is important for companies to clearly explain how they take medium- and long-term implications into account.
Next up, a German academic study.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.