CSRD implementation is challenging for many – if not most – companies. The expansive law has companies thinking about material issues and disclosures in new ways, largely due to its double materiality lens. For the first time, companies are being asked to report not only on issues that pose material risks and opportunities to them but on issues they materially impact. This definition of “material” expands the universe of issues subject to reporting and some companies are struggling to reign in their list of material topics. This was a major theme during my recent panel with Gabriel Webber Ziero of Swiss Re at Inside Practice’s ESG Data, Reporting & Disclosures conference in London.
So why do companies tend to overcorrect on their list of material issues? There are several reasons. One is the evolving nature of ESG reporting. A few short years ago, voluntary ESG reporting often took the form of “corporate social responsibility reports” (CSR) reports. CSR reports were an important step towards mandatory reporting of today, but with their voluntary nature came a lack of uniformity and standardization. Companies were using a variety of frameworks, and reports tended to be more narrative than quantitative. They also “told the story” of a company’s sustainability journey – filled with lighter “feel-good” statements on how many trees a company planted on Earth Day, or how the annual volunteer day turned out. Well-meaning, but would struggle to fit under the umbrella of “material” even under the CSRD’s double materiality standard.
Fast forward to today. Companies must now disclose sustainability information in line with the rigor of financial reporting and on material topics. Many feel that the work covered in the CSR reports of years past is important and therefore material. However, this isn’t always the case.
Conflating “important” with “material” can lead to bloated reports that struggle to answer the hard questions about how specific issues relate to underlying company strategy.
This isn’t to say that companies can’t be proud of this work and shouldn’t tell anyone about it. There’s plenty of room to market these efforts (assuming you do so responsibly and without greenwashing) outside of reports filed with regulatory bodies. You can find ways to message around these efforts, CSRD reports just aren’t the right venue. Mandatory sustainability reporting should be a focused exercise that aims to be succinct and direct. Letting in fluff can open companies up to a variety of unforeseen consequences, both legal and reputational. Regulators and investors will expect material information to be rigorously vetted and material issues to be managed through appropriate governance channels. Adding unnecessarily to your list of material issues creates more opportunities for misstatements and obscures the truly material issues facing your company.
Our members can learn more about materiality determinations here.
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