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When it comes to setting strategy, the CSRD specifies another important activity: it requires executives to understand and manage any significant impacts that their company has on the environment and society.
As it is, leaders often consider sustainability topics in terms of how those topics could affect the company’s finances—an “outside-in” view of materiality. Physical climate hazards such as floods and wildfires, for example, can damage property and disrupt operations. The CSRD obliges executives to take an “inside-out” perspective, too, by looking at their company’s environmental and social impacts and managing the most significant ones. This two-way perspective on what topics matter is known as “double materiality”—and adopting it will involve an evolution in management practice.
Many investors do want the inside-out view: in our survey, 60% agree that it is important for companies to report their impact on the environment and society. Leading executives already manage certain external impacts, whether to fulfil their company’s purpose or to safeguard their company’s licence to operate—witness the 5,000 or so businesses that have committed to set science-based targets for reducing their carbon emissions.
Still, formally judging which external impacts are material is an emerging practice, and few standards exist to guide managers. (The Global Reporting Initiative, a long-standing body that sets voluntary standards for sustainability reporting, refocused its impact standards on materiality in 2021.) The typical approach involves assessing the relevance of impacts based on feedback from stakeholders, such as investors and employees and customers, and input from management.
The CSRD can help executives prioritise external impacts, for it prescribes clearer methods of assessing materiality from the inside out. The directive also charges executives with considering more external impacts than usual—for example, the effects of producing and using microplastics. In the CSRD’s social category alone, three of the four topics include external impacts.
To perform its first impact materiality assessment, one consumer-goods company took a list of common sustainability matters for its sector, mapped those topics onto its value chain using a tool developed for this purpose and drew out the cascading impacts that its activities could have. Managers then scored each impact on multiple scales: positive to negative, actual to potential (over several time frames), localised to widespread, minor to major, and remediable to permanent. Knowing the high-materiality impacts, executives devised plans to manage and report on them.
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