The materiality analysis

They can also serve as a starting point for a sustainability strategy or the prioritisation of measures. The materiality analysis is therefore also referred to as the foundation of the sustainability strategy and reporting.

Companies that have already prepared sustainability reports - whether voluntarily or due to a reporting obligation - have also determined the topics for their sustainability reports on the basis of materiality analyses. How such an analysis is carried out is usually defined in the reporting standards. The sustainability reporting standards usually also specify how the topics are to be selected.

The CSRD and affected companies

The CSRD, an EU directive that must be transposed into national law by the EU member states, requires large companies to prepare a sustainability report from 2024-2028 - depending on which of the following criteria they fulfil

1. Financial year from 1 January 2024 for companies already subject to the previous sustainability legislation, the NFRD (reporting in 2025 on the data from 2024)
   
2. Financial year from 1 January 2025 for large companies that are not currently subject to the NFRD (reporting in 2026 on the data from 2025) According to the German Commercial Code, large companies are those that fulfil at least two of the following three criteria

• Total assets > 25 million euros
• Net sales > 50 million euros
• Annual average number of employees > 250
• Financial year from 1 January 2026 for listed SMEs as well as smaller and non-complex credit institutions and captive insurance companies (reporting in 2027 on the data from 2026)

Double materiality: two perspectives in the assessment

The CSRD requires these companies to publish an annual sustainability report in accordance with the European Sustainability Reporting Standards (ESRS). These standards were developed specifically for this purpose and specify how a materiality analysis should be carried out. The ESRS follow the principle of "double materiality" (sometimes also referred to as "dual materiality"). This means that two perspectives should be taken into account in the process for determining the most important sustainability issues:

Inside-out: On the one hand, consideration should be given to how the various sustainability issues impact the environment or society. These interactions are referred to as (positive or negative) impacts.

Outside-in: On the other hand, consideration should be given to how environmental or social changes affect the financial performance of the company. These interactions are referred to as (sustainability-related) risks or opportunities.

Materiality analysis is only the first step

For companies that are required to report in accordance with the CSRD, the materiality analysis is the first step in terms of content. The materiality analysis process is set out in the ESRS, in particular ESRS 1. As only rough principles for the materiality analysis are mentioned there, the EU Commission has published further supporting documents, such as the Implementation Guidance 1 Materiality Assessment and a compilation of Q&As. However, these documents also only provide guidance on what needs to be considered in the materiality analysis. There is no precise step-by-step description. Therefore, each company must to a certain extent determine for itself what the exact procedure should look like. The design of the materiality analysis should be adapted to the context of the company and take appropriate account of the business model, the size of the company and the stakeholders involved.