Preparing for CSRD - don’t wait!
Simon Braaksma, Senior Director of the Corporate Sustainability Office Philips International B.V. spoke to us about CSRD and his experience of conducting double materiality assessments, which is a key requirement of the new regulations.
Implemented in January 2023, the Corporate Sustainability Reporting Directive (CSRD) is attracting lots of attention as deadlines for reporting loom.
The CSRD aims to make environmental, social, and governance (ESG) disclosures more transparent. Initially this affects businesses in the European Union (EU), however, international corporations with subsidiaries in the EU will need to abide by the CSRD just one year later.
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Why is double materiality the first step to CSRD?
Double materiality is mandatory for CSRD, it ensures that companies focus on the sustainability issues most relevant to their stakeholders and that have a material impact on their financial performance. By considering both financial materiality and impact materiality, companies disclose a more complete picture of their performance and help all stakeholders make informed decisions.
Large public-interest European companies (with over 500 employees) must report on their 2024 activities.
Braaksma’s advice for those addressing CSRD is clear, “Don't underestimate the work that you need to do to be compliant with the reporting standards. The clear recommendation that we can give is to start as soon as possible, and start with a double materiality analysis.”
Having a robust double materiality assessment also contributes to the risk management requirements for CSRD. Being able to evidence Philips’ claims on sustainability with objective data helps cement our narrative with all stakeholders.
Philips has been carrying out double materiality analysis since 2022 to ensure they focus on the right topics and have the related disclosures in their annual report. Moving forward their materiality analysis will continue to adjust to consider new developments but, Philips already has a clear view of the topics and standards to comply with.
How did you get buy-in to a double materiality assessment from leadership?
Philips sees itself as a leader in the sustainability field, so has taken the approach of addressing voluntary legislation before it becomes mandatory. The board and supervisory board were presented with this approach and told that it is instrumental to being compliant in a timely manner with the CSRD and ESRS requirements.
Braaksma says, “CSRD is the elephant in the room, that 50,000 companies in Europe will be dealing with very shortly. The sooner you can get going on this, the better it is. The first thing you need is to identify and assess your material topics, and for that, the CSRD prescribes the double materiality analysis.”
Having outlined this approach Philips’ board and the supervisory board agreed on all the recommended disclosures.
“If you want to be a leader, don’t wait! But also, if you don't want to be a leader, don't wait!"
Philips has extensive experience working with big four accounting firms to assist in gap analysis, 15 years of experience in integrated reporting, and have identified 955 data points to deliver.
Braaksma points out that there are many companies still in the early stages of preparation for CSRD and they should be concerned. If they don't start very soon he does not believe that, given Philips’ experience, they will make their CSRD deadlines.
Is it viable to fully outsource a double materiality assessment?
While it is possible to outsource double materiality analysis to external consultants, it does bring with it certain risks.
External consultants may interview 10 people for their input and a second consultant may interview 10 different people, resulting in variable conclusions. Datamaran’s AI-driven platform has access to almost unlimited data sources, providing a robust and objective foundation on which to build a materiality analysis.
Without Datamaran how would you have approached the double materiality assessment?
As recently as five years ago capturing the information from all stakeholders required setting up meetings and lots of travel from all parties. Typically this would be outsourced to consultants to organize and involve a large time and staff resource to coordinate it all.
Despite all the resource investment it would still only yield the points of view of 20 people at most, in many cases single topic owners. This approach presented issues of completeness and quality of the process, issues that do not exist with Datamaran.
Will the more sophisticated requirements of ESRS mean that assessments based on qualitative interviews are no longer enough?
Engaging with auditors is critical whether you have conducted materiality assessments based on Datamaran or interviews with multiple stakeholders. Doing this early is important as any challenges or questions raised to your approach need to be addressed with clarity and evidence.
Auditors will often have their own sources of information and may question why certain issues are not included or downplayed in your materiality analysis, having multiple objective data points to respond to those challenges is important. Certainly, this can be evidenced by multiple interviews with 10 or 20 individuals but comparing against 955 data points requires a lot more interviews.
CSRD requires a third-party auditor of a materiality assessment, how did you prepare for that?
The mandatory CSRD materiality assessment or the double materiality assessment is just the starting point. Datamaran provides you with a fully auditable tool and data points.
“Datamaran is a very auditable system. We can provide all the input, as well as other documents or evidence that the accountant was looking for, directly from the platform. And we've got reasonable assurance on this. That's one level higher than what the CSRD prescribed. “I don't think we spent an awful lot of time on this topic to get reasonable assurance on it with our accountant, which was good news. It's also not the first year that we did this, but it is the first year we did double materiality.”
What advice would you give to companies planning their first double materiality assessment, or even to those that haven’t thought about it yet?
“Meeting the disclosure requirements is a massive task.” Start now and learn from the experience of others in your industry who are further down the line.
Local brewers should look to Heineken and investigate how they reported, Braaksma advises companies in the healthcare sector to read Philips’s annual reports.
“There is a GRI document on materiality assessment, but it is more focused on impact materiality which is really only one part of double materiality. I would recommend considering Datamaran as an alternative option. By the way, I'm not paid to say all of this.”
Is there an ESG Tech Stack, and is it easier to use technology even if you are just starting with ESG?
Braaksma is an advocate of technology as a solution rather than a more manual process.
All ESG disclosures, according to the CSRD, need to be audited so the accessibility of source data is an important factor. Auditing multiple data sources and tracking them via Excel, for example, can be done but requires a lot of time from auditors with the clock continuing to run on their fees.
For over 10 years Philips has been using a SaaS IT platform to collect environmental data from their sites, giving auditors access to such platforms ensures that the auditing process is easier now and in the future.
With ESRS requiring year-on-year comparison, is technology essential?
Braaksma recommends not over-engineering solutions due to technology’s ease of use.
“ESG is, at this moment, the hotspot in the labor market. And we need to be very careful… CSRD implementation is already consuming lots of resources. I'm very happy that we've got a streamlined process that is audit-proof for our materiality assessment. And we can just repeat it if we want half-yearly, but I think we will just go for a yearly exercise really.
“The thing that we will be doing, though, is that we will bring this forward from doing it in Q4 to doing it in Q2 to ensure that if there are changes in materiality we want to know as soon as possible.”
What are the must-have tools for the ESG toolbox?
Some tech companies overclaim for their solution’s capabilities; a single tool to meet all your ESG and CSRD needs. However, Braaksma has a healthy skepticism for this complex area, “We haven't seen the ‘Holy Grail’ of one tool that can cover environmental health and safety, all the social disclosures, materiality assessment, GBP issues, etc. There are companies that claim they've got a tool that can do it all, but I haven't seen that.”
“When it comes to double materiality, we are very happy that we've got a dedicated tool called Datamaran to run that for us. It makes our life a lot easier and gives us a head start in being compliant with the CSRD.”