Risk management as part of the EU’s Corporate Sustainability Reporting Directive financial materiality assessment

Abstract

The European Commission introduced the Corporate Sustainability Reporting Directive (CSRD) in 2023, requiring thousands of companies operating in the EU to publish sustainability reports in which these companies must report on their environmental and social sustainability. A vital part of these sustainability reports is assessing sustainability-related risks and opportunities by utilizing the concept of financial materiality. In other words, companies must evaluate the sustainability-related financial risks and opportunities that may impact them in the short-, medium-, and long-term. This process is referred to as a financial materiality assessment.

The identification process of material sustainability-related risks and opportunities (financial materiality assessment) forces companies to utilize and develop their risk management practices and knowledge. This study aimed to bring clarity the financial materiality assessment process and provide guidance for companies with no prior experience in sustainability reporting on how to approach the challenge in hand by embedding risk management approach and principles into the process. This was done by sharing relevant materials, including topical studies and enterprise risk management frameworks, sustainability-related megatrends, and risk reports. In addition, interviews were conducted with individuals responsible for CSRD reporting within their organization or those with expertise in conducting financial materiality assessments in practice.