Materiality measures the relative financial importance of a factor among a company’s ESG considerations.
The Sustainability Accounting Standards Board defines material issues as those “that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to an investor.”
To this day, given the lack of international regulations towards ESG disclosure, most companies have been able to adopt a narrative-based approach to disclosing their ESG actions. Complicating, on the one hand, the measure of these companies’ actual ESG impact. While on the other, making it easy for the decision-makers of said companies to forgo the true implications of climate and broader ESG inaction.
That is about to change due to the still relatively unknown new set of rules bolstered by the EU aimed at putting an end to this greenwashing while springing other governments to follow suit (Switzerland being the latest of it).
The Corporate Sustainability Report Directive, or CSRD, is a game changer and a major step forward for international regulations towards ESG disclosure. It is to be implemented for FY24 and will require companies with the following:
- A net turnover of €40 million;
- A balance sheet total of €20 million;
- 250 employees on average over the financial year
I.e. ~50,000 companies to switch from a narrative-based ESG disclosure approach to a qualitative and quantitative-based one. Making it now more accessible for investors to spot evident climate or broader ESG inaction and adapt as a consequence the access to capital, given the accrued risk of public and legal backlash inactive companies face.
- Fossil fuel industry faces surge in climate lawsuits
- Veracity of corporate net-zero pledges and advertising is being challenged in court
In short, this directive is an essential milestone in accelerating climate action and forcing companies to take this matter seriously, as the cost of capital will drastically increase for those failing to do so, besides the risks mentioned earlier.
Carbonˣ is in line with CSRD as it enables companies to have a qualitative and quantitative permanent carbon removal procurement strategy to eliminate residual emissions. Therefore, helping its corporate members to provide tangible data points on the resources and measures they have set in motion to reach net zero carbon consistently.
Furthermore, in working with Carbonˣ, companies go beyond the compensation of their carbon footprint. They also contribute to the development of the carbon dioxide removal industry, which is vital to mitigating climate change, as stated by the latest IPCC Report.
All in all, with the ramping up of these new regulations and directives, climate inaction will no longer be overlooked or easily hidden behind profuse narratives. Qualitative and quantitative factors will draw light on each company’s ESG impact, and those lacking behind will measure the extended financial materiality of it.