The Corporate Sustainability Reporting Directive (CSRD) has entered into force and marks a significant milestone for the EU’s aim to drive sustainability change. A crucial element to comply with this directive is the Double Materiality Assessment (DMA). This assessment forms the foundation of the CSRD, where companies are required to report using a double materiality perspective in compliance with European Sustainability Standards (ESRS). 

The double materiality assessment examines not only how a company affects the world, but also how the world affects the company. This dual-lens approach aims to integrate the relationship between a company’s operations and its stakeholders. The purpose of the double materiality assessment is to give a comprehensive overview of the company’s sustainability footprint.

What is double materiality?

The DMA offers a holistic approach by uncovering how the company impacts natural and human resources, as well as how the company’s financial performance and risks are impacted by such external ESG factors. Looking at the big picture from two different angles, a company can on one side see how sustainability issues can affect their financial well-being, and on the other side how they, as a company, impact both people and the planet.

This dual perspective is embodied in the concept of double materiality, which includes both impact materiality and financial materiality. First, impact materiality is an “inside-out” perspective and focuses on the actual or potential impact the company has on the environment and society. It considers both the positive and negative impact, while operations within the entire value chain need to be regarded. Examples of inside-out situations can be hazardous working conditions or pollution of soil.

Second, financial materiality is an “outside-in” perspective and focuses on how sustainability issues can cause risks or opportunities for the company. Outside-in situations can be that higher temperatures in the ocean can imply risks for a company in the aquaculture sector, or extreme weather events disrupting supply chains. Both perspectives include short-, medium-, and long-term impact.

We will use the abbreviation IRO to refer to Impact, Risk, and Opportunity in this article.

What is the process of running a proper DMA?

Double materiality assessments need to be done in accordance with ESRS 1, where the general requirements outline the approach and rules to be followed to comply with the CSRD. The ESRS mandate that a DMA is carried out. However, the ESRS itself do not mandate how the process should be designed or conducted. There is no one-size-fits-all solution, but the process needs to reflect the organization’s facts and circumstances.

After familiarizing yourself with the CSRD and the ESRS, here are some steps you may consider in your double materiality assessment process:

1. Understand your company’s context
   This involves understanding your company’s business areas, business relationships, your upstream and downstream* value chain, and other stakeholders. Other contextual information could be media reports, existing sector-specific benchmarks, or scientific articles.
2. Engage stakeholders
   The CSRD requires you to report on how you’ve involved your stakeholders. Make a plan for how to involve each stakeholder group, including how they can raise concerns anonymously. Maintain two-way communication throughout the process.
3. Identify actual and potential IROs
   In this step, you identify the material environmental, social, and governance matters within your business operations and throughout your entire value chain. It needs to include the sustainability matters related to your stakeholders. This process will result in a comprehensive list of impacts, risks, and opportunities for further assessment and analysis in subsequent steps.
4. Assess the materiality of the IROs
   To assess impact and financial materiality, you apply criteria to identify actual and potential material impacts, as well as material risks and opportunities. This resulting overview is the output of doing a complete double materiality assessment.
   
5. Reporting
   The sustainability statement must include descriptions of the DMA process, how IROs interact with strategy, and how thresholds and criteria to determine materiality have been defined, all in accordance with ESRS disclosure requirements.

What topics to report on?

The ESRS have 12 different ESG standards for the double materiality assessment. Two standards are general requirements, while five standards cover the environmental, four the social, and one the governance aspect. The first two standards, ESRS 1 “General Requirements” and ESRS 2 “General Disclosure”, are mandatory for all companies to report on. Beyond that, a company doesn't need to report on all 10 topical standards, but only on the material standards identified.

Start by listing sustainability IROs relevant to your business in a spreadsheet or software solution. The ESRS offer lists of topics and sub-topics that can serve as a starting point. For instance, one could start with "business conduct," focusing on specific areas such as "corruption and bribery." Then, assess the impact your company has on each of these topics and sub-topics. For example, if your company is causing air pollution, this could both impact the local environment and people in the local community.

Independently assess both actual and potential risks and opportunities sustainability issues are posing for your company. For instance, there are several financial risks related to producing carbon-intensive products. One of the risks might be an increase in carbon taxes, which might lead to higher direct costs for the company in the future. Other risks might be losing customers as they prefer more sustainable products, or less access to cheap capital because your company won’t be eligible for green loans.

‍Examples of IROs

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Which stakeholders to engage?

Traditionally, stakeholders involved in a company’s activities cover a broad spectrum, including investors, customers, employees, suppliers, and creditors. However, the concept of double materiality expands the traditional definition of stakeholders to encompass an even wider array, including local communities, governments, NGOs, academia, media, and the overall environment. This extensive perspective requires companies to consider the indirect impacts of their actions, relationships, and dependencies on various stakeholders. Direct engagement may be necessary, particularly for significant impacts, to ensure a company’s transparency in its sustainability reporting. 

A company’s sustainability statement needs to cover all significant impacts stemming from its business relationships across the value chain, both upstream and downstream. While disclosing value chain information is not mandatory for every data point, it becomes necessary when linked to significant IROs that extend beyond the company’s own operations. The materiality assessment should disclose these significant IROs within the value chain, considering their potential occurrence across different geographies, activities, suppliers, and customers.

What are the materiality thresholds?

If it is material to your company, it means it’s relevant. Information is deemed ‘material’—or significant—if it has the potential to impact stakeholders’ decision-making regarding the reporting company. These impacts, risks, and opportunities could be short-, medium-, and long-term. To provide ground for what to include and what not to include in the sustainability statement, companies must consider certain materiality thresholds.

Materiality thresholds are defined based on severity and likelihood of occurring. Actual negative impacts are determined by severity, while potential negative impacts are determined by severity and likelihood. Severity is defined as a combination of scale, scope, and irremediable character for negative impacts, and scale and scope for positive impacts. Scale refers to how grave the impact is, where for example child labour is of large scale. Scope indicates how widespread the impact is, and you can ask yourself how many people are affected. Irremediable character points to the extent to which the impact can be remediated or repaired.

The assessment of financial materiality remains consistent. It is determined by the potential magnitude of the financial impact on the company (such as significant cost increases) and the likelihood thereof. A sustainability issue must meet either impact or financial materiality criteria to necessitate including it in a company’s CSRD report.‍

Focus on the most important

Based on your material thresholds, you will need to decide which sustainability matters are material to your company. Determining what is subject under the ESRS requires cross-departmental collaboration with stakeholders, and other sources, scoring the IROs under the ESRS topics. Use qualitative reasoning, threshold, and reliable sources of information to weigh the scores and decide which sustainability issues are material. Remember to pay attention to cases with high scale, even if the likelihood is low.

Including every significant impact, risk, and opportunity is important, but including too many IROs could overshadow the most critical ones. Engage in discussions with stakeholders, senior management, and specialists to determine which matters are most significant and should be focused on.

The IROs need to be described in an easy-to-read format and are the output of doing a complete double materiality assessment according to the CSRD. All assumptions and steps taken in the process need to be documented, as the CSRD report is subject to external assurance. Likewise, each material sustainability issue must be accompanied by a detailed description of the measures that will be implemented to address it, including policies, targets, actions, and long-term strategies.

What role does data play in the DMA?

The requirement for substantiated evidence and objective information emphasizes the importance of data in the DMA. Once a company identifies a material impact, risk, or opportunity related to a sustainability issue, it first needs to consider the disclosure requirements for that issue, to determine what information and evidence to disclose. If the ESRS are not adequately addressing an IRO, the company is obligated to provide detailed disclosures tailored to its specific circumstances.

How this can benefit your business

Corporate information can have a profound impact on both financial valuation and broader societal outcomes. Setting a company strategy based on what sustainability topics are material to the company can contribute to better decision-making and ensure that time and resources are allocated efficiently towards what matters the most to the company, its stakeholders, and society at large. The impact of the company on both people and the environment, coupled with strategic changes like investment decisions aimed at mitigating these effects, can lead to the emergence of new risks and opportunities.‍

How can Celsia be useful to you?

We offer double materiality assessment tracks to support companies in their assessment of their material topics. Our team provides guidance to identify which data you need and how to collect it, document it, and link it to relevant reporting indicators. Our software centralizes your CSRD work in one tool and lets you work and delegate responsibilities to your colleagues within the software. 

We have simplified the CSRD’s complex legal text into clear explanations and can help you map out the various standards, topics, and sub-topics down to a metric level. The software then automatically generates a CSRD report based on your assessment and data input.

_{*Upstream operations encompass the suppliers of materials, products and services to the company, while downstream operations encompass the logistics and services to get a product or service to the customers, while also considering the end users and end of life of a product.}

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