Introduction
Understanding Double Materiality
The concept of ‘double materiality’ within the CSRD requires companies to evaluate the relevance of a sustainability matter from two distinct perspectives. On one hand, companies must assess the impact they have on the environment and society, known as the inside-out view. This involves examining issues such as damage to nature and violations of human rights. On the other hand, they must consider how sustainability-related developments and events create risks and opportunities for the organisation, known as the outside-in view. Examples of this include reputational risk due to corruption incidents, the introduction of new carbon taxes, or opportunities for developing new sustainable products.
Making Substantiated Decisions on Materiality
In the context of the double materiality concept, a sustainability matter can be material either from the impact perspective or from a risk and opportunity perspective. The CSRD provides some guidance on this matter but ultimately leaves it up to each organisation to determine whether a subject is material or not. This determination should be substantiated. The assessment of which topics are the most relevant for an organisation is a crucial step towards CSRD compliance. The results of this assessment dictate which reporting standards, disclosures, and data points should be included in the organisation’s sustainability reporting, and which can be omitted.
Focusing on What Matters Most
The double materiality concept ensures that sustainability reporting emphasises the topics that are most relevant for the organisation and its stakeholders. Material topics also form the foundation for sustainable strategies. Reports and strategies based on material topics foster transparency, facilitate better decision-making, and direct resources towards the issues that matter most to the organisation, its stakeholders, and society at large.
Seven Steps for the CSRD Double Materiality Assessment
Identify list of material topics
The ESRS provides a list of sector-agnostic sustainability matters that organisations should consider in their materiality assessment. Companies are also required to identify entity-specific sustainability matters that are not explicitly mentioned in the ESRS. Sector-specific sustainability matters based on sector-specific ESRS may also need to be considered.
Impact Analysis
Quantifying the impacts, risks, and opportunities associated with sustainability matters is essential. Questions such as the extent of damage caused, the number of people affected, and the cost of mitigating negative impacts need to be answered. A granular assessment helps determine which disclosure requirements and data points are material.
Risk and Opportunity Assessment
This step involves assessing the financial effects of sustainability risks and opportunities that have not been incorporated into the financial statements. Companies need to evaluate how these risks and opportunities affect cash flows, development, performance, position, cost of capital, or access to finance in both the short and long term.
Identifying Material Topics Post-Assessment
In this step, organisations define the impacts they have on people and the environment, as well as the risks and opportunities these sustainability matters present. Defining these aspects can be a complex task, as they can be positive or negative, actual or potential, and interconnected with impacts from other topics.
Stakeholder Engagement
Stakeholders play a central role in the double materiality assessment. Under the CSRD, stakeholders are categorised into two groups: those impacted by the organisation and those who can affect the organisation. Stakeholder mapping is a valuable tool to determine which groups should be directly involved in the materiality assessment. Engaging stakeholders helps in understanding how the organisation’s activities impact them and gathers input and feedback on sustainability matters.
Materiality Mapping
After assessing impacts, risks, and opportunities, organisations create ranked lists for negative and positive impacts, risks, and opportunities. By applying a threshold, these lists can be divided into material and non-material categories. Setting the threshold can be challenging, as the ESRS provide limited guidance on this.
Strategic Integration
For each material sustainability matter, the CSRD requires companies to disclose measures taken to manage their environmental and societal impacts. These disclosures should include metrics, targets, policies, and action plans. Companies must also explain how they account for sustainability matters in their strategic planning processes.
Practical Tips and Takeaways
Conducting a double materiality assessment is a crucial first step toward CSRD compliance. Here are some practical tips and takeaways:
● Engage internal topic experts from various departments, such as Sustainability, Strategy, Finance, Risk, HR, and Legal, to define and assess impacts, risks, and opportunities.
● Translate ESRS criteria into tailored assessment guidance to ensure consistency in assessing impacts.
● Test material topics with stakeholders and allow for a discussion on strategic considerations.
● Go granular to gain new strategic insights and identify relevant disclosure requirements and data points.
● Share the outcomes of the assessment across the organisation and integrate them into strategic decision-making.
● Properly document all assumptions and steps in the process to prepare for assurance.
Materiality Analysis and Double Materiality
Materiality analysis under the CSRD involves considering both impact materiality and financial materiality. Impact materiality refers to the positive and negative effects that companies have on the environment and society, while financial materiality relates to the financial effects on the company. Materiality assessments are informed by the dialogue with affected stakeholders, which is a crucial part of the process. Companies should consider these two dimensions of double materiality to determine which sustainability topics are material for reporting.
Challenges for Businesses
● The implementation of the CSRD’s double materiality assessment introduces several challenges for businesses, including:
● The need to identify actual and potential positive and negative impacts along the entire value chain.
● Deciding between a high-level or granular approach to impacts, risks, and opportunities.
● Defining a methodology for assessing impacts based on likelihood and severity.
● Quantitatively assessing risks and opportunities.
● Balancing different impacts that may be completely different in nature.
● Understanding and addressing these challenges is essential to successfully navigate the CSRD’s double materiality assessment.
Key Aspects to Consider
To conduct a successful materiality analysis under the CSRD, organisations should consider five key aspects:
Understanding Impacts & Dependencies: Define ESG topics and derive their impacts, risks, and opportunities from both the impact and financial materiality perspectives.
Assessing Impact Materiality: Assess the positive and negative impacts of business activities on the environment and society.
Assessing Financial Materiality: Evaluate the financial risks and opportunities associated with sustainability matters.
Time Horizons & Scenarios: Consider short-term, medium-term, and long-term time horizons and use scenario analysis to evaluate sustainability impacts.
Stakeholder Involvement: Engage stakeholders in the materiality analysis process to gain a more objective perspective.
