Double Materiality: 6 Steps

Double materiality is a defining principle in the European Sustainability Reporting Standards (ESRS) and mandated by the Corporate Sustainability Reporting Directive (CSRD). It is impossible to produce any meaningful report without first conducting a double materiality assessment. In this article, we explore the six steps to perform a double materiality assessment in compliance with the CSRD.

Definition of sustainability matters

The first step in the materiality assessment is to longlist potential impacts for all business activities. A comprehensive mapping of activities allows you to zero in on the impacts, risks and opportunities (IROs) of different parts of the business. IROs are another fundamental concept of the ESRS and a Disclosure Requirement (DR) of the CSRD. In ESRS 2 IRO-1, companies are required to disclose the processes used to identify and assess material impacts, risks and opportunities. It’s not just the IROs that need to be reported but also how a company arrived at these IROs.

For each business activity, list all potential positive and negative impacts that the business creates directly or indirectly, and the risks and opportunities that it faces. A useful starting point or reference is your risk framework, which will already have a list of risks material to your business. The same goes for opportunities, if available. At this stage, do not worry about narrowing down the list of material matters. You are simply identifying the topics which may be material based on the type and nature of business.

Impact materiality assessment

Double materiality is when there is an impact on a business’ stakeholders (outward impact) and financial impact on the business (inward impact). To satisfy this condition of materiality under the CSRD, companies must establish the two-way impact of any topic. The impact materiality assessment step determines outward impact. Stakeholder consultation is vital to this step.

There is no single way to engage with stakeholders to gain their inputs on material matters that affect them. Engagement could take many forms such as surveys, interviews, focus groups, etc. and frequencies vary depending on the form of engagement and stakeholder group. In fact, a varied approach may be best to capture as many inputs as possible, while the use of independent consultants lends impartiality to the engagement process.

The goal of this step is to find out which of the sustainability matters in step one are actually relevant to stakeholders through their experience. Consulting stakeholders on IROs eliminates the possibility of overlooking material matters. Your list of IROs may change as you gather feedback.

Value chain assessment

This step is tied to the previous one as impacts created by a business often involve the value chain, and vice versa. Assessments of IROs for the value chain is a complex undertaking which we have covered in other articles. Particularly where large value chain operations are concerned, a company may find it necessary to work closely with related departments and business partners or contractors to identify material matters.

We always recommend starting the process by mapping the value chain, upstream and downstream, including all the key players and activities along the way. For each activity, list the potential IROs, seeking guidance from value chain risk experts or the like. You may find it helpful to conduct the stakeholder engagement exercise at this stage, after you have a list of the IROs from the impact materiality assessment and value chain assessment.

Financial materiality assessment

After you’ve determined the topics that are outwardly material to stakeholders, it is time to assess for inward impact. To satisfy the double materiality principle, material matters must, in addition to having an impact on stakeholders, also have financial impact on a company.

The key to understanding financial materiality in the context of the CSRD is to consider how a given sustainability material matter affects your current resources and/or business relations.

Addressing these considerations will define the relationship between financial value and non-financial value, which is a key purpose of sustainability reporting. When defining financial materiality, it is necessary to decide This step requires making informed assumptions and projecting future scenarios. For example, different degrees of global warming leads to different risks and opportunities, so an evaluation of the financial impact of climate change may produce very different results. Other factors must also be considered such as potential carbon taxes or carbon trading, which all affect financial capital.

We recommend consulting qualified financial experts to analyse and project financial impacts. They will also be able to assess the magnitude of financial impact and advise on the level of financial impact that is deemed material. Simultaneously, inputs or cross consultation from experts in your sustainability material matters provide the in-depth knowledge needed for financial impact assessments.

Determine thresholds for materiality

The CSRD uses a threshold of severity to determine materiality. Severity is measured by three parameters:

Scale

Scope

Irremediability

Scale refers to the magnitude of an impact – how serious is it? Scope refers to the extent of the impact – how many stakeholders are affected? Irremediability refers to the possibility of reversal – how easy is it to restore an ecosystem or undo the damages? This threshold of severity is mostly relevant for negative impacts, but don’t forget that positive impacts have a place in the materiality assessment too.

During stakeholder consultations, gather as much granular data as possible, asking questions that describe the scale, scope, and remediability of the impact. The most accurate results of a materiality assessment come from well-designed, intentional questions that guide stakeholders in the direction of the information.

While assessing the thresholds of severity, we also recommend assessing material matters for likelihood. The matters more likely to happen should take priority over those of lower likelihood. Use this stage and the next to narrow down the list of material matters.

Results

Armed with a list of material matters and their severity, you are equipped with all you need to advance to the final stage of the materiality assessment – prioritisation. The most common way to do this is by using a scatter plot. Severity can be plotted against likelihood, and there you have a ranking of material matters, with the top-ranking matters being the areas of reporting to focus on. This is the same process of prioritisation as what many already use in sustainability reporting.

The process of materiality assessment is itself a disclosure requirement of the CSRD. You should detail your approach including stakeholder engagement and ensure that double materiality is clearly established as a result of the process.

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