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CSRD double materiality: Your step-by-step guide

26 March 2024

Gert-Jan van de Poll, Senior Associate

The Corporate Sustainability Reporting Directive (“CSRD”) requires companies to report on relevant environmental, social, and governance (“ESG”) matters in their own operations, as well as in their upstream and downstream value chain. To determine what is relevant, a company must go through a materiality assessment process that applies the principles of double materiality. This is necessary to determine, in CSRD terminology, the specific reporting standards, disclosures, and data points that must be included in a company's sustainability reporting, as well as those that may justifiably be omitted.

What is double materiality?

Double materiality encompasses two dimensions: financial and impact. Financial materiality concerns outside-in ESG risks and opportunities emerging from the outside world, affecting the financial position of the company. Impact materiality concerns inside-out positive and negative impacts emerging from the business, affecting the outside world. A matter is considered material when it is significant or relevant from either a financial or impact standpoint, or both.

Although the CSRD offers some guidance, companies bear ultimate responsibility for determining ESG materiality and providing substantiation for their decisions. However, this autonomy has led to uncertainty in effectively conducting a double materiality assessment. To address this, below we offer direction on conducting a Double Materiality Assessment (“DMA”) using the recently released “EFRAG IG 1: Materiality Assessment Implementation Guidance”.

How is the materiality assessment performed? 

Step 1: Understanding the context

The first step of a double materiality assessment for a company is to gain a deep understanding of its activities, business relationships, and the context in which it operates. This understanding will facilitate the identification of impacts, risks, and opportunities (“IRO”) later on.

This process involves examining, among other factors, its business plan, strategy, financial statements, products/services, geographic locations, and business relationships throughout its value chain. Contextual factors such as legal and regulatory landscapes, media reports, and sustainability trends can also be considered.

Understanding affected stakeholders is crucial; it requires identifying and involving those impacted by the company's operations and value chain. This includes mapping stakeholders across the value chain.

Step 2: Identification of IRO

Based on a profound understanding of the company’s activities and the value chain, the next step is for the company to identify actual and potential IROs related to ESG matters within its own operations and across its value chain. This process results in a comprehensive list for further assessment.

The company can use sustainability matters outlined in ESRS 1, paragraph AR16, for guidance as a starting point to ensure completeness and should consider any additional entity-specific matters. External sources such as stakeholders, industry best practices, peers’ reporting, and frameworks, can also be consulted.

For each identified IRO, the company needs to disclose whether it relates to its own operations, upstream or downstream value chain, and the relevant time horizon (short-, medium-, and long-term).

Step 3: Assessing materiality of IRO

Following the identification of the company’s IROs, the next step is to assess both impact and financial materiality using scoring criteria to determine whether the identified IROs are material.

The CSRD does not set specific thresholds to determine when an IRO is material or not. The EFRAG, responsible for developing the CSRD reporting standards, did publish a working paper introducing a possible scoring system including thresholds. Nevertheless, exercising judgement remains necessary.

For impact materiality, the company assesses the materiality of identified impacts against criteria of severity and likelihood. This includes setting appropriate quantitative and/or qualitative thresholds. Severity is based on the scale, scope and irremediable character of negative impacts, and the scale and scope of positive impacts.

For financial materiality, the company assesses the materiality of identified risks and opportunities against criteria of likelihood and magnitude. Like impact materiality, this includes setting appropriate quantitative and/or qualitative thresholds. In this case, it is related to the anticipated financial effects on performance, financial position, cash flows, and access to finance, including cost of capital.

For both impact and financial materiality, it is crucial that engaging stakeholders helps the company in assessing IROs, thereby validating and ensuring the completeness of materiality assessment outcome.

Consolidation of impact and financial materiality outcomes leads to the final list of material IROs, which serves as the basis for sustainability reporting.

Step 4: Reporting

After completing the materiality assessment process and prior to reporting, it is recommended to check-in with your auditor to review, validate, and ensure the completeness of the materiality assessment outcome. Following the materiality assessment process, the company reports the assessment process and its outcomes based on specified requirements.

This includes describing:

  • the processes to identify and assess material impacts, risks, and opportunities (ESRS 2 IRO-1);
  • disclosing material impacts, risks, and opportunities, and their interaction with strategy and business model (ESRS 2 SBM-3); and
  • disclosing how material information was determined, including thresholds and criteria used (ESRS 2 paragraph 59).

By following these steps, companies can effectively conduct a double materiality assessment in compliance with CSRD requirements, ensuring comprehensive and transparent sustainability reporting.

How can we help?

We are able to assist you with your first double materiality assessment, combining our in-house methodology for agility with a tailored approach to reflect your uniqueness.