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The first reporting year under the Corporate Sustainability Reporting Directive is around the corner. Companies are facing regulatory requirements that demand greater transparency and accountability. One of the requirements set by the European Sustainability Reporting Standards is double materiality assessment, adding a layer of complexity to an already elaborate process of sustainability reporting. With the EU’s Corporate Sustainability Reporting Directive set to expand the scope of companies disclosing non-financial information, the time to understand the nuances of this directive is now. 

This article serves as your guide to navigating the double materiality assessment required by the CSRD. We’ll unravel complicated terms and provide clear, actionable steps for companies to conduct the assessment effectively. Stay tuned for additional resources at the end.  

Background on CSRD

EU’s Corporate Sustainability Reporting Directive (CSRD), which came into effect in January 2023, mandates that large companies and listed entities (with exceptions for micro-enterprises) disclose information regarding the impacts, risks and opportunities stemming from environmental, social, and governance (ESG) factors, as well as the impact of their operations on society and the environment. This information serves to enable investors, civil society organisations, consumers, and other stakeholders to assess the sustainability performance of companies and supports decision-making.  

What is Materiality? 

Materiality, a fundamental concept in accounting and reporting, refers to the significance of information or events that might influence the decisions of stakeholders. In the context of sustainability reporting, materiality helps companies to identify, understand, prioritise and report on ESG issues that have actual or potential, negative or posiitve impacts on the business and its stakeholders. 

What is Double Materiality?

Under Corporate Sustainability Reporting Directive, companies are required to not only evaluate how environmental, social and governance (ESG) issues affect their business (Financial perspective), but also how the businesses impact on the society and environment and cause issues (Stakeholder perspective). This information informs various stakeholders of the company (such as investors, customers, own employees etc.) and helps them in decision-making. This approach in Corporate Sustainability Reporting Directive is called double materiality.  

So, what’s the purpose of double materiality assessment? It’s all about compiling a list of sustainability topics and concrete impacts, risks and opportunities that stem from these topics, that guides reporting, as well as informs the company’s sustainability strategy.  

By examining their own interests alongside broader societal impacts, companies can gain a more holistic understanding of their role in the larger ecosystem. Ultimately, the CSRD leaves it up to organisations to determine if a sustainability matter is material, but requiring them to substantiate their choices. 

Suggestion box

Rather than viewing double materiality assessment reporting as a burden, companies should see it as an opportunity for innovation, inspiration and transformation. Embracing sustainability reporting can drive positive change within organisations, fostering creativity and resilience in the face of evolving challenges.

Timeline: When Does CSRD Come into Effect? 

On 5  January  2023, the Corporate Sustainability Reporting Directive (CSRD) was adopted into force. This means mandatory double materiality sustainability reporting for nearly 50,000 companies operating in the EU. The first companies will have to apply the new rules for the first time in the 2024 financial year, culminating in reports published in 2025. Sector-specific guidelines are anticipated to be released in 2024. Additionally, select non-EU entities will be subject to reporting requirements if their operations yield revenues exceeding EUR 150 million within the EU market. 

Double Materiality Assessment has several key benefits

• Risk Mitigation: understanding the potential financial impacts of ESG issues, enables companies to identify and mitigate risks, proactively address emerging threats and capitalise on opportunities, safeguarding their long-term viability.
• Future-proof Strategy: companies that embed ESG considerations into their business strategies are better positioned to adapt to changing market dynamics and seize opportunities arising from the evolving landscape of sustainability.
• Improved Stakeholder Relations: by engaging with stakeholders and transparently reporting on social and environmental impacts that are relevant for various stakeholders, companies can build trust-based relationships with said stakeholders, and further attract responsible investors and customers that value sustainable practices.
• Regulatory Compliance: Adhering to these regulations ensures alignment with evolving sustainability standards and enhances credibility in the eyes of investors, customers, and regulators.

Six Actionable Tips for Conducting a Double Materiality Assessment

1. Begin Early: As the first reporting year under Corporate Sustainability Reporting Directive is approaching, it is advisable for companies to start early. CSRD requires disclosure of more than 1100 datapoints. Companies need sufficient time for gathering data and engaging stakeholders.
2. Identify & Engage with Stakeholders: Carefully identify stakeholders, reaching beyond internal groups to encompass a diverse range of stakeholders who are both impacted by and have an impact on your organisation. Think bigger, include employees, government bodies, media, board members, and shareholders, customers, value chain suppliers, partners, local residents, and other relevant groups. Identify “affected stakeholders” and take into account the expectations of the users of your sustainability reports. Do not miss out identifying who can represent nature as a “silent stakeholder” under ESRS. Which NGO’s, experts and nature-related organisations can help you in determining your company’s impact on the nature and ecosystems. Actively involve mapped stakeholders in all phases of identifying, analysing and prioritizing material impacts, risks and opportunities.
3. Refine a Material Matters List: Compile a full list of environmental, social and governance (ESG) issues that are relevant for your company and its stakeholders. When determining the list of sustainability matters, companies can leverage multiple sources such as previous sustainability reports, sector-specific material topics, material topics stemming from other sustainability reporting standards, media, data etc. Therefore, when identifying these sustainability topics, companies should consider their operating sectors, geographical locations, and various parts of their value chains.
4. Score the Material Matters: Evaluating the significance of each ESG issues involves assessing both its financial and impact perspectives through a blend of quantitative and qualitative measures. This step necessitates gathering data for impact materiality and financial materiality assessments, which can be resource-intensive due to the need for advanced data collection and analysis capabilities. Once sustainability matters have been described in terms of impacts, risks, and opportunities, the next step is to quantify those impacts and risks. By engaging with (again) stakeholders, NGO’s, experts we must answer complex questions like: How many units of detriment does this operation cause? How many communities are impacted by it? How much would it cost to reverse the harmful impact of said operations? This challenging exercise must be auditable, companies have to be ready to disclose actions taken, the operational context of the company, the stakeholders engaged, the factors considered, and the decisions made by the company.
5. Develop a Double Materiality Matrix: After scoring and comparing all ESG issues, it’s crucial to establish a threshold for what qualifies as material. The full grid can steer the organisation’s business and sustainability strategy, but the top material issues are under mandatory CSRD disclosure standards.
6. Collaborate with Internal Departments: Engage legal, audit, finance, and operations functions to build a shared understanding of the assessment process and its strategic implications.

For organisations feeling overwhelmed by the prospect of conducting a double materiality assessment, we at Impact Institute offers multiple solutions.  

Our integrated software, data, advisory services, and education solutions simplify the CSRD and ESRS reporting process, helping companies meet their sustainability reporting obligations with ease.  

We can help you comply with CSRD requirements, develop granular reports, and fill in data gaps with our award-winning Global Impact Database. Our CSRD Academy is ready to educate you and your team, and our impact experts can help set targets and actions to make sure your organisation stays within planetary boundaries.