Double Materiality and its Implications for CSRD Reporting

The CSRD requires companies to disclose sustainability information based on the impacts of their operations on people and the environment as well as on how sustainability matters affect them. These two perspectives represent a key innovation of the Directive which is known as double materiality. In this article, we will learn about this concept and understand why companies should consider it as a key element of their CSRD reporting strategy.

In this article, we will cover the following:

• What is Double Materiality?
• The Significance of Double Materiality in CSRD Reporting
• How to Conduct a Double Materiality Assessment (DMA)?
• All in all, Why is Double Materiality Important for my Company?
• How can Greenomy Help?
  

What is Double Materiality?

Double Materiality embeds two different dimensions. Namely, impact materiality and financial materiality:

Impact Materiality

A sustainability matter can be considered as material from the impact perspective “when it pertains to the undertaking’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium- and long-term time horizons.”

Impacts related to the company’s own operations and value chain, including those through its products and services and business relationships, are included in that scope. This impact materiality perspective is used to assess material impacts under the GRI standards.

Financial Materiality

A sustainability matter can be considered as material from the financial perspective “if it generates risks or opportunities that affect (or could reasonably be expected to affect) the undertaking’s financial position, financial performance, cash flows, access to finance or cost of capital over the short, medium or long term.”

Impact and financial materiality are inter-related as a sustainability impact can also be financially material or become financially material. Sustainability matters that will be either material from an impact perspective or a financial perspective or that are both, will be considered as material topics to be reported on in the CSRD.

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The Significance of Double Materiality in CSRD Reporting

The concept of double materiality is deeply incorporated in the CSRD. Today, investors and other stakeholders are increasingly interested in understanding not only the impact of the company on people and the environment, but also the impact of people and the environment on the company. Therefore, the concept of double materiality was introduced in the CSRD and will be reflected in the disclosure requirements.

The double materiality assessment will determine the European Sustainability Reporting Standards on which the company will have to report on. To know more about the ESRS, check out this article.

ESRS 1 and ESRS 2 are cross-cutting and mandatory standards, irrespective of the outcome of the materiality assessment. However, the other 10 ESRS, called topical standards, will be reported only if they are considered material, following the outcome of the Double Materiality Assessment (DMA).

If a sustainability matter is considered as material, companies must report according to the ESRS related to that specific sustainability matter. However, it does not necessarily mean that the entirety of the standard will have to be completed. Indeed, the ESRS allows for a more granular breakdown within the standards. For metrics, the breakdown goes as far as an individual datapoint.

This implies that, if a particular metric data point is considered not material within an ESRS, it can be omitted for reporting. For more qualitative disclosures like policies and actions, the ESRS allows to determine which disclosure requirements can be considered as material.

If the entity concludes that a topic is not material and it thus omits all the Disclosure Requirements in a topical ESRS, it still can briefly explain the conclusions of its materiality assessment for the topic. You will find on the image below the complete flowchart to determine disclosures in the ESRS based on materiality.

It is important to note that companies also have to develop and report additional appropriate entity-specific disclosures when the material sustainability matter is not covered by an ESRS or is covered with insufficient granularity.

How to Conduct a Double Materiality Assessment (DMA)?

But, how can companies really identify and assess material impacts, risks and opportunities? Although there is not one single approach to double materiality assessments, there are key common steps to take and elements to consider when undertaking a DMA.

Establish CSRD’s Boundaries and Granularity

A first element to consider is establishing the scope and determining the level of granularity of the assessment:

• It is indeed important to understand which subsidiaries should be taken into account for the CSRD report and thus, for the DMA, as well as understand the value chain, as sustainability matters need to be assessed over the whole value chain.
• ESRS requires the disaggregation of information to be consistent throughout the reporting process. It means that the company, when it reports under the ESRS, needs to adopt the same disaggregation of information as the one used in the materiality assessment. This shows that it is an element to consider from the start.  
  

Stakeholders Engagement and Identifying Sustainability Topics

The company should identify relevant stakeholders to include and engage in the process, as well as create a preliminary shortlist of sustainability topics relevant for the company.  Stakeholders play a significant part in the company’s DMA as they contribute to the identification of the material impacts of the company.

To do so, interviews and surveys are carried out with the main stakeholders. But the involvement of stakeholders does not end here. CSRD notably requires companies to disclose how the implication of stakeholders inform the strategy and business model, as well as its policies and actions. The role of stakeholders is therefore central in CSRD reporting.

This stakeholder engagement can also inform the preliminary list of relevant ESG topics, which may also require the input of internal or external specialists and documentation. To identify them, the company needs to look at the entire value chain and consider all time horizons.

ESRS 1 defines a list of sustainability topics and sub-topics to guide this process. However, this list is non-exhaustive and companies need to include all sustainability topics that might apply to them, regardless of their coverage in the ESRS.

Defining and Assessing the Impacts, Risks and Opportunities

Impacts, risks and opportunities are the cornerstone of sustainability reporting in the ESRS. Policies, actions, metrics and targets need to be linked to the material impacts, risks or opportunities identified in the DMA. It means that they need to be clearly defined in order to ensure a precise understanding and assessment.

Impacts

Impact materiality can be informed by the due diligence process, and the materiality of impacts can be based on the severity of impact (as well as the likelihood of that impact for potential impacts). Severity of impact can be evaluated based on three different criteria: the scale, the scope and the irremediability character of the impact. For positive impacts, the latter is not taken into account. Scale of impact relates to the context in which the impact takes place. Scope of impact relates to how global the impact is and irremediability shows the extent to which a negative impact could be remediated.

Risks and Opportunities

Risks and opportunities are assessed from the financial materiality perspective and the company can ask itself this question: Does the sustainability matter trigger material financial effects on my company? To answer it, the likelihood of occurrence and the potential magnitude of the financial effect need to be taken into account.  

Determine Thresholds for Impacts, Risks and Opportunities

Once all impacts, risks and opportunities have been identified and assessed, companies should rank them and apply thresholds to determine those that must be considered as material and therefore reported in accordance with the ESRS. Deciding where the thresholds lie is therefore key as it will not only determine the amount of sustainability matters included in the report but also decide the focus that can be dedicated to a particular matter.

All in all, Why is Double Materiality Important for my Company?

Double materiality assessment can be used as a strategic tool for companies in their ESG reporting strategy. This methodology not only offers companies a structure to identify and assess sustainability matters, but also highlights the areas of strategic focus, by identifying the most relevant impacts, risks and opportunities of the company. This gives companies the opportunity to define policies, actions, metrics and targets to track relevant ESG topics which can ultimately lead to better decision-making and transparency.

Moreover, double materiality assessment is the first step in CSRD reporting, and informs large parts of the ESRS which means that it can ease the process of CSRD reporting, if done properly from the start. Finally, it serves as a serious methodology to effectively assess the impacts, risks and opportunities, which is an important element to consider regarding compliance purposes.

Greenomy as your Ally for CSRD Reporting

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• Automated data collection for accuracy and efficiency.
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