Double Materiality: A Guide for CSRD Compliance

Double materiality, as defined under the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), is a dual approach to assessing and reporting on sustainability issues. It recognizes that sustainability matters can be material from two perspectives:

1. Impact Materiality (Inside-Out Perspective): Examines how a company’s operations impact people, the environment, and broader societal systems. This includes actual or potential, positive or negative impacts that extend across the company's operations and its value chain.

   
   

2. Financial Materiality (Outside-In Perspective): Assesses how sustainability-related risks and opportunities affect a company’s financial condition, performance, and ability to create value over time. This includes aspects such as regulatory risks, resource scarcity, and climate transition risks.

Both perspectives are interrelated, as corporate actions to mitigate environmental and social impacts often lead to financial risks and opportunities.

Double Materiality in CSRD: Key Changes from NFRD

The transition from the Non-Financial Reporting Directive (NFRD) to CSRD introduces major updates in sustainability reporting:

• Expanded Scope: CSRD applies to all large companies (listed or not) and all companies listed on regulated markets (excluding micro-enterprises), significantly broadening its reach.

• Mandatory Double Materiality Assessment: Companies must assess both financial and impact materiality in their sustainability reporting.

• Enhanced Reporting Requirements: Companies must disclose a wider range of ESG factors, including climate risks, human rights, and governance structures.

• Digital Reporting & Accessibility: CSRD mandates digital tagging to improve data accessibility and comparability across industries.

• Assurance & Compliance: Sustainability reports require external assurance, similar to financial reporting audits.

Conducting a Double Materiality Assessment

A structured materiality assessment is required to determine which ESG matters are significant. ESRS 2 mandates that companies disclose their materiality assessment process and results.

The key steps include:

1. Understanding the Framework:

   - Review ESRS and CSRD requirements to ensure compliance with regulatory expectations.

   - Analyze industry standards and best practices for double materiality assessment.

   - Establish a common understanding among internal stakeholders on the importance of materiality assessment.

   
   

2. Stakeholder Engagement & Due Diligence:

   - Conduct surveys, interviews, and consultations with affected stakeholders.

   - Use stakeholder feedback to validate materiality conclusions.

   - Identify stakeholder priorities and concerns that should be factored into the assessment.

   
   

3. Identifying Relevant ESG Issues:

   - Assess sustainability topics based on regulatory requirements, industry trends, and stakeholder concerns, ensuring alignment with material Impacts, Risks, and Opportunities (IROs).

   - Leverage international frameworks like GRI, ISSB, and OECD guidelines to systematically identify and assess IROs related to environmental, social, and governance factors.

   - Create a long list of IROs by conducting a comprehensive assessment of sustainability matters, considering both actual and potential impacts, risks, and opportunities across operations and the value chain.

   - Map IROs across the value chain to determine how sustainability issues influence financial performance and stakeholder interests.

   
   
   
   

4. Determining Material Impacts, Risks & Opportunities:

Assess Impacts:

• Positive vs. Negative Impacts: Identify whether an impact contributes positively to sustainability goals or poses risks to environmental and social systems.

• Actual vs. Potential Impacts: Distinguish between current, measurable impacts and future, possible effects that could arise under different scenarios.

• Scale and Scope: Evaluate how widespread and significant an impact is, both in terms of affected stakeholders and ecosystems.

• Irremediability: Determine whether negative impacts can be reversed, mitigated, or if they have permanent consequences.

• Likelihood: Estimate the probability of a potential impact occurring and its expected timeframe.

• Materiality Assessment Criteria: ESRS 1 Chapter 3.4 requires that undertakings apply objective criteria, using appropriate quantitative and/or qualitative thresholds to assess the materiality of actual and potential impacts. This is based on severity and, for potential impacts, also likelihood (see Chapter 3.6 Deep dive into impact materiality – Setting thresholds).

Classify ESG Risks & Opportunities:

• Analyze ESG-related risks and opportunities based on their potential effects on financial performance and business resilience, considering their likelihood and magnitude.

• Establish time horizons for material impacts to understand their evolving nature and urgency.

• Consider dynamic sustainability factors that may intensify over time, requiring adaptive strategies and mitigation efforts.

5. Develope a Materiality Matrix:

   Visualize and prioritize ESG issues based on their significance to stakeholders (impact materiality) and their effect on financial performance (financial materiality).

   
   

Challenges & Best Practices in Double Materiality Implementation

Common Challenges:

• Data Integration: Combining diverse ESG data sources requires robust management systems.

• Stakeholder Expectations: Balancing internal and external stakeholder priorities.

• Complexity in Assessing Materiality: Defining objective thresholds for material issues.

Best Practices:

• Use industry benchmarks and peer comparisons.

• Align with global reporting standards (GRI, ISSB, TCFD).

• Implement scenario analysis for ESG risks and opportunities.

Reporting & Disclosure Under CSRD

Companies must align sustainability reporting with ESRS disclosure requirements:

• Transparency & Consistency: Ensure clear, honest reporting of ESG impacts and challenges.

• Cross-Referencing Financial & ESG Data: Integrate sustainability findings with financial disclosures.

• External Assurance: Engage third-party auditors for report verification.

For further details, access the EFRAG IG 1 Materiality Assessment Implementation Guidance to effectively navigate the double materiality requirements.

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