Double Materiality Assessment

In December 2022, the EU parliament announced the Corporate Sustainability Reporting Directive (CSRD). This mandates over 60,000 listed, large, small- and medium-sized companies trading in Europe to report on sustainability-related topics such as biodiversity & ecosystem impacts, circular economy, workers in the value chain and more.

The CSRD introduces a critical facet: the Double Materiality Assessment (DMA), a rigorous process companies must follow to assess the most material sustainability-related impacts, risks and opportunities to their business. Conducting a DMA can be complex, time-intensive and costly. However, it provides a great opportunity to meaningfully inform corporate strategy.

What is Double Materiality and what are the DMA requirements?

Under CSRD, materiality (essentially relevance or significance) is established through two dimensions—hence the ‘double’—financial and impact:

• Impact materiality illustrates the immediate and potential impacts that an organisation’s direct activities cause to environmental and social dimensions.
• Financial materiality requires assessment of sustainability matters that pose financial risk or reward to an organisation.

The methodology, outcomes and analysis of a DMA should be recorded, and disclosed as part of a CSRD report. Although there is not a prescribed format for documentation to be provided as evidence, the European Financial Reporting Advisory Group (EFRAG)—a corporate reporting advisory group affiliated with the European Commission—suggest that it is accessible for internal team delivery and external assurance purposes. How the DMA results are represented can vary with no stipulated visualisation suggested. Usually, materiality is captured via a matrix. This is valuable to guide strategic delivery of sustainability initiatives with prioritisation illustrated.

A DMA is an extensive process which ensures organisations consider both the full range of sustainability issues and their interdependencies. Identified topics in impact and financial assessment often intersect, and undertakings must consider not only immediate impacts, but how sustainability-related risks and opportunities could shape future operations. The DMA process will highlight the core issues that individual companies face, what they must report on, and the impacts they need to address. Firms must disclose their process across methodologies, assumptions applied, inputs, judgements and use of thresholds, and have this independently assured by a certified external auditor. This consistency diminishes potential for greenwashing and affords significant levels of transparency for investors, civil society organisations, consumers and other stakeholders. EFRAG provides useful DMA implementation guidance and updates, however following the guidance is not mandatory.

Implementation Timeline

A timeframe for the double materiality assessment should be appropriately aligned to the stage of the CSRD rollout that corresponds to organisation size. For example, large undertakings that must comply with CSRD legislation and report in 2025 are conducting double materiality assessments now – in some cases this may already be too late should material issues be identified for which the company has no related policies, processes or data capture in place.

ESRS guidelines state firms must disclose changes to material impacts when compared to the previous reporting period. This suggests some form of re-assessment is required annually, potentially including stakeholder engagement. Conducting fresh extensive materiality assessments every few reporting periods is also important to maintain transparency and compliance as non-material issues may become material over time.

View Gemserv’s CSRD timeline here to learn when your organisation should begin considering a double materiality assessment

Challenges and Opportunities

From our experience with clients to date, the typical challenges companies face include the following:

• Understanding the mandatory requirements under ESRS and how EFRAG’s guidance may be considered in non-compliance cases.
• Delivering a robust double materiality assessment without bias – often internal measures and assessments can be biased and therefore many opt for external support
• Defining a proportionate scope for the Double Materiality Assessment
• Correctly forecasting and integrating the scale of financial impacts
• Developing meaningful outputs, whether in the form of a double materiality matrix or otherwise.

The assessment process can be resource-intensive and financially strenuous. Consider the task of stakeholder engagement across different geographies or quantifying qualitative sustainability data to financial impacts. Many opt to form a dedicated sustainability reporting team or outsource most of the delivery. Naturally, smaller undertakings may be unable to afford this, and must depend on internal capability and capacity spread across the organisation. This can make the research, engagement, data collection, analysis and consolidation required for reporting required convoluted, presenting particular risk around fulfilling all reporting requirements and meeting the deadlines.

Time constraints present a significant challenge to most who set out to conduct DMAs. Structure and effective collaboration are imperative for success, with the building of suitably rigorous processes no small task.  Undertakings failing to pursue their CSRD checklist with urgency will undoubtedly experience setbacks and potentially additional cost or de-prioritisation of business-as-usual tasks in order to meet required deadlines for completion of the DMA. There is therefore significant benefit in proactivity with double materiality engagement that will yield positive results long-term.

Why should my organisation undertake a DMA?

While a significant addition to workloads across organisations, a DMA offers numerous advantages to businesses. Firstly, double materiality offers financial institutions and investors a greater understanding of how their investments will be financially impacted by sustainability-related risks and opportunities. This can in turn assist corporates with gaining access to capital.

The assessment can also help to expose early high-risk areas of an organisation’s operations, and support threat minimisation. On top of this, the DMA process demands meaningful stakeholder engagement, with the insights gained from this invaluable in shaping a truly responsible and socially conscious business strategy. Furthermore, while mandated only for CSRD, a DMA is interoperable. Following insights from a DMA can help business remain compliant with other EU directives and regulatory pieces such as the Corporate Sustainability Due Diligence Directive (CSDDD).