From Start to Finish: Conducting a Double Materiality Assessment

In an era of heightened focus on sustainability and corporate accountability, a double materiality assessment is essential for businesses aiming to meet the expectations of regulators, investors, and stakeholders. This approach is especially significant under frameworks like the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS).

This guide offers a step-by-step process for conducting a double materiality assessment, including essential actions and best practices. It also delves into the unique requirements of a CSRD double materiality assessment and how to conduct an ESRS gap assessment.

Understanding Double Materiality

Double materiality is a two-dimensional framework that expands the traditional idea of materiality by considering both:

• Financial Materiality: This focuses on the risks and opportunities sustainability issues present to a company’s financial performance. It involves how environmental, social, and governance (ESG) factors might affect the company’s financial health.
• Environmental and Social Materiality: This considers how the company’s activities, products, and services affect the environment and society. It assesses the broader societal impacts of corporate operations beyond financial outcomes.

By incorporating both dimensions, organizations can address financial risks and societal impacts, creating a holistic view of their sustainability footprint.

The Importance of Double Materiality in the CSRD

The Corporate Sustainability Reporting Directive (CSRD) is an EU regulation mandating companies to disclose comprehensive sustainability data. A key requirement under the CSRD is the use of a double materiality approach in reporting on ESG impacts, which means organizations must address both financial risks and societal impacts.

Conducting a CSRD double materiality assessment is crucial for compliance with the expert firm like Global ESG Monitor is crucial for the assessment that helps identify sustainability factors that are financially significant to the company.

The Role of ESRS in Double Materiality

The European Sustainability Reporting Standards (ESRS) implement the Corporate Sustainability Reporting Directive (CSRD) requirements. They guide companies in assessing, disclosing, and reporting key sustainability information. For companies aiming to align with CSRD, an ESRS gap assessment is essential. This involves identifying differences between current sustainability reporting practices and ESRS requirements.

How to Run a Double Materiality Assessment

With the basics covered, let’s dive into the step-by-step process for conducting a double materiality assessment.

1. Establish the Scope and Objectives

Start by defining the scope and objectives of your double materiality assessment. Consider these questions:

• Which ESG factors are relevant to our business?
• How will the results of this assessment be used (e.g., compliance, stakeholder engagement, risk management)?
• Which frameworks are we aligning with (e.g., CSRD, ESRS)?

Once the scope is set, involve senior leadership to ensure alignment with the company’s strategic goals and priorities, and secure buy-in from all key stakeholders.

2. Identify Stakeholders

The next step is to identify and map your key stakeholders. In a double materiality assessment, key stakeholders typically include investors, regulators, employees, customers, suppliers, and local communities. The aim is to understand which ESG issues matter most to them. Engaging with stakeholders helps clarify their concerns and expectations. For example, investors may prioritize financial materiality, while local communities may be more focused on environmental or social impacts.

3. Identify Relevant ESG Issues

To conduct a meaningful assessment, identify ESG issues that are particularly relevant to your company. These can be industry-specific, but common areas often include:

• Climate change and carbon emissions
• Waste and resource management
• Human rights and labor practices
• Diversity, equity, and inclusion
• Corporate governance and ethics

For a CSRD double materiality assessment, evaluate each issue based on its financial and non-financial significance. The ESRS offers a structured list of sustainability topics, so cross-referencing can help ensure no critical areas are overlooked.

4. Data Collection

Data collection is foundational to any materiality assessment. Begin by gathering both quantitative and qualitative data on the identified ESG issues. Data sources may include:

• Internal reports (e.g., financial documents, ESG performance metrics)
• External publications (e.g., industry reports, sustainability benchmarks)
• Stakeholder surveys and interviews
• ESG ratings and indexes

Ensure your data collection process aligns with ESRS gap assessment requirements to support comprehensive sustainability reporting.

5. Assess Financial Materiality

The first dimension of double materiality focuses on financial materiality, evaluating how ESG factors might impact your company’s financial performance. Key steps include:

• Risk Identification: Identify financial risks related to each ESG issue, such as potential cost increases due to stricter environmental regulations.
• Opportunity Identification: Look for growth and innovation opportunities, like revenue from green products or savings from energy efficiency.
• Scenario Analysis: Use scenario analysis to evaluate how ESG-related events might impact financial performance in the short, medium, and long term.

Assessing financial materiality is essential for managing shareholder value and financial risks effectively.

6. Assess Environmental and Social Materiality

This second dimension assesses your business’s impact on the environment and society. Key actions include:

• Impact Mapping: Map each ESG issue’s effects on the environment and society, such as carbon emissions, water usage, and waste generation.
• Prioritization: Prioritize ESG issues with the most significant societal or environmental impacts. Stakeholder input is crucial here to align with their concerns.
• Benchmarking: Compare your impacts with those of industry peers and benchmarks, such as the ESRS, to pinpoint areas for improvement.

This dimension helps companies recognize their broader responsibilities and embed sustainability into their core strategies.

7. Create a Materiality Matrix

After collecting and analyzing the data, use a materiality matrix to visualize the results. This matrix plots ESG issues along two axes:

• X-Axis: Financial materiality (impact on financial performance)
• Y-Axis: Environmental and social materiality (impact on environment and society)

The matrix’s top-right corner will highlight issues with significant financial and societal impacts.

8. Validate and Engage Stakeholders

With the matrix completed, validate your findings by re-engaging key stakeholders. This ensures that the results align with the company’s financial priorities and societal expectations. Present the findings to the board, senior management, and external stakeholders to refine the assessment and align it with corporate goals.

9. Conduct a Gap Analysis and Improve Continuously

Next, conduct an ESRS gap assessment to determine if your sustainability reporting meets ESRS requirements. Identify areas where you fall short and develop an action plan to address these gaps.

• Action Plan: Outline steps to address identified gaps, such as launching new sustainability initiatives, improving data collection, or strengthening stakeholder engagement.
• Monitoring and Reporting: Set up a framework for ongoing monitoring and reporting on material ESG issues, allowing you to adapt to emerging risks and opportunities.

10. Report and Communicate Findings

The final step is to communicate your findings in a sustainability report. Under the CSRD, companies must provide transparent, consistent ESG disclosures. Your double materiality assessment results should guide this reporting process.

• Transparency: Explain the assessment process and methodology clearly.
• Material Issues: Identify the ESG issues that matter most to your company, covering both financial and societal impacts.
• CSRD Compliance: Ensure your report addresses CSRD requirements for both financial and non-financial materiality.
• ESRS Alignment: Structure your disclosures according to ESRS standards to meet regulatory obligations.

Conclusion

Running a double materiality assessment is essential for companies aiming to meet stakeholder expectations and comply with regulations like the CSRD. By understanding financial risks and societal impacts, businesses can make informed decisions, improve sustainability strategies, and position themselves for long-term success. An ESRS gap assessment ensures that your reporting meets top standards, setting the stage for effective ESG practices.