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Nick Inge 14 May 2024

CSRD: Identifying Impacts, Risks, & Opportunities within a Double Materiality Assessment

Double Materiality Assessment (DMA) is embedded in the CSRD (Corporate Sustainability Reporting Directive) and supports the framework's main objectives of increasing accountability and transparency across businesses in the EU. This article unpacks the details of the DMA and how to identify impact, risks, and opportunities (IROs) to report on.

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What is a Double Materiality Assessment? 

Companies within the scope of the CSRD must report on their impact in different areas of sustainability topics and how sustainability affects their business. This dual perspective is known as the double materiality approach, which lays the basis for sustainability reporting under European Sustainability Reporting Standards (ESRS). The DMA allows a company to understand whether sustainability information meets the criteria of double materiality and, therefore, needs to be included in the reporting. 

The DMA combines two perspectives: impact materiality and financial materiality. 

Impact Materiality 

Sustainability information is considered material from the impact perspective if it impacts people or the environment and is related to a sustainability topic (sub-topics or sub-sub topics) as defined by EFRAG. 

Notably, this includes positive and negative external impacts directly caused or linked to the organisation, such as those occurring inside the value chain. For example, if an EV company uses lithium to produce batteries, the environmental impact of extracting the mineral is directly linked to the manufacturer.  

Financial Materiality 

Sustainability information is material from the financial perspective if it poses risks or opportunities that may affect an organisation's financial performance (such as cash flow or access to capital), which can be direct, such as cost escalations, but also longer-term factors, such as regulatory changes and reputation risk. 

Sustainability information must be reported on as part of the CSRD if it's "material from the impact perspective or from the financial perspective or from both of these two perspectives." In terms of reporting, both impact and financial materiality should be given equal importance.

Role of DMA and its relationship to the ESRS under the CSRD Reporting 

In order to standardise sustainability reporting requirements, the European Financial Reporting Advisory Group (EFRAG) was commissioned to deliver reporting standards, ESRS, which provide specific criteria across 12 broad ESG topics. 

Double materiality assessments determine whether sustainability information within the topics (and their subtopics) has to be disclosed.

The cross-cutting standards ESRS 1 and ESRS 2 focus on essential concepts and principles and disclosure requirements, respectively. Both are mandatory for all organisations within the scope. 

An organisation needs to report on the remaining 10 ESRS, known as topical standards, only if they are recognised as material as a result of a DMA. 

Does that mean organisations need to report on the entire scope of ESG topics covered by ESRS? 

Not necessarily. The standards introduce a granular perspective, considering each of the circa 1200 ESRS data points individually. The reporting body can volunteer to provide a brief explanation for the points not recognised as material. 

Namely, to conduct a DMA, a consultant needs to examine all of the data points within the topics to identify whether there is materiality to impact and, likewise, risks and opportunities. 

Step-by-Step Guide to Perform a Double Materiality Assessment 

There isn't a one-size-fits-all approach to identifying impacts, risks, and opportunities within the value chain. Each organisation needs to consider its structure, type of economic activity, location, and upstream and downstream value chain to choose the right path. However, certain steps should be followed when conducting a DMA.  

EFRAG published a draft guide to implementing materiality assessment for organisations and professionals to refer to. The guidelines can be divided into three main steps: 

  1. Defining relevant stakeholders and value chain items.

Companies must familiarise themselves with the relevant sustainability topics (from the over 80 topics, subtopics, and sub-subtopics listed in ESRS 1) and consider those that are most pertinent to their activities. 

During this stage, companies are also advised to identify and analyse the wide range of stakeholder engagement (including customers, shareholders, employees, civil societies, and suppliers) and decide when to involve them in the assessment process. The desired outcome is to create a comprehensive stakeholder map to further guide the collaborative process of completing the assessment. 

In a similar fashion, companies must also identify key value chain items and create relationships with relevant stakeholders. For example, product distribution may be recognised as a key value chain item and linked to transportation companies as the relevant stakeholders. 

Stakeholder and value chain relationship building is crucial as it forms the basis of eventual impact mapping. In this process, the identified impact areas will be linked back to a value chain item and thus related to stakeholder groups, who will participate in determining the materiality of the identified impact topic.

Resources such as previous materiality assessments, risk assessments, and stakeholder engagement on sustainability matters reports can greatly assist in the process. 

It should be stressed that the aforementioned list of ESG topics is not conclusive, and organisations may need to include additional sustainability information not covered by ESRS if these are found to be relevant. 

  1. Identifying Sustainability Topics and their Impacts, Risks, and Opportunities.

This step can prove to be the most challenging as it requires a deep understanding of processes happening inside the organisation, across the value chain, and broadly in sustainable development, and how they can affect the business on various levels.

The relevant information can be gathered through qualitative and quantitative interviews, surveys, and workshops with various stakeholders and experts. 

For instance, human rights violations in the supply chain can pose internal financial and reputation risks. The company could face regulatory scrutiny and public backlash, resulting in higher compliance costs and legal liabilities. Ultimately, it may also lead to a loss of investor confidence and difficulties in raising capital. 

On the contrary, a company that ensures fair labour conditions and supports the local community where it operates may boost its brand reputation and mitigate the risk of labour-related disruptions in its supply chain. In the long term, this could lead to increased customer loyalty and higher sales. 

Other examples related to external factors may include higher taxation imposed by new EU climate regulations. 

  1. Scoring and Determining the Final List of Material Topics.

Once all the IROs have been identified, the company needs to rank information according to their importance, thus selecting the ones that are considered material and must be included in the CSRD reporting. 

This process requires consideration of various criteria, indicating the severity of each factor's potential consequences. The criteria applied to impact evaluation depends on the impact type, risk or opportunity. Negative impacts are scored based on scale, scope and irremediability, and positive impacts on scale and scope. Risks are gauged on magnitude and likelihood, likewise with opportunities. EFRAG doesn't set one method for scoring; rather, it should be supported by clear and thorough justification and factual financial information to ensure transparency and accuracy for further audits and evaluations. 

After gathering all the information, the reporting team will perform the final check of the findings, taking into consideration all the feedback collected throughout the assessment process. 

While ensuring that the findings align with the company's vision is crucial to inform the strategy, the material information has to be reviewed against the CSRD requirements before these can be presented and submitted to the regulatory body. Companies often choose to communicate the findings through visual representation, such as a sustainability matrix, which supports transparency and liability in reporting obligations. 

Why Double Materiality Matters to Your Business? 

The double materiality approach is vital for organisations as an initial step toward compliance with EU regulations and other sustainability reporting frameworks, such as GRI. Furthermore, it helps identify key ESG topics that impact operations and ultimately leads to the integration of sustainability into business strategy across the value chain.

Organisations adopting a double materiality approach can provide investors and stakeholders with more comprehensive information to aid them in making informed decisions. Additionally, being transparent about a company's impact on people and the planet and how the social and environmental factors affect the business fosters a relationship built on trust and sets the foundations for successful partnerships. 

How Fingreen AI can help?  

Getting a Double Materiality Assessment right from the start is crucial to complying with the regulations and sustaining strong connections with your partners and investors. At Fingreen AI, we have developed an end-to-end CSRD project tool, allowing the user to map and track a DMA and then conduct ESRS data collection, which is converted into regulatory-demanded machine-readable formats, such as HTML, XBRL, etc.

  • Our AI-based tool will help you build and structure your company's value chain by suggesting key items (value chain elements and stakeholders) based on the uploaded strategy documents. 
  • We will assist you in identifying impacts, risks, and opportunities within your value chain, followed by the materiality score. 
  • Finally, you will receive a summary of all material topics with an individual assessment for each topic. 

Whether you seek support for your company or provide consultancy services, our automated solutions will address your needs with clarity and transparency.

Book a call with our team today to discover how we can streamline your reporting process.