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A framework for conducting the CSRD's Double Materiality Assessment
One of the key requirements of the Corporate Sustainability Reporting Directive (CSRD) is the Double Materiality Assessment. Experts from FiSer Consulting outline what the requirement exactly entails, and how companies that are obliged to conduct the assessment can successfully complete the process.
Since the Paris Climate Agreement was proclaimed in 2015, the European Commission has been appointed to ensure legislative proposals aligned with its objectives. As a result, the Commission introduced the European Green Deal as a roadmap for a climate-neutral Europe by 2050, which triggered sustainability regulations such as CSRD, strengthening the rules concerning the environmental, social, and governance information that companies have to disclose.
The CSRD requires European companies to expand their disclosures not only on how external ESG issues impact their financial performance (financial materiality) but also on how their operations affect the environment and society (impact materiality). Companies subject to the CSRD will have to report according to ESRS to ensure transparency and comparability.
Double Materiality Assessment
CSRD and ESRS incorporate the concept of double materiality for companies to assess how external ESG issues impact (positively or negative) financial performance and how their operations affect (positively or negative) the environment and society. This assessment helps define the scope and content of their ESG data collection and reporting, focusing on topical factors relevant to the firm.
To prepare the sustainability disclosures, companies can find support in the Materiality Assessment implementation guidance by the European Financial Reporting Advisory Group (EFRAG). Companies can also build upon the International Sustainability Standards Board (ISSB) standards and the Global Reporting Initiative (GRI) guidelines for financial and impact materiality assessments, respectively, if already in use.
In accordance with ESRS and following best industry practices, FiSer Consulting has developed a framework to conduct a Double Materiality Assessment. The process of assessing materiality (both financial and impact materiality) should consider, at least, the following steps:
This approach provides a structured way to perform a Double Materiality Assessment, helping integrate sustainability into strategic decision-making. Note that it is essential to document the process to obtain assurance on the disclosures from the auditors.
A Double Materiality Assessment requires performing due diligence across the value chain and engaging with stakeholders to identify potential sustainability matters. The ESRS provide a list of sector-agnostic sustainability matters that organisations should consider in their materiality assessment, but organizations are also required to identify entity-specific sustainability matters not explicitly mentioned in the ESRS.
In our approach, three main steps should be considered:
Impact materiality
Determining impact materiality is a challenging exercise. Impacts related to any sustainability matter on people and the environment can be positive or negative, actual or potential, and interconnected with impacts from other topics. Understanding the timeline of these impacts crucial, as they can occur in the short, medium, or long-term and relate to present or future events and activities across the value chain. By assessing the extent of the impact (severity) and the probability of its occurrence (likelihood), your company can quantify impacts, as shown below:
Impact materiality needs to be assessed from various perspectives, including the company's product and service mix, its geographic reach, and other considerations that reflect the company's capabilities to address specific sustainability matters.
Financial materiality
Sustainability matters can generate risks and opportunities that materially influence a company’s development, financial position, performance, cash flows, access to financing, or cost of capital over the short, medium or long-term.
Risks and opportunities emerge when significant impacts or dependencies intersect with a company's operations. These can be categorized into three main types: impact-driven (stemming from the company's direct influence on issues like biodiversity), dependency-driven (arising from the company's reliance on natural, human, and social resources), and from other contexts (such as regulation or consumer preference).
To determine financial materiality, the financial effects need to be calculated, whether through a qualitative or quantitative approach, considering both their magnitude and likelihood:
Defining and managing material topics
After assessing all impacts, risks, and opportunities, a company can consolidate both negative and positive impacts, risks, and opportunities. By applying a threshold or cut-off point, these can then be split into material and non-material categories. While companies have flexibility in defining criteria and thresholds, a common practice involves using a visual representation of material sustainability matters, such as a Double Materiality Matrix.
Additionally, in compliance with reporting standards, companies are mandated to disclose the process and outcomes of their materiality assessments at the IRO-level. Leveraging existing frameworks and guidelines can streamline this process.
To consolidate all material IROs, validation with stakeholders is crucial. This process would help understand a company’s interaction with its strategy and business model, enabling the development of an action plan for high-priority topics.
Once a Double Materiality Assessment has been conducted, several critical material topics might be identified. According to ESRS, a company must address these topics through comprehensive action plans, specific targets, and measurable KPIs to ensure compliance and drive sustainable growth.
The following examples illustrate how companies can manage material topics in each dimension of ESG:
How FiSer Consulting facilitates the process
Companies need to be ready for the transparency of providing granular disclosures about their policies, action plans and targets across all material topics, as the standards will bring greater visibility and scrutiny of their plans. Urgency for European companies to conduct a Double Materiality Assessment is required, as the exercise is complex, the deadlines are approaching, and some corporations have already started reporting in compliance with CSRD.
FiSer Consulting can facilitate the process, applying our framework, and offering a phased approach that delivers an initial assessment within 10 to 14 weeks, ensuring timely regulatory compliance. Our approach involves a five-step systematic process:
1) Double Materiality Assessment
Identify impacts, risks, and opportunities in ESG factors, developing a strategy and targets for prioritized matters.
2) Gap Analysis
Agree on definitions and scope of CSRD and ESRS and conduct a thorough analysis to identify data gaps and other areas of enhancement.
3) Implementation Roadmap
Design a roadmap with clear steps, timelines, resource requirements and controls to achieve compliance on regulatory reporting.
4) Stakeholder Engagement
Foster continuous steering with all stakeholders, facilitating alignment with reporting requirements to obtain assurance.
5) Ongoing Expert Advice
Provide continuous consultation to navigate complexities of governance and data management, ensuring successful delivery.
Notably, our approach is tailored and ensures alignment with evolving industry trends and regulatory demands. Our solutions help assess and implement regulatory requirements under CSRD and ESRS effectively, identifying opportunities and positioning our clients to be responsive.
Conclusion
In today’s environment, sustainability is essential for companies to achieve regulatory compliance and ensure long-term viability. Complying with CSRD and ESRS presents a significant challenge for European companies, requiring substantial investment and expert guidance. Conducting a Double Materiality Assessment is the critical first step in this process. Key is to be prepared well ahead of the implementation deadline, ensuring compliance while leveraging the change momentum to foster sustainable growth.
