Double Materiality Assessment under CSRD: A Guide for Implementation

The double materiality assessment required from the EU Corporate Sustainability Reporting Directive (CSRD) may seem daunting and leave you confused on where to begin. The European Financial Reporting Advisory Group (EFRAG) has been releasing draft documents to provide some guidance, and make the materiality assessment more understandable to everyone. 

Although there is no one-size-fits-all materiality assessment, we’ve created a consolidated guide of information based on EFRAG’s documentation to guide you in carrying out your double materiality assessment when it comes time to prepare your reporting according to the CSRD. 

The following guideline will lead you through the main steps to conduct a double materiality assessment for CSRD - considering both impact materiality and financial materiality.

👉 Keep in mind that the individual process design of the assessment is based on the specific circumstances of your own company, such as the type of economic activity, the geographic location, the business relationships or value chains of your company. The guidelines can therefore only serve as a basis.

How to Perform a Materiality Assessment based on the ESRS

EFRAG describes three main steps for conducting a materiality assessment:

1. Understand the context and define stakeholder involvement
2. Identify potential material topics and their impact, risk and opportunities
3. Assess the materiality of the identified impacts, risks and opportunities to determine the final list of material topics 

👉  The aim of these steps is to obtain a list of material impacts, risks and opportunities to report on.

In the following, you can find an over view of the steps to perform a materiality assessment:

1) Understand the Context and Define a Strategy for Stakeholder Involvement

Set the stage for your double materiality assessment:

1. Analyze your company’s activities, business model, business relationships and value chain (upstream and/or downstream) 

• Review your company’s business plan, strategies, financial statements, and investor-related information (if applicable)
• Map business activities and products/services in relation to their geographic locations
• Map the type and nature of economic relationships and the upstream and/or downstream value chain
• Identify the scope of information for the reporting regarding your company’s own operations and the value chain

2. Analyze your the legal and regulatory environment

• Factor in relevant EU and sector specific regulation
• Analyze media reports, peers and benchmarks, as well as other publications and scientific articles on sustainability developments

3. Define a time frame for your materiality assessment 

• Short-, medium- or long-term 

4. Define how you plan to engage stakeholders

• Analyze current stakeholder-directed activities (exchange with other departments, such as communication or investor relations)
• Identify key stakeholders and categorize them according to the nature of the relationship, activity, or product and service
• Define when to involve stakeholders in the materiality assessment process (e.g., at the stage of validating the list of potential sustainability topics, or scaling the severity and time horizons of impact materiality)

2) Identify Potential Material Topics and their Impacts, Risks and Opportunities

If applicable, base this process on previously conducted analyses and processes, including

• Existing materiality assessments based on other frameworks (e.g., GRI)
• Existing due diligence processes
• Previous feedback and inputs from stakeholders (e.g., surveys for customer or employee satisfaction) 
• Comparisons with benchmarks in the sector

Create a list of potential material sustainability matters (topics / sub-topics / sub-sub topics and identify the related impacts, risks and opportunities, leveraging your previous analyses and processes.

1. Top-down: 

Identify the list of sustainability topics and then assess whether material impacts (actual / potential, negative or positive), risks and opportunities exist

Two approaches:

• Start with the overview of topics covered by the ESRS with regard to the Environmental, Social and Governance Standards (based on AR 16) and complement this list with topics from previous analyses (see 1), or
• Start with the list of topics from existing enterprise risk management systems, or the due diligence processes and complement this list based on a comparison with the topics covered by the ESRS (based on AR 16)

2. Bottom up:

Identify the list of sustainability matters based on impacts, risks, and opportunities at a detailed level. Categorize them into topics and sub-topics and compare them to the topics covered by the ESRS (based on AR 16)

3) Assess the Materiality of the Identified Impacts, Risks and Opportunities 

This process involves assessing both impact materiality and financial materiality based on the list of potentially material topics with the aim of determining the final list of material topics. 

Impact Materiality Assessment

To assess the impact materiality of the previously identified list of potentially material topics, EFRAG advices you to: 

(1) Apply the objective criteria defining impact materiality (see chapter 3.4 of ESRS 1)

(2) Use suitable quantitative and/or qualitative thresholds (see below)

Go through the identified list of potentially material topics and their risks and opportunities and use the determined thresholds for the criteria of scale, scope and irremediability, as well as the likelihood of occurrence. Differentiate between the different types of impact: 

• For impacts categorized as actual negative impacts assess the severity of each impact by assessing scale, scope and irremediability. 
• For impacts categorized as potential negative impacts, additionally estimate the likelihood that the impact occurs in relation to the time horizon.
• For impacts categorized as actual positive impacts, apply the criteria of scale and scope.
• For impacts categorized as potential positive impacts, additionally estimate the likelihood that the impact occurs in relation to the time horizon.

Based on your stakeholder engagement strategy, your key stakeholders may be involved in this step and evaluate, validate or ensure the completeness of the final list of material impacts. 

‍The perspective of stakeholders is particularly valuable to determine the scale and irremediability of impacts, as well as to estimate their likelihood of occurrence.

Examples for Assessing Materiality for Actual Impacts

Actual impacts can be determined based on severity of an impact (as a result of scale, scope, and irremediability) and categorized on a range from low to high impact. All impacts with a severity over a certain threshold would then be considered material topics to a company. 

More specifically, an example of an impact which affects scale could be a negative impact which leads to a violation of human rights or non-compliance with a certain law/regulation. Scope, on the other hand, can be determined more quantitatively by assessing the number of people or regions affected by an impact, such as the number of people a negative impact would affect.

Steps to conduct:

1. Determine the scale of impact
2. Determine the scope of impact
3. Determine the irremediability of impact (for negative impacts only)

Examples for Assessing Materiality for Potential Impacts 

Different from actual impacts, potential impacts are measured by considering both the severity of an impact and the likelihood, or potential, of that impact to be made. 

Likelihood of an impact can be measured qualitatively or quantitatively depending on the type of impact, for example, the likelihood of a human rights violation to occur. 

However, ESRS 1 also states that severity takes precedence over likelihood when identifying material matters related to human rights impacts.

See below, for an illustrative example thresholds for the materiality of potential impacts, again all topics in the dark squares would then be considered material topics:

Steps to conduct:

1. Determine the severity (based on the above criteria)
2. Estimate the likelihood of occurrence

Financial Materiality Assessment

To assess the financial materiality of the previously identified list of potentially material topics, EFRAG advices you to: 

(1) Apply the objective criteria defining financial materiality (see chapter 3.5 of ESRS 1)

(2) Use suitable quantitative and/or qualitative thresholds (see below)

The quantitative and/or qualitative thresholds for anticipated financial effects can relate to the performance, financial situation, cash flows, access to and cost of capital of the company.

Criteria for assessing financial materiality 

• Likelihood of occurrence and 
• Potential magnitude of effects in the short-, medium-, and long-term

Go through the identified list of potentially material risks and opportunities and use an objective set of thresholds for the criteria of likelihood and magnitude. When you already have enterprise risk management processes in place that cover sustainability risks, base your estimations on a comparison between both. Define if the impacts are sources of actual or potential risks and opportunities.

The scope of assessing financial materiality for a company's sustainability reporting goes beyond the scope of assessing the information to be included in the financial reporting.

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You can build on the criteria and thresholds used to prepare your financial reporting, when defining the thresholds for financial materiality for sustainability reporting. However, the time horizons as well as the basis for preparation differ.

It may be helpful to involve the different departments and functions in your company as well as investors and other financial stakeholders (e.g., banks) for the assessment and validation of the identified material topics. This way, you can ensure that your list of risks and opportunities is complete.

Steps to conduct:

1. Estimate the likelihood of occurrence
2. Determine the magnitude

Consolidate impact and financial materiality and consider their interaction. The result is one final list of material topics which is the basis for the preparation of the sustainability statement.

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How to Report based on the Double Materiality Assessment

Reporting must encompass the assessment process and the outcomes in accordance with requirements stated in ESRS 2 IRO-1, ESRS 2 SBM-3, and ESRS 2 IRO-2.

Following the materiality assessment process, the company is required report on:

1. The process to identify and assess its material impacts risks and opportunities (ESRS 2 IRO-1)
2. Material impacts, risks and opportunities and the interaction with its strategy and business model (ESRS 2 SBM-3)
3. Disclosure requirements in ESRS covered by its sustainability reporting (ESRS 2 IRO-2)

How Does the CSRD Materiality Assessment Align with Existing Frameworks?

GRI 🤝 ESRS

While the ESRS are based on double materiality, the GRI framework concentrates on the impact materiality dimension (see GRI 3: Material Topics 2021 standard), which is the same for ESRS and GRI. 

Therefore, the GRI materiality assessment is a good starting point for the ESRS double materiality assessment, as it provides a good basis for impact materiality and there are several synergies between the two frameworks that can be leveraged.

👉 Moving from sustainability reporting based on the GRI framework to sustainability reporting based on ESRS requires the addition and integration of financial materiality. 

In this regard, sustainability reporting under ESRS expects the compliance with IFRS disclosures that reflect the financial materiality in the ISSB standards. 

ISSB 🤝 ESRS

According to EFRAG implementation guide, ISSB (International Sustainability Standards Board) and ESRS align, in principle, with regard to the definition of financial materiality. Thus, the same assessment process should be able to support the identification the risks and opportunities for financial materiality concerning both IFRS and ESRS. 

Further, EFRAG states that:

• The materiality approach of IFRS S1 and financial materiality in the ESRS are aligned
• The assessment of financial materiality in ESRS 1 paragraph 48  aligns with IFRS S1 paragraph 1
• The criterion for the materiality assessment is expected to rely on decision-usefulness, which is also used in IFRS S1

The IFRS considers only users’ needs of investors in the assessment whereas the ESRS assessment equivalently considers both investors and other stakeholders. However, the two perspectives are expected to be equivalent in terms of the financial materiality under ESRS.

👉 Moving from reporting based on IFRS to sustainability reporting based on ESRS requires the addition and integration of impact materiality.

International Due Diligence 🤝 ESRS

Materiality assessments must take into account the outcomes of the due diligence process in alignment with the definition in the international instruments of the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. 

Due diligence processes can help a company to directly identify affected stakeholders, which must also be considered when carrying out a materiality assessment. In addition, the criteria from the international instruments support the prioritization of actions under consideration of the severity and likelihood of the impacts.

👉  The due diligence process can help a company to identify and assess potential/actual negative impacts and realize the severity and likelihood of certain topics which could potentially be material for a company.  

Use Software to Reflect your Materiality Assessment and Streamline the CSRD Reporting Process

Sunhat’s software solution supports you in covering all the ESRS disclosure requirements of material topics and simplifies your reporting practice. By reflecting the outcomes of your materiality assessment in a software, you make sure to capture your materiality assessment in a structured and accessible way.

Sunhat’s software solution can help you to:

• find synergies between existing frameworks by leveraging the materiality assessment 
• gain an overview of the outcomes of the materiality assessment and the relevant disclosure requirements
• get started with easy-to-use templates based on the ESRS Application Requirements and EFRAG data point list — all customized to your materiality assessment

👉 If you’re interested in getting to know more about Sunhat’s smooth and intuitive CSRD module, request a demo.