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Our Guide to the CSRD's Double Materiality Assessment
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The EU's Corporate Sustainability Reporting Directive (CSRD) is now in effect as of January 1, 2024, applying from fiscal year 2024. Building on the Non-Financial Reporting Directive (NFRD), the CSRD expands the range of companies required to disclose non-financial information on environmental, social, and governance topics.
Companies should familiarise themselves with the directive now. This is crucial not only for those currently under its scope but also for those who will be included as the directive progressively expands to cover more businesses over time.
👉 In this article, we'll explain everything you need to know about the CSRD's double materiality assessment and practical steps for conducting it.
What is the CSRD?
“ The CSRD is an EU initiative designed to enhance the reporting obligations of companies in the EU, focusing on environmental and social factors. The directive came into effect on the 1st of January, 2024, and replaces the pre-existing EU directive known as the NFRD (the Non-Financial Reporting Directive). ”
The CSRD broadens the range of companies mandated to share non-financial data and deepens the reporting criteria to encompass more extensive environmental and social aspects. It's projected that the CSRD will increase the number of companies required to report from around 11,000 to over 50,000. This includes 10,000 non-EU entities with substantial operations within the EU.
Companies that fall under the scope of the CSRD will have to apply the new rules for the financial year commencing 2024, with reports being published in 2025.
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What is the purpose of the CSRD?
The purpose of the Corporate Sustainability Reporting Directive (CSRD) is to enhance and standardise sustainability reporting across the European Union. By expanding the scope of companies required to disclose information on environmental, social, and governance (ESG) issues, the CSRD aims to increase transparency and accountability. This directive builds on the existing Non-Financial Reporting Directive, addressing its limitations and ensuring that more companies provide reliable and comparable sustainability data.
Additionally, the CSRD seeks to support the EU's broader sustainability goals by integrating sustainability considerations into corporate strategies and decision-making processes. By requiring comprehensive and standardised ESG reporting, the directive helps investors, stakeholders, and the public better understand companies' sustainability impacts and risks. This increased transparency fosters a more sustainable and resilient economic system, encouraging businesses to adopt more responsible practices.
Who does the CSRD apply to?
The CSRD aims to enhance and standardise sustainability reporting across the EU, affecting a broader range of companies than its predecessor, the Non-Financial Reporting Directive (NFRD). The directive gradually expands its scope, requiring more companies to disclose non-financial information on environmental, social, and governance topics.
CSRD scope and timeline:
| Company Type | Start Date | First CSRD Report Due |
|---|---|---|
| Large companies and parent companies of large groups (over 500 employees) | January 1, 2024 | 2025, covering the 2024 financial year |
| Large companies meeting at least two of the following criteria: more than 250 employees, €50 million in net turnover, €25 million in total assets | January 1, 2025 | 2026, covering the 2025 financial year |
| Listed Small and Medium-Sized Enterprises (SMEs), Small and Non-Complex Credit Institutions, and Captive Insurance Undertakings | January 1, 2026 | 2027, covering the 2026 financial year |
| Non-EU companies with significant EU activities (net turnover over €150 million in the EU and at least one subsidiary or branch in the EU) | January 1, 2028 | 2029, covering the 2028 financial year |
Key differences between the NFRD and CSRD
- Expanded scope: The CSRD applies to a broader range of companies, including more small and medium-sized enterprises.
- Enhanced reporting requirements: Companies must now report in greater detail on a wider variety of environmental, social, and governance (ESG) factors.
- Mandatory audits: The directive requires third-party audits of sustainability reports to ensure the accuracy and reliability of the information disclosed.
What disclosures are required under the CSRD?
Companies under the scope of the CSRD must report in line with the twelve European Sustainability Reporting Standards (ESRS). Two of these standards require general disclosures on broad environmental, social, and governance (ESG) topics and apply to all companies.
In addition, there are ten specific ‘topical standards’: five environmental, four social, and one governance. These standards require detailed disclosures, but companies only need to report on them if they are deemed ‘materially’ relevant - this is where the concept of the ‘double materiality assessment’ comes into play.
General Disclosures
The European Sustainability Reporting Standards (ESRS) introduce two cross-cutting standards: ESRS 1 (General Requirements) and ESRS 2 (General Disclosures). These standards provide the framework for sustainability reporting under the CSRD.
ESRS 1: General Requirements
Adopted on July 31, 2023, ESRS 1 outlines key concepts and principles for sustainability reporting. It requires companies to disclose material information about their sustainability-related impacts, risks, and opportunities (IRO). This includes governance, strategy, risk management, and metrics related to climate change, regardless of the results of their materiality assessments. ESRS 1 also defines the double materiality process, which helps companies determine additional topics they must report on.
ESRS 2: General Disclosures
ESRS 2 establishes cross-cutting disclosure requirements that apply to all reporting entities, regardless of sector. It focuses on four main areas: Impact, Risk, and Opportunity Management (IRO); Governance (GOV); Strategy (SBM); and Metrics and Targets (MT).
Information required includes:
| Category | Details |
|---|---|
| ESRS E1: Climate Change | Includes Scope 1, 2, and 3 greenhouse gas emissions, climate-related risks, carbon pricing, energy mix, and the organisation's transition plan to align with targets such as net zero by 2050. Development of a climate transition plan, energy consumption, and climate adaptation strategies. |
| ESRS E2: Pollution | Covers disclosures related to air, soil, and water pollution from company operations, including the value chain. Information on pollutants, substances of concern, and strategies to mitigate pollution impacts. |
| ESRS E3: Water and Marine Resources | Addresses water consumption, recycled or reused water, and impacts on marine ecosystems. Disclosures on water usage, ocean degradation, and measures to protect marine resources. |
| ESRS E4: Biodiversity and Ecosystems | Focuses on the impact of company activities on biodiversity and ecosystems. Plans to address biodiversity loss, impacts on ecosystems, and related conservation efforts. |
| ESRS E5: Resource Use and Circular Economy | Involves resource use, waste generation, and circular economy practices. Information on resource inflows and outflows, waste minimisation strategies, and maintaining product and material value. |
💡 These structured disclosures also align with frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB), ensuring consistent and comparable sustainability reporting.
Environmental Standards
The ESRS includes five environmental standards, which encompass various aspects of environmental impact and sustainability. These standards require detailed disclosures and a thorough understanding of each topic, where they are deemed to be materially relevant.
| Category | Scope | Key Requirements |
|---|---|---|
| ESRS E1: Climate Change | Includes Scope 1, 2, and 3 greenhouse gas emissions, climate-related risks, carbon pricing, energy mix, and the organisation's transition plan to align with targets such as net zero by 2050. | Development of a climate transition plan, energy consumption, and climate adaptation strategies. |
| ESRS E2: Pollution | Covers disclosures related to air, soil, and water pollution from company operations, including the value chain. | Information on pollutants, substances of concern, and strategies to mitigate pollution impacts. |
| ESRS E3: Water and Marine Resources | Addresses water consumption, recycled or reused water, and impacts on marine ecosystems. | Disclosures on water usage, ocean degradation, and measures to protect marine resources. |
| ESRS E4: Biodiversity and Ecosystems | Focuses on the impact of company activities on biodiversity and ecosystems. | Plans to address biodiversity loss, impacts on ecosystems, and related conservation efforts. |
| ESRS E5: Resource Use and Circular Economy | Involves resource use, waste generation, and circular economy practices. | Information on resource inflows and outflows, waste minimisation strategies, and maintaining product and material value. |
❗️ A note on the importance of ESRS E1 - the Climate Change Standard
The European Commission has emphasised the significance of the Climate Change Standard (ESRS E1). If a company deems this standard immaterial, it must provide a detailed justification, making it challenging to opt out of reporting on it. As a result, most companies under the CSRD scope are expected to report on this standard. This ensures comprehensive disclosure of climate-related impacts, risks, and opportunities, aligning with broader sustainability and regulatory goals.
Social Standards
The ESRS outlines four key social standards (S1-S4) for comprehensive sustainability reporting on human-centric topics related to a company’s operations and value chain.
| Category | Scope | Key Requirements |
|---|---|---|
| ESRS S1: Own Workforce | Addresses working conditions, equal treatment, opportunities, and other work-related rights. | Information on secure employment, wages, health and safety, gender equality, training, diversity, and child labor. |
| ESRS S2: Workers in the Value Chain | Focuses on workers in the supply chain. | Disclosures on working conditions, wages, health and safety, gender equality, training, and child labor in the value chain. |
| ESRS S3: Affected Communities | Covers economic, social, cultural rights, civil and political rights, and indigenous rights. | Details on housing, food, water, sanitation, land and security impacts, freedom of expression, and cultural rights. |
| ESRS S4: Consumers and End-Users | Encompasses information impacts, personal safety, and social inclusion. | Information on privacy, health and safety, non-discrimination, access to products and services, and responsible marketing practices. |
Governance Standard
The ESRS includes one governance standard, ESRS G1, which outlines the requirements for companies to report on governance aspects related to business conduct.
| Category | Scope | Key Requirements |
|---|---|---|
| ESRS G1: Business Conduct | Covers disclosures on business strategy and approach, processes and procedures, and performance related to corporate governance. | Information on corporate culture, whistleblower protection, animal welfare, political engagement and lobbying, supplier relationship management, and strategies for preventing and detecting corruption and bribery, including training programs and incident reporting. |
What is materiality?
Materiality is a fundamental concept in corporate reporting, determining which information is relevant and significant enough to influence the decisions of stakeholders. Initially rooted in accounting principles, materiality focused primarily on financial aspects to meet investors' needs (both financial risks and opportunities). This traditional view is often referred to as single materiality, which assesses how environmental, social, and governance (ESG) risks and opportunities impact an organisation’s financial performance and position.
Over time, the scope of materiality expanded to include broader sustainability factors. In 2006, the Global Reporting Initiative (GRI) established guidelines for conducting materiality assessments in sustainability reporting, emphasising the importance of both financial and non-financial impacts. This approach was further developed by frameworks like the International Financial Reporting Standards (IFRS) and the Sustainability Accounting Standards Board (SASB), which integrate ESG considerations into corporate reporting to provide a comprehensive view of an organisation’s performance and risks.
The concept evolved into double materiality, which considers both the internal financial impacts and the external environmental and social impacts of an organisation. This dual approach, now embedded in European Sustainability Reporting Standards under the CSRD, mandates that companies assess and disclose how their operations affect and are affected by sustainability issues. This comprehensive perspective ensures that businesses report on significant matters that influence their financial stability and their contributions to sustainable development.
What is double materiality?
Double materiality is a crucial concept within the ESRS framework, guiding companies on which of the ten sustainability topics to report. This assessment applies to the environmental (ESRS E), social (ESRS S), and governance (ESRS G) standards. Companies only need to report on these topics if they are deemed to be materially relevant.
The concept of double materiality involves assessing both financial and non-financial perspectives:
- Financial Materiality (Outside-In): Examines how environmental and social factors affect the company's economic performance from a financial perspective.
- Impact Materiality (Inside-Out): Evaluates the impact of the company’s operations on the environment and society.
“ This dual approach ensures that organisations report comprehensively on sustainability issues that are significant to both the company's financial performance and their broader impact. By conducting a double materiality assessment, companies can prioritise and disclose the most relevant topics, providing stakeholders with a complete picture of their sustainability performance and impacts. This assessment is mandatory for determining which topics are materially relevant for reporting under the ESRS standards, ensuring transparency and accountability in sustainability reporting. ”
The CSRD mandates that companies conduct a double materiality assessment to identify which sustainability topics are materially relevant for reporting. While it does not prescribe an exact method, it provides general guidelines for the assessment process. Companies must evaluate the significance, importance, and likelihood of impacts for financial materiality, and assess the quality, severity, and probability of impacts for impact materiality.
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How to conduct a double materiality assessment
Conducting a double materiality assessment is a comprehensive process that involves several steps to ensure accurate and meaningful sustainability reporting. Below is a detailed guide on how companies can carry out this assessment.
Step 1: Understand Context and Value Chain
Approach: Start by mapping your company’s value chain and identifying key stakeholders involved in both upstream and downstream activities. Utilise existing sustainability documents, climate risk assessments, and human rights due diligence reports. This involves:
- Reviewing the company’s website and external materials for relevant information.
- Considering the legal and regulatory environment.
- Analysing media reports and publications about the company and its industry.
- Looking at peer reports and sector-specific benchmarks.
- Reviewing publications on sustainability trends and scientific findings.
Example: A food manufacturing company might map its value chain from raw material suppliers to end consumers, identifying key stakeholders such as farmers, transporters, retailers, and consumers.
Step 2: Propose Topics
Approach: Create a comprehensive list of potential ESG topics using the ESRS topic list, industry reports, sustainability frameworks, and competitor analysis. This list should include both sector-agnostic and entity-specific matters.
- Sector Topics: Use the ESRS list to identify general sustainability matters.
- Entity Topics: Consider unique issues such as company-specific tax policies or unique operational impacts.
Example: A car manufacturer may list topics like emissions, energy use, labor practices, and product safety.
Step 3: Engage Stakeholders
Approach: Engage with stakeholders through surveys, focus groups, and interviews to gather feedback on the proposed topics. This should include internal and external stakeholders such as employees, suppliers, customers, investors, and community groups.
- Methods of Engagement: Use varied methods like online surveys, in-person focus groups, and detailed interviews.
Example: A tech company might survey employees about workplace conditions, interview suppliers about labor practices, and hold focus groups with consumers about product impacts.
Step 4: Finalise Topics
Approach: Refine the list of ESG topics based on stakeholder feedback. Prioritise topics by their significance to stakeholders and impact on the business.
- Collaboration: Work with key internal decision-makers to finalise the list.
Example: A pharmaceutical company might prioritise topics such as drug safety, access to medicines, and research ethics based on feedback from healthcare professionals, patients, and regulatory bodies.
Step 5: Identify IROs (Impacts, Risks, and Opportunities)
Approach: Conduct a detailed analysis for each prioritised topic to identify specific impacts, risks, and opportunities. This involves:
- Impact Analysis: Identifying positive and negative impacts on people and the environment.
- Risk Analysis: Assessing risks to the company’s operations and reputation.
- Opportunity Analysis: Identifying opportunities for innovation and competitive advantage.
Example: A clothing retailer might identify the environmental impact of textile production, the risk of supply chain disruptions, and opportunities for sustainable sourcing practices.
Step 6: Score IROs
- Approach: Develop a consistent scoring system based on the severity and likelihood of each IRO. Use both qualitative and quantitative data to score the IROs.
- Scoring Criteria: Consider factors such as scale, scope, irremediable character, likelihood, and financial magnitude.
Example: A utility company might score the impact of carbon emissions, considering regulatory fines (severity) and the probability of increased regulation (likelihood).
Step 7: Assess Results
- Approach: Aggregate and analyse scoring results to set thresholds for determining material topics. Document the rationale for these decisions to ensure transparency.
- Setting Thresholds: Use both qualitative and quantitative thresholds to determine materiality.
Example: A mining company might set a threshold for water usage impacts based on regional water scarcity and stakeholder concerns.
Step 8: Integrate ESRS Disclosures
- Approach: Align identified material topics and IROs with corresponding ESRS metrics and disclosures.
- Data Integration: Ensure that the data collected aligns with ESRS reporting requirements and supports comprehensive disclosure.
Example: A financial institution might integrate climate risk data with ESRS disclosures on financial performance and risk management.
👉 Following these detailed steps ensures a robust double materiality assessment, helping companies identify and report all relevant sustainability topics. This process not only ensures compliance with the CSRD but also enhances transparency, stakeholder engagement, and strategic decision-making.
Double materiality challenges
Conducting a double materiality assessment involves navigating several challenges. Below are explanations of these challenges and helpful solutions.
Complexity in Data Collection and Analysis
- Challenge: Gathering comprehensive data across the entire value chain is resource-intensive and complex.
- Solution: Implement robust data management systems and leverage advanced analytics to streamline data collection and ensure accuracy across the value chain.
Engaging Diverse Stakeholders
- Challenge: Effectively engaging a wide range of stakeholders to gather meaningful feedback can be difficult.
- Solution: Develop a structured stakeholder engagement plan, using various methods such as surveys, focus groups, and interviews to ensure comprehensive and inclusive feedback.
Defining Materiality Thresholds
- Challenge: Setting appropriate thresholds to determine what issues are material can be subjective and contentious.
- Solution: Establish clear criteria and use a combination of quantitative and qualitative data to set materiality thresholds, ensuring they are aligned with industry standards and stakeholder expectations.
Consistency and Standardisation
- Challenge: Ensuring consistency and standardisation in data collection, analysis, and reporting across various regions and business units are challenging.
- Solution: Develop and enforce company-wide guidelines and standards for sustainability reporting to ensure consistency and reliability of data across all regions and business units.
Keeping Up with Regulatory Changes
- Challenge: Staying updated with evolving regulatory requirements and standards can be difficult.
- Solution: Stay informed about regulatory updates through continuous monitoring and participation in industry forums. Regularly review and adjust reporting practices to remain compliant with new requirements.
Integration with Strategic Planning
- Challenge: Integrating the results of the double materiality assessment into the company’s strategic planning and decision-making processes can be challenging.
- Solution: Align sustainability goals with business objectives and embed ESG considerations into decision-making processes to ensure comprehensive integration.
❗️ Navigating the complexities of double materiality and CSRD reporting can be particularly challenging for companies. The process demands extensive data collection, engaging diverse stakeholders, balancing financial and impact materiality, and staying updated with evolving regulations. Each step requires meticulous planning and execution to ensure compliance and transparency. These challenges can be daunting, making it essential for companies to have expert guidance.
That's where Greenly comes in. Greenly offers comprehensive CSRD reporting services to help companies effectively manage these complexities, ensuring accurate and compliant sustainability reporting.
How Greenly can help your company with CSRD reporting
Greenly can help your company comply with the Corporate Sustainability Reporting Directive (CSRD), utilising a Double Materiality Methodology to ensure thorough, accurate, and streamlined sustainability reporting. Our platform offers a range of features designed to help your organisation manage, assess, and report on sustainability metrics effectively. Here’s how Greenly can assist you:
Double Materiality Assessment
Greenly employs a form-based approach to simplify the Double Materiality Assessment, essential for CSRD compliance. This method helps identify significant impacts, risks, and opportunities related to your company’s activities, products, and services.
- Form-based Assessment: Structured forms aligned with thematic ESRS requirements capture a comprehensive picture of your company’s sustainability impacts. These forms are tailored to each major sustainability topic, ensuring that only material IROs are included in your CSRD report.
- Engagement and Accessibility: Our platform integrates comment boxes throughout the forms, allowing for additional context and details, and ensuring a customised and thorough assessment.
- Impact and Financial Materiality: Assess both the environmental and financial impacts of your activities. Quantify the severity, scope, remediability, and likelihood of impacts, and evaluate financial consequences to determine significant risks and opportunities.
Onboarding and Training
Greenly provides extensive onboarding and training to ensure you are fully equipped to navigate the CSRD framework.
- Comprehensive Training Materials: Detailed documents covering the CSRD process, including data collection guidelines and reporting obligations, are available in our Help Center.
- Interactive Training Sessions: These sessions encourage discussion and feedback, ensuring all participants thoroughly understand the material and their responsibilities.
Data Collection and Reporting
Our platform facilitates efficient data collection and reporting, essential for CSRD compliance.
- Integration and Format Compliance: Ensure all data meets CSRD formatting requirements, whether integrated from Greenly’s platform or transferred from your internal systems.
- Project Management Tools: Manage the data collection process with features that include descriptions of data points and data extraction formats.
- Data Storage and Retrieval: Simplify future reporting cycles with effective data retrieval systems and proof management.
- Task Management & Progress Monitoring: Monitor your reporting progress in real-time, ensuring timely completion and accountability.
Advanced Features
Greenly’s platform offers advanced features to enhance your sustainability reporting.
- Carbon Reduction Simulation: Assess the potential impact of your carbon reduction plans using our simulation tools.
- Audit-Ready Platform: Built with security at its core, our platform ensures your data is protected and audit-ready, enhancing the credibility of your reports.
- Ease of Access for Auditors: Simplify the audit process with straightforward access for auditors to review and verify data directly on the platform.
- Automatic Export: Generate and export your sustainability reports in the required XHTML format with XBRL tagging to meet all technical specifications.
By partnering with Greenly, your company can confidently incorporate double materiality and navigate the complexities of CSRD compliance, ensuring that your sustainability reporting is comprehensive, accurate, and aligned with regulatory requirements. Get in touch with us today.
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