Our Guide to the CSRD's Double Materiality Assessment

The EU’s Corporate Sustainability Reporting Directive (CSRD) will shortly be coming into effect. A follow-up to the existing Non-Financial Reporting Directive, the CSRD will expand the scope of companies obliged to disclose non-financial information on environmental, social, and governance topics. 

Companies should look to familiarise themselves now with the directive so that they are prepared for the coming changes. This means understanding several key concepts, including that of the ‘double materiality assessment’. 

👉 In this article we’ll explain everything you need to understand about the CSRD’s double materiality assessment, as well as practical steps that companies can follow to conduct the assessment.

The directive came into effect on the 5th of January, 2023, and replaces the pre-existing EU directive known as the NFRD (the Non-Financial Reporting Directive). However, it should be noted that the NFRD is still effective until the CSRD comes into full effect. 

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 count of companies required to report from around 11,000 to over 50,000 companies. 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. 

👉 To learn more about the NFRD, why not take a look at our article on the directive.

The CSRD will apply to all EU-based public companies, excluding micro-enterprises (defined as companies with less than 10 employees and an annual turnover or balance sheet below €2 million). Additionally, the directive will apply to EU-based private companies qualifying as ‘large’ - ie. companies that have two or more of the following: (1) 250+ employees (2) annual revenues of over €40 million (3) a balance sheet of over €20 million. 

The application of the directive will be expanded gradually, and will eventually also include consolidated reporting for non-EU based parent companies with annual revenues of over €150 million and either (1) a branch bringing in over €40 million in annual EU revenues or (2) an EU listed subsidiary that meets the criteria of a ‘large’ company, as outlined above.

👉 To learn more about the CSRD head over to our article dedicated to the directive, which explains everything you need to know.

What is the purpose of the CSRD?

The CSRD aims to ensure that stakeholders, including investors, have access to accurate and transparent information, allowing them to assess the impact of companies on both people and the environment. For investors in particular this will help them to determine the financial risks and opportunities stemming from sustainability issues affecting the company.

Companies that fall under the scope of the CSRD, are required to report in line with twelve draft standards, otherwise known as the European Sustainability Reporting Standards (ESRS). Two of these standards cover general disclosures across broad environmental, social, and governance (ESG) topics that all companies must report on. 

In addition to these two mandatory disclosure standards, there are ten more specific ‘topical standards’: five of which cover environmental standards, four of which relate to social standards, and one covering governance standards. These topical standards require more detailed and specific disclosures, however, companies only need to report on these standards where they are considered to be ‘materially’ relevant. This is where the concept of the ‘double materiality assessment’’ comes into play - but more on that later. First, let’s take a closer look at the sustainability topics covered by the ESRS: 

General Disclosures

General disclosures are mandatory for all companies that fall under the scope of the CSRD. It covers a company’s governance; strategy; impact, risk, and opportunity management; as well as metrics and targets. Additionally, companies are called upon to share information concerning ESG policies, alignment with EU taxonomy, stakeholder engagement and inclusion, and details on how the material impact of the environmental, social, and governance standards were assessed.

Environmental Standards

There are a total of five environmental standards under the ESRS. These cover: 

• ESRS E1 - the Climate Change Standard. This covers scope 1, 2, and 3 emissions, climate-related risks, carbon pricing, energy mix, and the organisation’s transition plan to ensure that it aligns with the targets set by the Paris Agreement (ie. net zero by 2050). 
• ESRS E2 - the Pollution Standard. This covers the disclosure of information pertaining to air, soil, or water pollution arising from a company’s operations (including its value chain). 
• ESRS E3 - the Marine Resources Standard. This standard concerns water consumption, recycled or reused water, and adverse impacts of the company on marine ecosystems. 
• ESRS E4 - the Biodiversity and Ecosystems Standard. This standard addresses the impact of organisations on biodiversity and ecosystems. Companies must disclose a plan to address any biodiversity loss. 
• ESRS E5 - the Resource Use and Circular Economy Standard. Companies are asked to disclose information on waste generated and any relevant circular resource flows.

Social Standards

There are four social ESRS standards. These include: 

• ESRS S1 - the Own Workforce Standard. Under this standard, companies must share quantitative information such as employee location, gender breakdowns etc. Companies must also provide information showing that they are in compliance with child labour policies, and alignment with UN Guiding Principles on Business and Human Rights. 
• ESRS S2 - the Workers in Value Chain Standard. Companies are asked to disclose policies relating to upstream workers in the value chain, for example, human trafficking policies, and how value chain workers are taken into consideration when making operational decisions. 
• ESRS S3 - the Affected Communities Standard. This ESRS standard focuses on the impact of the organisation on communities and the policies in place to ensure that these communities can effectively raise issues to the company. 
• ESRS S4 - the Consumers and End-Users Standard. This is very similar to S3, but instead focuses on issues raised by end-users of goods or services produced by the company.

Governance Standard

The final ESRS standard falls under governance: 

• ESRS G1 - the Business Conduct Standard. This standard mandates both qualitative and quantitative disclosures. Qualitative disclosures include procedures to create organisational transparency and information on how issues such as corruption and bribery are addressed. Quantitative aspects of the standard include key metrics such as the number of bribery incidents, the value of political contributions etc.

Companies must undertake a double materiality assessment to identify which of the ten ESRS topical standards (outlined above) matters the most to the organisation and its stakeholders. 

The double materiality assessment identifies both how a company's operations impact people and the environment, and also considers how sustainability considerations impact the company itself (hence the term ‘double’ materiality assessment). Topical sustainability standards can be material from either perspective - ie. material in terms of the company’s impact, or from a risk and opportunity perspective. 

The assessment invites a wide variety of stakeholders to evaluate both risks and opportunities relating to sustainability standards covered by the CSRD. Stakeholders cover a broad group, including customers, employees, scientific experts, and investors. Input from these groups will include both quantitative and qualitative data. 

The CSRD provides some guidance in the determination of materiality, however, companies are left with a lot of discretion to discern for themselves whether or not a subject is material.

The European Commission has singled out the Climate Change Standard as being particularly significant. Where a company deems that this topical standard is not materially important, it must provide a detailed justification as to why this is the case - in effect, this means that it is very challenging for companies to opt not to report on this standard. 

It’s expected that most companies that fall under the scope of the CSRD will also have to report under this specific standard. This will mean that they must provide information on their full scope of emissions (scopes 1,2, and 3), alongside their assessment of climate risks, and information on policies and strategies relating to climate change mitigation and adaptation.

Step 1 - Engage with stakeholders

It’s first important to determine which company stakeholders are impacted by the company operations, and which stakeholders have the power to affect the company. By engaging with these stakeholders, organisations can collate valuable input and feedback on material sustainability topics. 

Under the CSRD stakeholders are asked to identify the company’s most significant impact on the environment and people, as well as the biggest risks and opportunities for the company. 

Step 2  - Identify relevant sustainability issues

Companies should consider the full list of ESRS topics as part of their double materiality assessment. Additionally, companies should also identify any sustainability topics that are not outlined by the ESRS but that are specific to the company's operations. 

💡 When identifying relevant sustainability topics as part of the materiality assessment, companies should consider the sectors within which they operate, the geographical location of their operations, and the different steps of their value chain. Previous materiality assessments, impact risk assessments, external reports, and stakeholder inputs are all useful in creating a shortlist of sustainability topics. 

Step 3 - Assess impacts, risks, and opportunities

Once the organisation has identified the sustainability matters to be included as part of its double materiality assessment, the next step is to identify the impacts that the company has relating to these topics, and also the risks and opportunities presented. 

This stage of the assessment can be one of the more challenging aspects as it’s necessary to cover the entire value chain. Impacts can vary hugely, they may be both positive and negative, and cover short, medium, and long term implications. Companies will likely need to engage with a variety of different stakeholders and experts. 

Step 4 - Assessment of impacts

Once a company has identified the impacts, risks, and opportunities of the various sustainability topics, it's then time to assess their impact. Step 4 involves the assessment of impacts. 

This requires a company to consider the negative impact of activities, who may be affected, and how this negative impact may be avoided or reversed. An in-depth analysis will help a company to later determine which disclosure information and data is relevant. 

The relevant data and information will usually require engagement with stakeholders and experts, and can be obtained through interviews, surveys, and workshops. 

Step 5 - Assessment of risks and opportunities

The next step is to assess the impact of risks and opportunities with regard to the financial value of the company. Essentially the CSRD asks companies to consider to what extent they can continue to use their current resources and to what extent they’re able to maintain their existing relationships. 

This is another challenging task as again it mandates that companies apply these considerations to their whole value chain. It also requires insight into future sustainability developments - for example, will certain activities be taxed more heavily in the future (for example their emissions may be subject to carbon credit schemes)? 

Again companies can expect to require the input of a range of experts, including financial experts who can assist with estimating the scale of any financial impacts. 

Step 6 - Create the material overview

After all of the impacts, risks, and opportunities have been identified and assessed, an organisation will be able to identify sustainability topics that should be considered material and therefore subject to reporting under the CSRD. 

The ESRD provides some guidance on how to set thresholds as to what constitutes material issues, however, it's a determination that ultimately needs to be made by the organisation itself. Companies should look to involve senior management and experts in the discussion.

The outcomes of these determinations need to be communicated. Some organisations may choose to create a materiality matrix, while others may instead opt to translate results into a table that can hold more detailed information. 

Step 7 - effects on company strategy

For every sustainability topic that is determined to be material, companies must provide information on what measures they will take to manage the impacts. This means that companies disclose the metrics and targets they have set for each sustainability topic, as well as their strategy for achieving any targets.

Additionally, the CSRD also asks companies to disclose information on how they account for sustainability issues in their strategic planning processes.  

When does the CSRD come into effect?

The CSRD was adopted on the 5th of January 2030, and the EU Commission released the final version of the ESRS on the 31st of July, 2023. It’s expected that specific requirements for sectors will be released in 2024, along with guidance for non-EU companies. 

The reporting requirements of the CSRD will be phased in gradually as follows: 

• 2025 (for the 2024 fiscal year) for companies already subject to NFRD reporting;
• 2026 (for the 2025 fiscal year) for large companies listed on a European regulated market (excluding SMEs and micro-cap companies);
• 2027 (for the 2026 fiscal year) for listed SMEs. 
• 2028 (for the 2027 fiscal year) for qualifying non-European companies whose European revenue exceeds 150 million euros.

Companies will have to include the relevant CSRD disclosure information in their annual sustainability reports. This must be in a machine-readable digital format so that submissions are able to be collected into a single EU-wide database.

At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required. 

If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.