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Our Guide to the CSRD's Double Materiality Assessment
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The concept of double materiality lies at the heart of the EU’s Corporate Sustainability Reporting Directive (CSRD), now in effect as of January 1, 2024. This dual approach to materiality requires companies to assess not only how sustainability issues impact their financial performance but also the environmental and societal impacts of their activities.
With double materiality being a cornerstone of CSRD compliance, businesses must prioritise understanding and implementing this assessment to meet the directive’s requirements.
👉 In this article, we'll explore everything you need to know about the CSRD's double materiality assessment and practical steps for conducting it.
What is the CSRD?
Before diving into double materiality, it’s important to understand the EU’s Corporate Sustainability Reporting Directive (CSRD) itself. Replacing the Non-Financial Reporting Directive (NFRD), the CSRD significantly expands the scope of companies required to disclose sustainability data. Over 50,000 companies, including 10,000 non-EU entities with substantial operations in the EU, will now fall under its remit.
“ The directive aims to enhance and standardise sustainability reporting across the EU, ensuring greater transparency and accountability on environmental, social, and governance (ESG) topics. By mandating detailed and reliable disclosures, the CSRD supports the EU’s sustainability goals and encourages companies to adopt more responsible practices. These requirements apply from fiscal year 2024, with the first reports due in 2025. ”
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Who does the CSRD apply to?
The CSRD affects 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 |
What disclosures are required under the CSRD?
Under the CSRD, companies must report in line with the European Sustainability Reporting Standards (ESRS), which include two cross-cutting standards and ten topical standards across environmental, social, and governance (ESG) topics. While some disclosures are mandatory for all companies, others depend on the results of a double materiality assessment to determine their relevance, including entity-specific sustainability matters unique to each organisation’s operations and impacts.
Key disclosures include:
- General Requirements (ESRS 1): Framework for reporting, covering governance, strategy, risk management, and climate-related metrics.
- General Disclosures (ESRS 2): High-level information on impacts, risks, and opportunities, as well as governance and strategy.
| Category | Number of Standards | Key Focus Areas |
|---|---|---|
| Environmental | 5 | Climate change, pollution, water and marine resources, biodiversity, resource use, and circular economy. |
| Social | 4 | Workforce conditions, value chain workers, affected communities, and end-user impacts. |
| Governance | 1 | Business conduct, anti-corruption, corporate strategy, and stakeholder engagement. |
Companies are expected to provide detailed disclosures on these topics where deemed materially relevant, aligning with global frameworks like the TCFD and ISSB.
What is a double materiality assessment?
The double materiality assessment is a cornerstone of the CSRD, requiring companies to evaluate sustainability from two key perspectives:
- Financial Materiality (Outside-In): Examines how environmental and social factors, such as climate change or resource scarcity, affect the company’s financial performance and economic position.
- Impact Materiality (Inside-Out): Evaluates how a company’s operations and activities impact the environment, society, and broader stakeholders, such as through emissions or labor practices.
This dual approach ensures companies provide a comprehensive view of their sustainability risks, impacts, and opportunities, aligning financial performance with broader sustainability considerations. It builds on the traditional concept of single materiality, which focuses solely on financial risks and opportunities, to include the wider consequences of business activities.
The CSRD mandates that companies conduct a double materiality assessment to determine which sustainability topics - across environmental, social, and governance (ESG) areas - are materially relevant for reporting (ie. to identify their most significant sustainability risks). While the directive does not prescribe a specific method, it outlines general guidelines:
- For financial materiality: Companies must evaluate the significance, importance, and likelihood of external factors influencing their financial stability.
- For impact materiality: Businesses need to assess the quality, severity, and probability of their impacts on the environment and society.
This holistic approach reflects the growing demand for transparency and accountability, ensuring corporate reporting aligns with the EU’s sustainability goals and supports better decision-making for all stakeholders.
💡 The concept of double materiality is closely aligned with principles established by the Global Reporting Initiative (GRI), which has long emphasised the importance of considering both financial and non-financial impacts in corporate reporting. By incorporating these broader perspectives, double materiality ensures that reporting reflects the interconnectedness of business operations and sustainability issues.
“ The double materiality assessment ensures companies evaluate each sustainability matter from both financial and impact perspectives, offering a comprehensive view of sustainability risks and opportunities. ”
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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 potentially relevant sustainability matters 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 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 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 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.
Greenly's Carbon Management Solutions
While Greenly offers support for CSRD compliance, our platform goes far beyond this, we provide a suite of carbon management solutions to support businesses in reducing their environmental impact and meeting sustainability goals. By focusing on actionable strategies and cutting-edge tools, Greenly empowers companies to take control of their emissions and align with global climate objectives.
Carbon Management
Greenly’s platform simplifies the process of tracking carbon emissions across all scopes: direct (Scope 1), indirect (Scope 2), and supply chain-related (Scope 3). By accurately measuring emissions at every level, companies can identify high-impact areas and take meaningful steps to reduce their overall carbon footprint.
Tailored Emissions Reduction Plans
Beyond measurement, Greenly provides practical insights and recommendations to help companies reduce emissions. From energy usage and transportation to waste management and operational efficiency, Greenly’s science-based action plans guide businesses toward impactful changes that align with their sustainability goals.
Lifecycle Assessments (LCAs)
Greenly helps businesses assess the carbon impact of their products and services across their entire lifecycle. By understanding the footprint of every stage - from raw material sourcing to end-of-life disposal - companies can make informed decisions to improve sustainability.
Building a Sustainable Supply Chain
Supply chain emissions (Scope 3) often account for the largest share of a company’s carbon footprint. Greenly offers tools to evaluate and mitigate these emissions, providing insights into supplier practices and supporting sustainable procurement. By working with aligned suppliers, companies can reduce emissions while building resilience across their supply chain.
Offsetting Residual Emissions
For emissions that cannot yet be reduced, Greenly connects companies with verified carbon offset projects. From reforestation efforts to renewable energy initiatives, these projects support global climate action and help businesses address their residual impact responsibly.
👉 Greenly empowers companies to take actionable steps toward sustainability. With effective carbon management solutions, tailored reduction plans, and tools to build a resilient supply chain, your business can make a meaningful difference. Get in touch with us today to learn more.
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