Preparing for the Double Materiality Assessment: The Next Step in CSRD Reporting

If you joined our webinar or read our blog post on getting to grips with the latest in EU sustainability regulation, you'll know all about the Corporate Sustainability Reporting Directive (CSRD): the CSRD represents a major step forwards in corporate sustainability reporting, legally binding companies in the EU to disclose their impact on the environment and on human rights transparently and consistently. The vision of this regulation is to secure a more just transition to a low-carbon world.

Where our previous post provided an overview of the CSRD and who it affects, this piece focuses on the concept of 'double materiality', one of the most important changes to the reporting process under the new regulation. We explain what this means, why it's important, and how companies can prepare for it.

Quick background to CSRD

To deliver on the 1.5ºC targets of the Paris Agreement, the European Financial Reporting Advisory Group (EFRAG) was established in 2001 with the support of the European Commission.

In 2022, with the release of the CSRD, the role of EFRAG was extended to provide technical advice on a harmonised set of sustainability reporting standards for companies operating in the EU. This is how the European Sustainability Reporting Standards (ESRS) were developed. The ESRS identify and require the disclosure of environmental, social, and governance (ESG) impacts, risks, and opportunities for over 50,000 companies in the EU and specific non-EU organisations.

To refresh your memory, read our blog on the CSRD.

Double materiality means a deeper dive into climate-related impact

The new framework introduces the principle of 'double materiality' for assessing ESG impacts. This means that companies now have to report on

• how their business is financially impacted by climate change (financial materiality) and
• their impact on people and the environment (impact materiality).

This initiative therefore requires companies to better understand their impact – and be accountable for it. A double materiality assessment is a crucial foundation for strategic ESG planning, budget allocation, risk management and reporting. It identifies and prioritises the climate-related impacts that can affect a company's performance, value creation, reputation, and legal position, as well as capturing a company's ESG impact.

Getting the details right is key to successful CSRD reporting

Now that double materiality assessments are mandatory for most companies under the CSRD, how do you begin your reporting?

Start with establishing the appropriate structure and process: A double materiality analysis requires widespread engagement across an organisation and the collaboration of its stakeholders to establish governance structures and processes. South Pole suggests that companies appoint a project manager who is responsible for coordinating and implementing the materiality assessment. Building a comprehensive company oversight and involving the appropriate actors is also crucial to ensure resources are appropriately allocated, that the results can be verified and that the findings are effectively integrated into the corporate strategy.

It is also critical to collect the correct data as part of this effort and organisations need to make sure a robust process is in place to rate the identified topics for the financial materiality and impact materiality assessment. The topics should cover all relevant ESG subjects for the company and organisations should adopt a multi-source approach. The disclosure exercise should include a process for identifying material issues, as well as a list of material topics and a statement on how material topics are managed and monitored.

More emphasis on stakeholder and third-party validation

Alignment with stakeholders is also crucial to validate the material issues that have been identified. The information can be gathered via communication channels such as surveys, interviews, meetings, and workshops. When this is done, and the topics have been validated, understood, and rated, it is time to act on the results.

All of the analysis conducted as part of the materiality assessment should then be documented and disclosed to ensure the transparency and effectiveness of the report. Additional third-party validation is recommended for EU companies subject to the CSRD.

Starting early will save you time in the long run

The ESRS is a significant step towards a sustainable future, and companies must adapt to the new standards to ensure their long-term viability. The double materiality approach comprehensively assesses ESG impacts, risks, and opportunities and encourages companies to be accountable for their environmental and societal impact.

To comply with the ESRS, companies need to establish appropriate structures and processes, identify critical topics, gather evidence, validate the outcomes with stakeholders, and act on the results. A regular assessment is necessary to ensure alignment with ESG priorities and effective reporting.

While the additional reporting may seem burdensome, early compliance with CSRD will enable insights into benefits and cost-savings associated with the enhanced requirements, and can help kickstart innovation. It can also open opportunities for partnership alignment along the corporate supply chain, which is key for future proofing business operations.