To comply with CSRD, businesses must perform a double materiality assessment. Double materiality extends on the existing concept of materiality widely used in managing financial risks to also include impact materiality. In this article, we explore the concept of double materiality and how it fits into the context of CSRD. We also look at how we approach double materiality assessments. This is part of a series of articles exploring CSRD. In the series we look at how businesses can adopt and integrate CSRD into their operating model.
What is Double Materiality?
Double materiality is a method of determining which sustainability topics are in important to an organisation. It is an approach which helps companies to understand sustainability from two perspectives, financial materiality and impact materiality.
The first perspective is financial materiality and is something many businesses are already considering. This looks at the financial risks a business faces as a consequence of external factors, such as climate change.
The second perspective is impact materiality. Impact materiality considers the impacts that an organisation has in operating its business. These impacts often relate to environmental concerns, such as pollution or over-use of natural resources. Social impact is also considered, such as the working conditions of workers in the value chain, or the communities affected as a result of the operations of a business.
When combined, financial and impact materiality provide a comprehensive perspective on the material impacts and risks for a company.
To determine what constitutes something to be material, a business will use a scoring mechanism to determine the significance of a given topic. The business itself will have a perspective on the scores for topics, but an important aspect of double materiality is getting the perspective of stakeholders.
Stakeholders play a critical role in double materiality. The combination of stakeholders up and down a value chain will see a business from multiple different vantage points. Their perspectives combined will provide a normalised view of what topics are material.
Overall, double materiality is a method of identifying sustainability related topics which a business should be focusing on. In the context of CSRD, this results in defining the topics a business reports against in their annual report.
What is a Double Materiality Assessment?
A Double Materiality Assessment is the activity a business performs to determine which material topics they must report on. It requires a business to take into consideration perspectives and information needs from affected stakeholders across their value chain.
The double materiality assessment is a mandatory part of CSRD reporting. Guidance provided by EFRAG, the standard setters responsible for CSRD, sets out the responsibility of the board to ensure the process is performed appropriately. The process will be subject to audit assurance as part of the CSRD requirements.
How do you perform a double materiality assessment?
Using the guidance provided by EFRAG, combined with our experience from working with companies, we’ve developed a double materiality assessment approach for enterprises.
Our assessment spans three main phases of activity; context settings, stakeholder engagement and topic analysis. Across these three phases of work, the material topics for an organisation will be identified and verified using clear and consistent criteria.
Whilst we believe this approach is right for most businesses, a degree of flexibility also needs to be recognised. The general flow of activity is still relevant, but the effort and methods used may differe depending on the size and complexity of a business.
Defining the context
The first phase of work in our approach to double materiality is to determine the context for the assessment. This involves multiple activities, designed to define the topics to be assessed, the relevant stakeholders and the method to be used.
The choices made in these three key activities will depend on the size, complexity and timeline for the business. Ultimately, the board is responsible for ensuring the decisions made in this phase are appropriate for the business, and we advocate that the outputs of this phase should be presented to the board in formal papers for assurance.
Stakeholder Engagement
The bulk of the effort in a double materiality assessment happens in engaging stakeholders. This phase will result in capturing the requirements and perspectives of stakeholders on topics from across the value chain.
Stakeholder engagement has the potential to consume large amounts of resources. Our experience is that businesses should consider stakeholder engagement across two dimensions.
The first dimension is to align stakeholders on their relevance to topics. The second dimension is to then determine the mode of engagement for that stakeholder.
We use four methods of engagement across stakeholders, giving businesses the flexibility to capture relevant inputs, but ensuring efficient use of resources. The most intimate engagement is by direct 1-1 interviews. For some critical stakeholders in the business, this may be relevant for many reasons, but for most, this would be an expensive approach in terms of cost and time.
For important stakeholders, a one to few or one to many approach is appropriate. This takes the form of workshops, user groups and surveys. These provide an opportunity for collecting diverse views across groups of stakeholders with minimal effort.
The final method is to use market research. This allows for stakeholder perspectives to be considered, without direct engagement. This activity can consider academic research, publications from representative bodies such as consumer groups or investor forums. There are a growing number of technology platforms emerging to support this activity, using machine learning to process large data sets to map topics to sectors, businesses and products.
For large, complex businesses with potentially thousands of stakeholders in their value chain, an efficient method of stakeholder assessment is crucial. For companies who operate multiple businesses under a group or holding company, or for private equity investors required to report on the business with majority stakes, this use of technology has significant advantages.
Topic Materiality Analysis
The final phase in our assessment approach is to process all of the inputs to determine material topics which the company should report on. This information, including documentation on the methodology used, should again be presented to the board for assurance.
During the stakeholder engagement, scoring mechanisms are typically used to provide a consistent criteria for topic analysis. This information fees into the production of a materiality map, a visual representation of topics against a matrix of materiality criteria.
This point in the overall CSRD program is an opportunity to ensure stakeholders are continuously engaged. Providing the results of the assessment opens up further dialogue which will be crucial as focus shifts later in the CSRD program to taking action to improve sustainability performance.
With material topics identified, the methodology documented and board assurance obtained, the company can now focus on developing a robust approach to producing a CSRD compliant annual report.
Further Information
Our teams have been working with large, complex companies as they adopt and integrate CSRD into their business. If you’d like to learn more about how we approach double materiality assessments or any aspect of CSRD, get in touch and one of the team will arrange a call to discuss how we can help.
Jordisk is a sustainability consulting firm specialising in CSRD. Our experts have a deep understanding of CSRD and the broader package of EU directives. We take a pragmatic approach to help clients efficiently and effectively integrate these EU regulations into their business.
