Double Materiality Assessment Process

The ESRSs provide a list of sector-agnostic sustainability matters that organisations should consider in their materiality assessment. Organisations will also be required to identify entity-specific sustainability matters that are not explicitly mentioned in the ESRS.

Organisations need to consider their applicable operating sectors, geographical areas of operation, as well as their value chain to identify potentially relevant sustainability matters. Previous materiality assessments, internal documentation (e.g. impact and risk assessments), external documentation (e.g. sector reports, benchmarks and ESG ratings), and insights from stakeholder engagement are all good points of reference to start from.

By working with internal specialists and using internal resources, organisations can avoid being overwhelmed with a huge list of topics and can create an actionable short list of topics to be considered in the next steps of the assessment.

In the future, organisations will also have to consider sustainability matters based on the sector-specific ESRS’s that are still in development.

In the process of determining whether the sustainability matters as identified in the previous step are indeed material (and should therefore be disclosed in the sustainability statements), organisations must next define the impacts the organisation creates and the risks and opportunities they present.

This can be a challenging exercise. Impacts related to any sustainability matter on people and the environment can be positive or negative, actual, or potential, and interconnected with the impacts from other topics. Understanding the timeline of these impacts, risks, and opportunities is also important, in that they can occur in the short, medium or long term and pertain to (future) events and activities across the value chain.

We believe in the need to tap into all the relevant units of an organisation to make these assessments as rich as possible and to avoid duplication of effort.

Once sustainability matters have been described in terms of impacts, risks and opportunities, the next step is to quantify them.

The level of detail involved in this step should be applied at a granular level, as defined in the ESRSs. This detailed assessment helps to later determine which disclosure requirements and data points are material. Moreover, organisations need to disclose how they manage the impacts, risks and opportunities connected to each topic, clarifying potential strategic implications.

The input for these quantitative assessments should be achieved through the combination of stakeholder input and expert analysis. This can be done through interviews, surveys, and workshops. In addition to this bottom-up approach, a holistic, top-down review can help make sense of how very different impacts stack up against each other.

The next step is to zoom in on what this all means for your bottom line. The CSRD requires you to assess sustainability’s financial effects t understand to what extent you can continue to use your current resources and to what extent you can maintain your existing relationships.

This may be a challenging exercise since it requires an understanding of events in the value chain, as well as insight into sustainability developments that can affect business processes.

For comprehensive results, bring together sustainability, risk and finance leaders to uncover how emerging issues could reshape costs, revenue or relationships. Sustainability teams can help identify events that might trigger a risk or opportunity, for example, new regulations, increased public scrutiny or changing stakeholder expectations regarding a certain topic. In contrast, risk experts can support and ensure alignment with the broader enterprise risk management approach, and financial experts can help to assess the magnitude of the financial effect, for example, an increase in R&D expenses, loss of revenue or increase in operational costs.

Once all impacts, risks and opportunities have been assessed, it's time to pull everything together into a materiality overview. Here you prioritise issues based on their significance, balancing stakeholder concerns with strategic relevance. An organisation can create separate ranked lists for negative impacts, positive impacts, risks and opportunities. By applying a threshold or cut-off point, these can then be split into material and not material impacts, risks and opportunities.

Less can be more. In fact, while an organisation should include all significant impacts, risks and opportunities, if too many IROs are included, the core issues that are most critical to the organisation may be overshadowed. Focusing on what truly matters helps avoid diluted action and scattered reporting.

For each sustainability matter that has been identified as material, CSRD requires that companies disclose exactly what measures are being put in place to manage environmental and societal impacts. As a result, in time, companies should also disclose not only the metrics and targets they have set for each sustainability measure but also the policies and action plans they will implement to achieve their goals.

These requirements lead to an increasing need to expressly consider sustainability impacts and to take a longer-term perspective when developing corporate strategy. The disclosure of action plans also requires companies to credibly formulate how they will ensure sustainability matters are addressed in the organisation and which parts of the organisation need to be involved.