Understanding the CSRD 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.

At a later stage, organisations will also have to consider sector-specific sustainability matters based on the sector-specific ESRS 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.

In our experience, it is crucial to tap into all the relevant units of an organisation to make these assessments as rich as possible and also to avoid duplication of effort. Since these assessments need to cover the entire value chain, organisations are likely to need to consult stakeholders and topical experts along the way.

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.

Input for these quantitative assessments can be obtained from engaging with stakeholders and experts, both internally and externally, through interviews, surveys, and workshops. In addition to this bottom-up approach, a holistic, top-down review of the outcomes is advised to address a critical challenge organisations face when assessing impacts: how to compare impacts that are completely different.

The next step is to assess the financial effects that have not yet been incorporated into the financial statements. CSRD asks organisations to look at financial effects from two perspectives: to what extent can you continue to use your current resources and to what extent can you maintain your existing relationships?

Again, 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. 

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. We suggest bringing these experts together in a workshop so they can challenge each other on the relative score of each topic and how that fits into the bigger picture.

Once all impacts, risks and opportunities have been assessed, 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. 

An organisation should include all significant impacts, risks and opportunities, however, if too many IROs are included, the core issues that are most critical to the organisation may be overshadowed. Therefore, it is advised to engage in thoughtful discussions with stakeholders, senior management and specialists to pinpoint and prioritise the most material matters that the organisation can focus on from a strategic perspective.

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.