How to conduct a double materiality assessment for the CSRD

As part of the EU’s Corporate Sustainability Reporting Directive (CSRD) companies in scope will now be required to report on their double materiality. But how should they prepare?

The notion of a materiality assessment in sustainability reporting has evolved to include a more comprehensive perspective known as “double materiality”.

The concept requires companies to report on two dimensions.

🏢 Internal Impacts: This refers to how sustainability issues, such as environmental, social, and governance factors, impact the company’s own business operations, financial performance, and long-term viability.
🌎 External Impacts: This involves reporting on how the company’s activities, products, and services impact society and the environment. It considers the company’s influence on stakeholders, communities, ecosystems, and broader societal challenges, such as climate change, human rights, supply chain sustainability, and community well-being.

By reporting on both internal and external impacts, companies demonstrate transparency and accountability in managing their sustainability risks and opportunities. This approach provides stakeholders with a clearer understanding of how the company is addressing sustainability challenges and contributing to sustainable development.

But for companies who haven’t done so before, where should they begin with double materiality reporting?

How to perform a double materiality assessment

Companies subject to the CSRD will need to report using the European Sustainability Reporting Standards (ESRS). Therefore, to understand the process of conducting a double materiality assessment, you can use the draft ESRS 1 General Requirements, which includes a step-by-step guide (see page 30).

The steps below offer a basic model for conducting a double materiality assessment. However, depending on the specific requirements and guidelines set forth by the CSRD and ESRS in the coming months, there may be other considerations or requirements to consider.

The planning process

Planning is vital for every business process, so we’ve decided to keep it separate from the main steps.

Before starting, you should gain an overview of the timelines, engage with the appropriate leaders, determine ownership, and assign roles to team members. Everybody involved should clearly understand both the “what” and “how” of the process.

Step 1: Establish the purpose and scope

Clearly define the purpose and objectives of the assessment. Determine the scope, which may include specific business units, geographic locations, or supply chains.

Step 2: Identify stakeholders

Identify the key stakeholders who will be involved in or affected by the double materiality assessment. This may include employees, customers, investors, communities, regulators, and NGOs. Nature itself may be considered as a silent stakeholder.

Step 3: Internal impacts assessment

Assess the internal impacts of sustainability issues on the company 🏢:

Identify and analyse sustainability issues: Consider environmental, social, and governance factors that are relevant to the company’s operations, strategy, and performance.
Assess risks and opportunities: Evaluate how these sustainability issues may pose risks or create opportunities for the company. Consider the financial implications, operational impacts, reputational risks, and regulatory compliance aspects.

For example:

Opportunity ✔️ – Implementation of energy-efficient practices in our manufacturing facilities has resulted in significant cost savings and reduced carbon emissions.

Risk ❌ – Inadequate waste management practices in our office have led to increased environmental pollution and potential legal liabilities.
Quantify and prioritise: Use appropriate metrics, indicators, or frameworks to quantify the impacts and significance of the identified issues. Prioritise the issues based on their materiality to the company’s financial performance, operations, and long-term viability.

Step 4: External Impacts Assessment

Assess the external impacts of the company’s activities on society and the environment 🌎:

Identify and analyse external impacts: Consider the potential positive and negative effects of the company’s activities, products, and services on stakeholders, communities, ecosystems, and broader societal challenges. This includes considering aspects such as carbon emissions, waste generation, human rights, community engagement, and product safety.
Stakeholder engagement: Engage with relevant stakeholders to understand their expectations, concerns, and feedback regarding the company’s impacts. This can be done through surveys, interviews, focus groups, or consultation processes.
Quantify and prioritise: Use relevant metrics, indicators, or frameworks to quantify the external impacts and significance of the identified issues. Prioritise the issues based on their materiality to stakeholders and their potential for positive or negative effects.

Step 5: Reporting and Disclosure

Prepare a comprehensive report that summarises the double materiality assessment findings, this may be done with the use of a reporting framework such as CDP or GRI:

Internal impacts: Report on the identified sustainability issues, their financial implications, and the company’s strategies and actions to address them internally. This includes disclosing risks, opportunities, targets, and progress made.
External impacts: Report on the identified external impacts of the company’s activities, products, and services on society and the environment. Disclose the company’s efforts to mitigate negative impacts and contribute positively to sustainable development.
Communication: Communicate the assessment results to internal and external stakeholders through various channels, such as sustainability reports, annual reports, websites, and stakeholder engagements.

Step 6: Monitor and Review

Finally, establish a mechanism to monitor and review the identified material issues on an ongoing basis. Continuously evaluate the changing landscape, stakeholder expectations, emerging risks, and opportunities to ensure the company’s sustainability strategy remains relevant and effective.

Remember, the process of performing a double materiality assessment may vary depending on the specific context and industry of the company. It’s important to tailor the approach to suit your organisation’s unique needs and circumstances.