Is your business prepared for the CSRD?

The European Union's Corporate Sustainability Reporting Directive (CSRD) will significantly impact how businesses report on their sustainability performance. A key requirement of the CSRD is the mandatory implementation of a double materiality assessment (DMA). This requirement can seem daunting, but it presents a significant opportunity for businesses to take a proactive approach to sustainability, to test the resilience of its business strategy and gain a competitive advantage.

After this dive into DMAs, be sure to read our Guide to CSRD Preparedness (coming shortly), which outlines the concrete steps you should take following your materiality process to get CSRD-ready in advance of incoming reporting deadlines.

What is a double materiality assessment?

A double materiality assessment is a process that helps companies identify sustainability matters that are most relevant to them and their stakeholders. It considers both the impact a company has on people and the environment, and the risks and opportunities that these sustainability matters pose for the company's financial performance.

In essence, a double materiality assessment considers two types of materiality:

• ‍Impact Materiality: This refers to the environmental and social impacts of a company's business activities. This includes factors such as climate change, pollution, resource depletion, labour practices, and human rights.‍
• Financial Materiality: This refers to how sustainability issues can affect a company's financial performance. This includes factors such as the cost of compliance with environmental regulations, the impact of climate change on supply chains, and the growing demand for sustainable products and services.

By completing a double materiality assessment, companies can gain a comprehensive understanding of their sustainability performance and identify additional risks and areas for improvement. This information can then be used to develop a sustainability strategy that creates long-term value for the company and its stakeholders.

CSRD has a number of specific technical and assurance requirements that need to be met, and the materiality process is based on the European Sustainability Reporting Standards (ESRS).

The benefits of double materiality assessments

There are a number of benefits to conducting a DMA:

• ‍Improved regulatory compliance: Double materiality assessments are a mandatory requirement of the CSRD. Other incoming standards (e.g. UK Sustainability Reporting Standards) are likely to follow a similar approach. By completing a robust assessment, companies can ensure that they are meeting their reporting obligations - including an auditable trail of materiality decisions and assumptions.‍
• Reduced risks: Sustainability for companies is about long-term viability. Double materiality assessments can help companies to better identify, define and mitigate sustainability risk, and beef up risk management systems to build resilience. This can help to protect the company's reputation and financial performance.‍
• Enhanced stakeholder engagement: Double materiality assessments can help companies to better understand the sustainability concerns of their stakeholders, including “silent” ones.This can lead to improved stakeholder relationships and increased trust.‍
• Increased innovation: A core aspect of double materiality is about identifying opportunities for improving both sustainability performance and enterprise value. This can lead to the development of innovative products and services and drive competitive advantage. Without a dedicated process, such as a DMA, these opportunities can often be overlooked. ‍
• Improved brand reputation: Better understanding of context and material focus can help an organisation to position its brand more memorably and favourably. And by demonstrating a commitment to sustainability, companies can improve their brand reputation and attract new customers and investors.

How we can help

Our team of sustainability experts can help your business to conduct a compliant double materiality assessment and develop a sustainability strategy that is aligned with the CSRD requirements. We have extensive experience in helping businesses of all sizes to improve their sustainability performance.

If you don’t fancy going it alone and want some help preparing your business for the CSRD, get in touch today.

How to undertake a CSRD-compliant double materiality assessment

Follow these steps to develop a CSRD-compliant double materiality assessment.  This comprehensive view of sustainability matters can be used to manage sustainability risks, identify opportunities to create long-term value, and improve stakeholder engagement.

1. Lay the groundwork

Preparing for the double materiality process requires a good understanding of the organisation’s operating context and business strategy, as well as a broad knowledge of sustainability issues and the steps involved in a DMA.

Some stakeholder input is useful at this stage for a breadth of perspective and to prepare teams for any incoming requirements.

• ‍Build a light-touch plan for what will happen (use this list as an outline!), when, and how you will record aspects of the process - primarily the assumptions and decisions made and the datapoints and methodologies used - for an eventual limited-assurance audit by the company auditor.‍
• Map out your different stakeholders. Just like any good sustainability initiative, stakeholder engagement is crucial. List out who will be consulted, how and when in your plan. ESRS requires engagement with all “affected stakeholders”, including"silent" stakeholders (ESRS also defines Nature as a stakeholder), which can be represented by NGOs and objective scientific research. Your list should include them, investors, customers, client, employees, and regulators. ‍
• Gather information from key company documents, desk research, scientific papers, and analysis of each of the company’s business lines. ‍
• Engage a small core of senior stakeholders through interviews at this stage to understand the overall direction of business travel, their perspectives on the company's impact, their priorities for sustainability reporting, and gain buy-in on behalf of their departments for the DMA process.

2. Build a materiality long-list

Use the contextual information gathered in step 1 to produce a list of potentially material or near-material sustainability topics to further analyse.

• ‍The list should be unique to your company. Consider both sector-specific and company-specific factors, such as your areas of operation, value chain, industry and market(including labour) analysis, investor trends, and your geographical, social and environmental footprint.‍
• Leverage existing resources to create your list, starting with the topics list from the ESRS. Use industry benchmarks or standards, such as SASB, examine suppliers' and vendors' ESG reports, take inspiration from your company's risk register, and look at what peers are doing.

3. Analyse the IROs (Impacts, Risks and Opportunities)

This can be the most intensive part of a DMA. For each sustainability matter in the long list, you need to both identify and quantify the possible external impacts your company could have and the risks and opportunities potentially present for your company over the short, medium and long term. Then you need to weight these IROs based on a number of factors and input from a number of sources.

• ‍Develop a scoring mechanism: Firstly, you require a methodology for objectively weighting materiality of each Impact, Risk, and Opportunity (IRO), including thresholds by which to assess severity.
  
  Your company’s risk management framework may have existing criteria that can be used, otherwise you need to define the markers of severity and likelihood, combining them for a materiality weighting. ESRS 2 IRO-1 requires the undertaking to explain how it determined the materiality of the impact, including the qualitative and quantitative thresholds used.  
  
  The severity of many Risks and Opportunities can be measured in financial terms (the thresholds for materiality will be different for each company), whereas Impacts will require the measures below, outlined by EFRAG:
  
  The severity of an actual or potential negative impact is assessed from the perspective of the affected people or the environment and it is determined by the following characteristics that inform the basis for determining the thresholds:
  • (a) Scale: how grave the impact is (i.e., extent of infringement of access to basic life necessities or freedoms (e.g., education, livelihood etc.);
  • (b) Scope: how widespread the impact is (i.e., number of individuals affected or the extent of the environmental damage); and
  • (c) Irremediable character: the extent to which the impact can be remediated (e.g., through compensation or restitution; whether the people affected can be restored to their exercise of the right in question). The underlying question is: are there any limits on the ability to restore the environment or those affected to a situation at least the same as, or equivalent to, their situation before the negative impact?‍
• Impact analysis: Identify and assess any potential environmental and social impacts that could be associated with each of the listed sustainability matters. Go beyond the financial implications and consider the scale, scope, likelihood and reversibility of each impact. This could be anything from pollution of waterways or deforestation through to forced labour or consumer safety. Depending on specific circumstances, in-depth assessment is not always necessary where there is scientific consensus on the severity of an impact. ‍
• Financial risk and opportunity analysis: Don’t forget the bottom line. Assess the financial risks and opportunities associated with each sustainability topic.This could include compliance costs, climate change impacts on your supply chain, or potential for new sustainable markets.
  
  Some creativity and scenario planning is required to get the best coverage of potential risks and opportunities, and different lenses should be applied for the short- and longer-term (a workshop or brainstorm can be useful here). The risk and compliance function should also be consulted; some risks will already be well documented on the risk register, though it’s likely there will be gaps.
• Engage and survey stakeholders from the different groups mapped earlier.  Input is required to help understand different perspectives on severity and materiality of the IROs and broader issues. Surveys can ask to score each long-listed sustainability topic on both the potential impact on the company’s finances and the impact that the company can have on the issue. The degree of impact on stakeholders may inform the degree of engagement, particularly around prioritisation.

4. Categorise and prioritise IROs

This is where you determine the level of materiality foreach topic or sub-topic, what is reported upon, and where it sits in terms of priority in the company’s sustainability strategy.

• ‍Identify your organisations key material topics and themes using the analyses and weightings above. These priority areas should instruct your sustainability strategy, be incorporated into the risk management systems and form part of the wider business strategy, if they are not already.‍
• Categorising topics is very useful. Materiality is not equal; for some topics, an organisation may want to take a leading stance in order to differentiate in their market, but other topics might only warrant the minimum levels of compliance for reporting to ESRS standards. Some non-material topics may be entirely irrelevant, yet others maybe on the borderline and require monitoring. For example:
  

• ‍Collaborate and play back with core stakeholders. Ensure the analysis reflects the organisation and is validated by those in the business, especially those within sustainability-related governance functions.

5. Integrate and report

• ‍CSRD Disclosure: The results of the double materiality assessment should be documented in a CSRD report and integrated into the company’s annual report. This report should disclose the material sustainability matters identified by the assessment, along with the associated IROs and aligned with the relevant CSRD topical standards for mandatory disclosure.  There will be some gap analysis and work to do before reporting on these datapoints for CSRD – see our CSRD preparedness article. ‍
• Sustainability strategy: The findings of the assessment should also be integrated into your company's overall sustainability strategy. This will ensure that your sustainability efforts are aligned with best-practice double materiality processes and CSRD reporting obligations.‍
• Graphical representation: It is useful to visually represent the materiality of sustainability matters and to illustrate the severity and likelihood of IROs. Visual aids can enhance transparency and communication with stakeholders about your sustainability journey. A clear and concise DMA matrix is the go-to format.‍
• Strategic Integration: The DMA is not a one-off exercise if CSRD is a required disclosure – it will be a repeatable exercise every year and is a useful planning and resilience-checking tool to use at a strategic level at the start of the annual cycle. Integrate the findings into your overall sustainability and business strategies and action plans to build long-term value to the organisation and its stakeholders (and ensure your sustainability efforts are CSRD-compliant)

Next steps for CSRD preparedness

A DMA is only one part of the EU's Corporate Sustainability Reporting Directive. Detailed, ESRS-aligned reporting is also required, with hundreds of datapoints potentially needed. A thorough gap analysis is recommended, and we will provide more guidance in this blog as to how to prepare for your first CSRD report.

What support is available?

It can be useful to engage a consultancy like Eaglesfield ESG to run the DMA for you, to ensure best practice, CSRD compliance, stakeholder buy-in and to avoid de-resourcing other areas of sustainability.

There are also plenty of resources out there for to help manage the process yourself. EFRAG has its own guidance on ESRS implementation, and there are numerous webinars and publications out there. You may even find it helpful to up-skill an employee with external training.

The recommended approach is to get a year's practice in before your company falls into mandatory scope of CSRD, which will give you a chance to build out the correct processes and start mapping the data requirements.

For any help and guidance on setting up for CSRD success, do get in touch!