Double Materiality Assessment according to CSRD and ESRS

Background to CSRD and ESRS

For companies subject to sustainability reporting, the introduction of the CSRD (Corporate Sustainability Reporting Directive) and the associated European Sustainability Reporting Standards (ESRS) requires conducting a double materiality assessment (Double Materiality). The complex requirements face many companies with new challenges, often leading to fundamental questions such as: What requirements need to be met? When and how should these be implemented? And most importantly: Where to start? This article provides an overview of the topic and answers to your questions.

What is a double materiality assessment?

Double materiality is a central part of sustainability reporting under the CSRD. It requires companies to consider and assess both their positive and negative Impact on the environment and society, capturing both potential and actual impacts. At the same time, within the double materiality analysis, companies must consider the effects of external factors on their own financial performance. This approach enables a comprehensive and transparent evaluation of a company's sustainability performance. The requirements for the double materiality analysis are described in ESRS 1 and must be reported mandatorily in ESRS 2.

To determine which issues are material to a company, two perspectives are always considered.

1. Financial Materiality (Outside-In)
   ‍The company assesses the opportunities and risks that external sustainability issues such as climate change, biodiversity changes, or water resources may have on its own financial performance.
2. Impact Materiality (Inside-Out)
   ‍It examines the negative and positive impacts of the company's business activities on the environment and society, such as greenhouse gas emissions.

When is a topic considered material?

A topic qualifies as material and thus reportable if it gains relevance either through the company's specific impacts, risks, and opportunities (Outside-in perspective) or through its impacts on people and the environment (Inside-out perspective). The key is to limit the sustainability report to information that is of substantial importance for the respective company and thus represents significant value for the users of the report. The execution must consider different thematic areas that are divided into Topics, sub-topic, and sub-sub-topics.
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Who needs to conduct a double materiality assessment?

Every company subject to the requirements of the CSRD is obligated to conduct a double materiality analysis. The following graphic illustrates which companies are required to report when:
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6 steps to conduct a double materiality analysis

Performing a double materiality analysis requires a structured and efficient approach to create a viable basis for the subsequent gap analysis and the capturing of reporting contents. A double materiality analysis involves several steps:

Step 1: Identification of Stakeholders & Status Quo Analysis

An in-depth examination of the company's operations, business model, business relationships, and the entire upstream and downstream supply chain is carried out. Different groups of stakeholders who have an influence on or an interest in the company's activities are identified, including customers, employees, suppliers, local communities, and investors. After identification, the company develops a sustainability strategy for dialogue to understand their concerns and expectations and integrate them into the company's strategy.

Stakeholder examples:

• Employees & management: Are directly affected by sustainability initiatives, with a significant role in change and implementation.
• Customers: Increasingly prefer environmentally friendly products, influence supply through demand and feedback.
• Suppliers: Their practices can influence your company's sustainability footprint. Close collaboration is needed to ensure a sustainable supply chain.
• Local communities: Your company's operations affect employment, the environment and community initiatives locally.
• Shareholders & investors: Place importance on ESG criteria, whereby the company's sustainability strategy influences their investment decisions

Step 2: Creation of the Longlist

The longlist resulting from the analysis of the value chain covers potentially relevant ESG issues. The aim is to identify, group, and prioritize the most important issues for the company and its stakeholders in the areas of Environment, Social, and Governance (ESG). These prioritized issues are then integrated into the company's sustainability reporting. The ESRS 1 - General Requirements document created by EFRAG can be used as a starting point.

Step 3: Analysis of Material Impacts, Risks, and Opportunities

Companies must identify their material impacts, risks, and opportunities (IROs). Material impacts include both positive and negative effects arising from the company's activities on the environment and stakeholders (Impact Materiality). Material risks and opportunities include financial aspects related to sustainability that result from dependence on resources such as natural, human, and social factors (Financial Materiality).

Step 4: Prioritization of Material Topic

The material Topic are analyzed for their financial and non-financial impacts using a materiality matrix. This matrix acts as a strategic tool for prioritizing ESG issues, considering both internal company aspects and stakeholder concerns. It helps identify key areas to guide resource allocation and reporting. The materiality analysis thus sets the boundaries for all subsequent steps and the scope of reporting according to ESRS.
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Step 5: Compilation of Material Topics

After identifying potentially positive or negative impacts within the context of the CSRD, these impacts must be assigned to the respective ESRS thematic fields. The structuring and categorization of influences exerted by the company on the environment, society, and governance are performed through these thematic fields, which in turn define the framework for the company's reporting.

The ESRS consists of two cross-cutting standards (ESRS 1 and ESRS 2) and 10 topic-specific standards covering the ESG criteria (Environmental, Social, and Governance). Within the ESRS framework, ESRS 2 is always mandatory. The need for further reporting obligations is determined by the result of the double materiality analysis. For industrial companies, ESRS E1 and ESRS S1 usually form the basis. If ESRS E1 is considered non-material for a company, this must be documented. A detailed explanation, based on the results of the materiality analysis and describing the analysis process in detail, is required.
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Step 6: Reporting

The results of the double materiality analysis must be transparently communicated to stakeholders through sustainability reporting and disclosure procedures and verified by a recognized third party. The evaluation process according to ESRS 2 IRO-1 and the results according to ESRS SMB-3 and ESRS 2 IRO-2 must be disclosed.

How often do you need to conduct a double materiality assessment?

The materiality analysis should be regarded as a living document and, therefore, reviewed annually as part of the company reporting cycle to decide on the disclosure of information. Although the initial effort to create it is high, a comprehensive re-creation with intensive stakeholder involvement is not necessary every year. Instead, adjustments are required, for example, in the event of major corporate changes such as mergers and acquisitions, entering new markets, or significant changes in the business environment.

Tips for an effective materiality analysis

Companies that have composed their sustainability reports under the NFRD (Non-Financial Reporting Directive) already have experience, while many medium-sized companies are still in the process of establishing necessary procedures. Adapting to new standards remains a challenge even for experienced companies, especially to accurately identify and represent sustainability aspects relevant to both the company and its stakeholders. Whether a materiality analysis is conducted internally or externally is at the discretion of the company. Many opt for in-house analysis, which can be advantageous as it significantly reduces future accounting efforts due to the early involvement of all stakeholders, increasing their willingness to cooperate in data collection later.

These tips are helpful for effective implementation:

• Plan sufficient time and resources for the development and adaptation of the individual methodology. An early start to the evaluation is essential for effective ESRS reporting.
• Appoint project managers and integrate experts and top management to effectively define and assess impacts, risks, and opportunities (IRO).
• Familiarize with sustainability standards such as ESRS, GRI, GHG Protocol, and IFRS.
• Take enough time to prioritize ESG topics. Overly extensive reporting on ESG topics can impair the informative content and comprehensibility of the report.
• Share the findings of the double materiality assessment across the company and embed them in strategic planning.

What happens after the materiality analysis?

After performing the double materiality analysis, it is important to establish clear procedures that enable regular data collection, consolidation, analysis, and quality assurance. Additionally, it is crucial to define specific and quantifiable goals for reducing environmental impacts or improving social concerns.

According to the CSRD guidelines, the conducted double materiality analysis must then be audited by an independent auditor with "limited assurance." This involves closely examining the data collection and evaluation process and verifying the accuracy of the results through sampling. For some companies, an audit with "reasonable assurance" is envisioned, meaning that auditors bear greater responsibility for confirming the accuracy of the reported balance sheet items.

Manual processes or collaboratively edited Excel files for data collection and calculation often do not meet the requirements for traceability of results, as a full audit trail cannot be guaranteed. Software-based processes can avoid methodological errors through changelogs, four-eyes approval principles, and constantly updated references (e.g., to external emission factor databases), ensuring continuous traceability and simplifying audit processes.

How does the Tanso software support your company?

After successfully performing the double materiality analysis, Tanso's software enables meeting CSRD requirements and achieving sustainability goals through audit-compliant and integrated ESRS reporting to the highest standards. Focusing on data-intensive categories (e.g., Corporate Carbon Footprint), Tanso not only allows standard-compliant reporting but also actively engages in managing and optimizing ESG performance.

Learn here how the software can also support your organization in setting up a robust and audit-proof standard process with an audit trail.