What is a Double Materiality Assessment and why is it key for CSRD Compliance?

As the compliance deadline for the EU’s Corporate Sustainability Reporting Directive (CSRD) rapidly approaches, businesses across Europe are under increasing pressure to integrate a crucial component in their reporting: the Double Materiality Assessment (DMA). But what exactly does the required double materiality entail? And more importantly, how can companies prepare to weave it into their Environmental, Social, and Governance (ESG) reporting?

If you are navigating the complexities of DMA for the first time or finding the path to regulatory compliance somewhat daunting – you are not alone. This article aims to demystify the DMA, as well as provide clear insights into its significance for CSRD compliance. It will also outline strategies to effectively approach the DMA and provide an overview of EcoAct’s services that can support your company in turning regulatory compliance into a strategic advantage.

Together, we can transform the challenge of compliance into an opportunity for a sustainable transformation.

European Sustainability Reporting Standards (ESRS) Overview

Before delving into the complexities of DMA, it is important to understand the European Sustainability Reporting Standards (ESRS), which specify the ESG indicators that companies must disclose. The ESRS are categorised into three pillars – Environmental (E), Social (S), and Governance (G).

From 2024 onwards, nearly 50,000 companies across Europe will be required to align their disclosures with the ESRS framework under the CSRD. This requirement will be phased in, gradually encompassing companies of different sizes, and it will eventually include a significant number of non-EU firms by 2026. The intent behind the Directive is to create uniformity and boost the transparency of sustainability reporting within the EU and beyond.

Conducting a DMA is a crucial part of the CSRD journey to determine the significance (materiality) of each ESG matter in the context for the entire value chain of an affected undertaking. Besides certain requirements that are generally mandatory, affected companies must only report on material matters. This means that the DMA is an instrument to define the scope of future ESG reports and to limit the necessary workload to a reasonable level.

The Double Materiality Assessment – what is it?

Assessing impacts, risks, and opportunities of each sustainability matter is key for a DMA. The CSRD requires looking at a double materiality. This means that companies must not only consider how their activities across the entire value chain impact people and the environment, but also how sustainability issues and the environment can affect the company financially in the short-, medium-, and long-term, as exemplified in the graph below.

In more detail, the double materiality assessment is a dual-lens approach that:

• First, assesses the impacts of a company’s actions on natural and human resources (Impact Materiality), considering both positive and negative impacts. This “inside-out” view focuses on the company’s actual or potential short-, medium-, and long-term impacts on people and the environment that are directly linked to its operations and its value chain.
• Second, evaluates how sustainability risks and opportunities could potentially influence a company’s financial performance (Financial Materiality/Dependency). This “outside-in” view focuses on how sustainability matters may pose either a prospective material risk or opportunity that could affect a company’s financial performance and position over the short-, medium-, and long-term.
  
  This approach, as summarised in the graph below, is vital for companies affected by the CSRD, not only to ensure compliance but to also integrate sustainability within core business strategies, as it helps companies identify which ESG topics are most material i.e., significant to their operations across the entire value-chain.

Which challenges do companies face and how can they overcome them?

Although the DMA is a crucial step on the CSRD journey, it also poses certain complications. Generally, the concept is new, and most companies will be carrying out this analysis for the first time. Ensuring that all steps are aligned with the guidelines of the ESRS is crucial, as both the process and the results are subject to a third-party audit.

EcoAct’s approach for a robust and compliant double materiality assessment:

With a solid foundation in sustainability consulting and over 18 years of experience, EcoAct has advanced climate data analytics teams and specialists dedicated to research and innovation. These teams have developed a digital DMA tool that facilitates data-driven insights. This forms the basis of a robust and compliant double materiality assessment.

Our approach is based on three steps:

1. Data-driven Industry Benchmark Matrix

• EcoAct works with you to map your value chain in terms of activities taking place upstream, in direct operations and downstream as well as the corresponding countries where these activities take place.
• This information is then mapped against activities that can be selected in the EcoAct DMA tool. Furthermore, the criticality of each activity is assessed together with the affected company to obtain an adequate prioritisation.
• The result of the mapping is used as input for the EcoAct DMA tool, which is linked to industry benchmark data from large, reliable databases. Through the combination of value chain information and industry benchmark data, the EcoAct DMA tool automatically creates a first double materiality matrix at the level of ESRS and indicates potentially relevant sub-topics.

2. Stakeholder Dialogue

• The data-driven matrix is based on industry benchmarks and the indicated value chain information and hence, serves as a first hypothesis but does not yet contain the views of stakeholders along the value chain as required by the ESRS.
• For this purpose, EcoAct will conduct interviews with key stakeholders and send out surveys to further relevant stakeholders, including internal and external, depending on the preferences of the affected company and the availabilities of stakeholders.
• During the stakeholder dialogue the first data-driven matrix and the set of potentially material sub-topics will be challenged, focusing on impacts, risks and opportunities in the specific area of each stakeholder.

3. Translation and Confirmation of Results

• The outcome of the stakeholder dialogue will be used in the EcoAct DMA tool to assess the impact and financial materiality of each subtopic considering the views of consulted stakeholders.
• Based on this additional information, the tool creates a final double materiality matrix indicating the materiality of each relevant sub-topic. Furthermore, the sub-topics can be broken down to the indicator level for a full set of material and mandatory indicators that the affected company will need to disclose.
• EcoAct presents the final matrix to the project team for confirmation and if needed supports with obtaining the approval from the board of management.

Our approach is not only aligned with the ESRS guidelines, but it is also based on a robust tool linked to reliable databases. That way, quantitative industry benchmark data as well as qualitative information from stakeholders lead to the final matrix. Moreover, the EcoAct DMA tool facilitates the translation of results and automatically creates the first data-driven matrix plus the final double materiality matrix including the outcome of the stakeholder dialogue.

Four key solutions to help tackle double materiality assessment challenges

Challenge	Solution
Breadth of Topics and Data Sources The challenge includes addressing a wide range of topics such as climate change, workers in the value chain, and corruption, which requires both quantitative and qualitative KPIs. Analysing over 100 topics and sub-topics demands significant resources.	Mixed-Methods Approach for DMA Implementing a mixed-method approach for the Double Materiality Assessment (DMA), incorporating industry data, benchmarks, expert interviews, and stakeholder consultations (including suppliers, HR, legal teams, clients, and the ESG team), ensures thorough coverage of risks, opportunities, impacts, and dependencies.
Stakeholder Involvement The CSRD requires active involvement of both internal and external stakeholders in determining material issues, necessitating comprehensive identification of relevant parties and effective communication strategies.	Comprehensive Stakeholder Mapping Conduct comprehensive stakeholder mapping and timely engagement to ensure broad and effective participation, enhancing the DMA’s inclusiveness and relevance.
Knowledge Management and Transfer With a high number of stakeholders involved, transferring, and managing knowledge becomes a challenge, requiring stakeholders to become experts on ESG topics.	Invest in Training and Workshops Facilitate training sessions and workshops for the ESG team and all relevant stakeholders to ensure everyone is well-informed and equipped to contribute effectively to the DMA process.
Documentation and Procedure Accurate and reliable documentation of the DMA process is crucial for ensuring transparency, repeatability, and compliance, especially for ESG annual reports and continuous improvement.	Thorough Documentation Ensure every step of the DMA process is documented in detail, enhancing the process’s accuracy, reliability, and compliance, while also supporting audit processes.