What are the key elements of the double materiality assessment?
The double materiality assessment, as guided by the European Financial Reporting Advisory Group (EFRAG) and outlined in the European Sustainability Reporting Standards (ESRS), involves a systematic evaluation to determine material sustainability impacts, risks, and opportunities (IROs).
1. Context and Scope Definition
Understanding the organization’s context and defining the scope ensures the assessment is comprehensive.
Before you start your assessment, it is important for you to understand the context of your organization. This should include understanding the company, business and sector, as well as the organization's value chain and stakeholders.
Your value chain refers to the full range of activities, resources and relationships related to your business model and the external environment in which your company operates. It is important to consider your entire value chain (upstream, own operations, downstream) when determining your impacts, risks and opportunities (IROs).
Once you have understood your value chain, make sure you define the scope of your assessment. This means considering the boundaries of your analysis, such as which organization are you conducting the assessment for and which subsidiaries are included.
2. Stakeholder Engagement
Engagement provides critical insights into impacts and expectations.
Stakeholders will be a key part of your materiality assessment. Your stakeholders are those who can affect or are affected by your business activities. They can be split into affected stakeholders and users of the sustainability statement.
- Affected stakeholders are individuals affected by the undertaking's activities, such as suppliers, customers and employees.
- Users of the sustainability statement are users of financial reporting, such as investors, lenders and regulators.
While engaging stakeholders is critical, the ESRS do not describe any specific behavior (e.g. conducting a survey). You can engage with stakeholders through consultations, interviews, or surveys to validate and refine IRO identification.
Dialogue with stakeholders may assist in the materiality assessment across the various steps, and different groups of stakeholders can provide feedback on relevant topics and relevant impacts, risks and opportunities.
3. Identification of Sustainability Matters and IROs
Identifying relevant sustainability topics ensures the assessment addresses all significant impacts, risks, and opportunities.
Once you understand the context, you can start identifying sustainability topics that are relevant for you. You should use the ESRS topic list (ESRS 1 AR 16) as a starting point and add additional topics, such as entity-specific or sector-specific topics from the Sustainability Accounting Standards Board (SASB) where necessary.
To identify your IROs, consider using stakeholder inputs, including the entire value chain and collecting evidence from various other sources, such as internal reports, impact or risk assessments, desk-research and external benchmarks.
4. Scoring IROs
Scoring provides a framework for evaluating the significance and relevance of impacts, risks, and opportunities.
Impacts are evaluated based on severity, considering the impacts’ scale, scope, and irremediable character (for negative impacts). For potential Impacts you assess the likelihood of occurrence.
Risks and Opportunities are evaluated based on magnitude of the financial effect and likelihood of occurrence.
Additionally, you should assess the time horizon for each IRO. The IRO can occur in the short-term (less than 1 year), medium-term (2-5 years) or long-term (> 5 years).
5. Threshold Setting
Materiality thresholds determine which IROs must be reported and influence the scope of sustainability disclosures.
To determine whether an IRO is material or not, a materiality threshold needs to be defined. This materiality threshold has implications for reporting, as it determines which IROs and therefore which topics will have to be included in your CSRD report.
6. Reporting and Results
Reporting outcomes provide transparency and fulfil regulatory requirements for sustainability disclosures.
After conducting your assessment, you will know which topics are material to your organization and can determine the reporting scope. You have to report on the assessment process and outcome (General disclosures: ESRS 2 IRO-1, IRO-2, SBM-3) and the relevant topic-specific information (material topic standards based on ESRS and entity specific disclosures where necessary).