Double Materiality Assessment - Guide from start to finish

This article is a comprehensive recap of our webinar exploring the concept of Double Materiality Assessment (DMA). This topic falls under the Corporate Sustainability Reporting Directive (CSRD) mandating companies to disclose their environmental and social impacts.

Want to check the full 40 minutes Webinar? ➡️ Check the recording.

All our advice is based on our digestion of the ERFAG’s guidance, as well as our hands-on experience working with clients.

Key points that will be covered:

• DMA definition: Distinction between impact and financial materiality and its role in ESG
• Conducting the DMA: Step-by-step process (value chain mapping, stakeholders, IROs, materiality thresholds & scoring) and its connection to sustainability reporting
• Hands-on use cases based on experience with clients

Double Materiality Assessment: Definition

The Double Materiality Assessment (DMA) is a concept in sustainability reporting considering both the impact materiality (focuses on the company's impact on the environment and society) and the financial materiality (concentrates on how environmental and social factors can impact the company's overall financial performance). In essence, impact materiality looks at the company's effect on the world, while financial materiality examines the world's effect on the company.

This whole process aims at identifying the relevant sustainability matters to a specific company in its unique context e.g. considering its operations, business model & geographic locations.

🌹ROSE ADVICE: A simple way to view financial materiality is to ask: Does an item have any chance to impact my cashflows in one way or another?

3 steps to perform the Double Materiality Assessment

Step 1 - Context setting

Map your unique company context. For this, consider your entire business landscape, including current operations, strategic plans, financial projections, and potential future ventures like new technologies, products, or markets.

Map your value chain by identifying your business area

‍Upstream: All activities taking place before you can operate your business like the production of raw or intermediary materials, any sort of transport, the generation of energy, packaging etc.

‍Own Operations: Everything falling under the company’s control.

‍Downstream: Occurring after the own operations activities from the gate of company to the end customer and product disposal

🌹ROSE ADVICE: To map your value chain, begin with a basic first version and iterate over time. Consider the legal landscape and industry benchmarks in the process. The goal is to have a workable initial version and continuously improve it until 2026.

Map your stakeholders

The key is to map which stakeholders have a view on which topics. Ultimately, the ESRS requires to disclose how a stakeholder views and interests are considered. Common stakeholder groups include employees, customers, suppliers, investors, the public, and the environment. It is encouraged and pragmatic to use existing engagement initiatives & data sources (employee surveys, dialogues, incident reports, whistleblower disclosures). When information is missing, conduct interviews or specific surveys.

🌹ROSE ADVICE: Stakeholder mapping often seems complex, but there are various approaches. Prioritize direct engagement with stakeholders whenever possible. If direct interaction is challenging, consider using proxy data like market trends or industry reports.

Step 2 - Impact, Risk & Opportunity (IROs)

Sustainability matters are the broader environmental, social, and governance (ESG) issues relevant to a company, whereas the IROs are the specific instances of these sustainability matters within the company's operations.

Sustainability matters are divided into Topics, Sub-topics (Climate change adaptation, Energy, Pollution of Air, Marine resources, Working conditions etc…), Sub-Subtopics (Extraction and use of marine resources, Land degradation, Health & Safety, Adequate wages, Diversity etc…).

The list to start from is listed in Appendix A, AR 16 from the ESRS. As you are performing the DMA, it will be your job to identify, within each Sub-Topic and Sub-Sub-Topic, how these sustainability matters are reflected specifically in your company and its value chain. The result will be a list of Impacts (Positive and Negative), Risks and Opportunities, unique to your company, and tied to sustainability matters.

Each topic is categorized by business area (upstream, operations, downstream) and classified as a positive or negative impact, risk, or opportunity, with an assigned time horizon (actual or potential).

🌹ROSE ADVICE: Go consistently through the list of items in the delegated act- AR16 - sustainability matters list. For a systematic approach, begin by mapping your value chain and identifying key stakeholders before reviewing sustainability matters.

Step 3 - Setting Thresholds & Scoring

According to the DMA guidance, setting thresholds is the process through which the company defines whether each IRO is considered material or not. 

• Impact materiality requires assessing the scale (depth of the impact) and the scope (how widespread it is) of environmental and social impacts. For negative impacts, the potential for remediation (how much can be repaired) also shall be considered. If a scale out of 5 is being set for each criteria, there will be a max of 5 x 3=15 for Negative Impact and 10 for Positive Impact to map to likelihood (see possible threshold visual below).
• Financial materiality involves evaluating the magnitude (how much it impacts monetarily) of environmental and social risks and opportunities. In terms of points, here we have a scale from 1-5 for both Risks and Opportunities.

In both cases, it will be key to assess how likely they are to occur and set the threshold accordingly. See a threshold matrix example: 

Here are a few examples: 

• “Natural disasters caused by climate change” interrupting the supply chains falls under a financial Risk with a potential severe financial effect, yet with a low probability of occurrence.
• “Oil in water due to tanker accident” leading to pollution of water is a negative impact with an extremely large scale, yet with a localized scope. In terms of remediability, it is pretty difficult to clean up and has a long lasting impact on the environment. It is quite likely to occur.
• “Oil in water due to tanker accident” also represents a financial risk due to potential fines and reputational damage (even if they are not that likely to occur).

A score is computed for each item and then benchmarked against the threshold.  It will narrow down which of the long list of IROs are material or not to your company. In such an exercise, we highly recommend involving stakeholders to validate the items that score close to the threshold.

Thanks to the materiality on the IRO level, you can then shortlist your sustainability matters (Topics, sub-topics and sub-subtopics) which will form the base for your business in your CSRD reporting. Once sustainability matters are defined, the next step will be to map the materiality on the Disclosure Requirements’ (DR) level.

🌹ROSE ADVICE: Remember that the non material items will need more documentation back-up than the others. If the score is not high enough, it is important to have evidence to explain the rationale:  is there any scientific evidence or stakeholders' conversation that can support it? 

ROSE’s unique perspective on DMA

ROSE leverages technology to streamline sustainability processes, making them more efficient and enjoyable. By collaborating closely with clients, ROSE delves into regulatory complexities and tailors solutions to their specific business needs. 

We believe in a pragmatic approach (start, move, iterate), prioritizing immediate actions while laying the groundwork for future improvements.

Find out more on what comes after the Double Materiality Assessment in this article.

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Source: EFRAG's Implementation guidance for Materiality assessment (considered as source of truth in terms of DMA best practices).

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