The deadline is approaching for companies that need to conduct double-materiality assessments to comply with the EU’s CSRD, a process that takes time and involves many steps
Timelines to comply with the European Union’s Corporate Sustainability Reporting Directive (CSRD) are fast approaching as large non-EU-based companies with significant EU operations will need to report on 2025 data starting in January 2026.
While this may seem like a long time away, the reality is that many experts and heads of sustainability at impacted companies are advising that compliance professionals should start now because of the requirement for a double-materiality assessment, which will determine the scope of companies’ required disclosures under this legislation. Indeed, Cassandra Garber, VP of Corporate Sustainability & ESG at Dell Technologies started the process for conducting the company’s double-materiality assessment in 2023.
By getting started early, companies can more easily engage multiple internal departments — such as legal, audit, finance, and operations functions — on the requirements of CSRD and the double-materiality assessment and build a shared understanding of the issue’s strategic implications.
A key aspect of the legislation is its emphasis on double materiality. CSRD disclosures are streamlined by the legal requirement that companies disclose only material matters. This necessitates that organizations assess both their outward impacts on environmental and social matters, and the interrelation between sustainability matters and their financial outcomes.
Steps for conducting a double-materiality assessment
Double-materiality assessments can be daunting for companies because it is new, even though the European Financial Reporting Advisory Group (EFRAG) has recently published guidance documents to facilitate a consistent and comprehensive double-materiality assessment process. In practice, the exercise of assessing the importance of sustainability matters through a double-materiality lens is not all that different from companies’ historic approach of stakeholder engagement on sustainability matters.
Refine list of material matters — To start, Kevin Fertig, a climate and sustainability strategy expert at Agendi Inc., says companies should review which environmental, social & governance (ESG) topics (among a long list of topics provided by CSRD) are most pertinent to them as a helpful starting point. The goal is to refine a list of the ESG topics that have proven to be, or have the potential to be, material for the reporting company. This shortlist will be highly context-dependent and should be personalized for each company.
Fertig also encourages companies to consult a wide array of resources to determine which ESG issues are most relevant for their business, including:
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- reviewing any previously conducted materiality assessments;
- connecting with executives, the head of investor relations, and internal finance and risk teams to highlight ESG matters that have been previously identified as financially material or are considered highly relevant to shareholders;
- assessing any potential material ESG impacts on supply chain partners (suppliers, customers, and members of affected communities) per the guidance published by EFRAG; and
- consulting industry-specific materiality guidance resources developed by the International Financial Reporting Standards Foundation and the Sustainability Accounting Standards Board.
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In addition, casting a wide net of stakeholder engagement is also recommended for conducting a double-materiality assessment — particularly as this engagement can help compliance team members compile this shortlist of material matters, their relative importance from both a financial and impact perspective, and any key impacts, risks, or opportunities that arise from those material matters. While CSRD is not prescriptive in its recommendations on stakeholder engagement, companies are encouraged to consider the input of diverse stakeholders, including customers, employees, shareholders, regulators, civil society, community organizations, and suppliers.
Score the matters — Many more sophisticated companies will have a solid understanding of most financial material matters. CSRD requires companies to similarly assess the materiality of matters from an impact perspective, which considers the severity and likelihood of a company’s impacts on society and the environment. Companies must score the shortlisted matters on measures of both parts of the double-materiality equation — financial and impact materiality — and then integrate objective and quantitative information wherever possible, often completing or complementing the process by using qualitative feedback, says Fertig.
“More often than not, companies currently rely on a qualitative, relative scale, scoring matters against each other on a low-medium-high or 1-5 scale… with the understanding that they will be expected to quantify their material risks and opportunities over time and integrate this information into future iterations of their double-materiality assessment” he explains, adding, for example, companies conducting climate-related financial risk assessments can roll this information into their evaluations of the materiality of climate to their business.
By getting started early, companies can more easily engage multiple internal departments — such as legal, audit, finance, and operations functions — on the requirements of CSRD and the double-materiality assessment.
This impact-materiality exercise includes analyzing the scale, scope, irremediability, and likelihood of the company’s global impacts (both positive and negative) on each issue; while the financial-materiality exercise involves assessing the actual or potential effects of each issue on the company’s financial performance (such as on revenues, expenditures, cost of capital, etc.) Companies must evaluate both the magnitude and likelihood of these financial effects and may wish to also consider reputational risks or opportunities arising from these ESG matters.
Develop a double-materiality matrix — Once all these ESG matters have been scored and mapped against each other, there needs to be a cut-off of what is and is not a material issue. While the matrix as a whole should guide business strategy and sustainability reporting, matters deemed material will trigger mandatory disclosure to the relevant CSRD topical standards. CSRD also is not prescriptive in its recommendations for materiality thresholds; rather, companies are given leeway to develop thresholds for both the impact- and financial-materiality perspectives that reflect the company’s individual circumstances. “Judgement is involved in setting the threshold for impact-materiality side, along with appropriate justifications,” Fertig says. Most companies already have a pre-established definition of what a financially material issue is and should rely upon that metric for the financial-materiality threshold. It is helpful for companies to engage their audit functions to ensure a common understanding of these thresholds and have them validated internally.
Once the thresholds are set, any mapped ESG matter that scores higher than the impact threshold should be considered material from an impact perspective; and any matter that scores higher than the financial threshold should be considered material from a financial perspective. Of course, some matters will be considered material from both perspectives, although a matter only has to be considered material from either perspective to trigger relevant disclosures under CSRD.
The double-materiality assessment is a foundational step in complying with CSRD. Companies to gather the input and ensure the collaboration of internal cross-functional experts as a critical step to supporting the development of audit-ready processes and data. This can be a heavy lift — so for large companies, the time to get started is now.
