Double Materiality Assessment: How to identify Sustainability Reporting topics under the CSRD
2024 will mark the start of ESG reporting under the CSRD. It is therefore crucial for affected companies to get the necessary data and processes on track in time. The initial step of preparation for the upcoming requirements is to conduct a Materiality Analysis. It aims to identify material sustainability topics to include in the report, considering the company-specific sustainability context. In doing so, the double materiality concept must be applied, impacts, risks and opportunities must be assessed, and stakeholders must be involved in the process.
What is a double materiality assessment?
A double materiality assessment is a mandatory tool under the CSRD (Corporate Sustainability Reporting Directive) to determine the inclusion of a topic in the sustainability report. A matter is regarded as “material” when it meets the criteria for impact materiality, financial materiality, or both.
The impact materiality (also called inside-out perspective) assesses actual or potential, negative or positive effects your organization has on its social and ecological environment. For instance, contributing to climate change through GHG emissions is an actual negative impact to be assessed regarding its scale, scope and remediability.
The financial materiality on the other hand covers the outside-in perspective, in terms of risks and opportunities, that are likely to influence your organisation’s financial situation. As an example, damages to production facilities from natural disasters affect cashflows and may increase costs of capital.
Why does my company need to conduct a materiality analysis?
Besides the obligation in the CSRD to conduct the analysis, the ESRS (European Sustainability Reporting Standards) encompass a vast range of approximately 1000 potential data points in over 80 disclosure requirements. The materiality assessment reduces this number to fit your organization's specific context.
Further benefits of the assessment are,
that it generates a better understanding of relevant sustainability matters,
it enables to prioritize the central fields of action, and
allows you to focus resources, identify the right measures and involve your stakeholders, as required by the CSRD.
What if my company already has a materiality analysis?
Established reporting frameworks and regulations like the SASB standards, the GRI and the NFRD have already adopted the materiality concept. So, if your organization has already created a sustainability report under one of these frameworks, you have done some helpful groundwork for the CSRD materiality assessment and may be able to rely on parts of previous results.
SASB views sustainability matters exclusively from a financial materiality perspective, while the GRI assesses the impact dimension and relevance for stakeholders, only regarding the financial materialization of sustainability impacts as a posterior effect. The NFRD materiality formula follows the same principle as the CSRD. However, only topics that fulfill the criteria for impact and financial materiality must be included in reporting, while under the CSRD, impact OR financial materiality determines the reportable topics.
How does Horváth approach the materiality assessment?
We have developed a 7-step approach, illustrated below. It shows necessary building blocks on how to conduct a materiality analysis and obtain audit-proof results. Those can be used in follow-up work, for instance a gap analysis and tailored roadmap to reach CSRD compliance.
What are the outcomes of the assessment?
After successfully completing the assessment process, your organization will have an intuitively understandable visualization of all material reporting topics in a materiality matrix.
Based on this topic list, you then derive mandatory Disclosure Requirements and their underlying Data Points from the ESRS. These need to be once again assessed regarding their materiality. The resulting long list of material Data Points is compiled into a "requirement catalogue" for your organization's sustainability report, defining its exact content. In a subsequent gap analysis, you identify the Data Points for which data is already available and where processes, systems and internal controls are already in place. For the remaining gaps, measures must be derived to close them timely and ensure reporting readiness.
Horváth sees four central success factors
It is crucial to ensure the involvement of relevant internal and external stakeholders from the beginning. This creates internal acceptance and secures valid assessment results.
Availability of reliable data to quantify impact and financial materiality must be achieved.
It's all about the timing: Start early and adopt a long-term perspective to define a yearly review and regular update logic.
Diligent documentation along the entire process is the key to a positive auditor statement.
Why is Horváth your best partner in this endeavor?
Our structured project approach supports you in tackling the complex and challenging requirements from the CSRD. You benefit from our multi-faceted industry insights and our knowledge of particularly relevant topics. Furthermore, we provide hands-on support in a workshop-based format. This includes agilely designed working materials which seamlessly interlock with the ones we have in our portfolio for your consecutive CSRD gap analysis.
Lea Isabelle Bartke
Horváth Materiality Assessment Tool: your fit-to-standard way to conduct a Materiality Assessment