ESRS Double Materiality Assessment: Your questions answered

Position Green has received many questions from customers and companies about the processes and approaches involved in double materiality assessment. Our experienced advisor answer some of the most frequently asked questions.

Who should be running the double materiality assessment process internally?

It is not a given that the sustainability department should be in charge of the double materiality assessment. It could also be group accounting or the CFO office that would run the process. It is important to point out that while you need one strong owner for the project, you must include people from different parts of the organisation to understand the financial business risks related to the aspect and the impact on people and environment. 

The financial materiality element certainly requires someone with a finance background to be involved with the analysis, whether that’s from the finance team, investor relations or some other function.

If a company has already completed a materiality assessment, would you start over or work from the materiality topics already identified and add the financial materiality to it?

It depends on how you performed the last materiality assessment. It’s essential that it is in line with the requirements of the European Sustainability Reporting Standards (ESRS) as well. Very few companies have used that methodology before to do a materiality assessment. Of course, if you ran a materiality assessment fully based on the criteria that are used in the ESRS for your impact materiality, you should be able to complement with financial materiality, but there is a low likelihood of that. The company at least benefits from their internal stakeholders’ understanding of a materiality process. While you might have to reinitiate the process in line with the ESRS, you already have a level of internal buy-in and understanding.

How does the sustainability due diligence process differ from the double materiality assessment process?

The two processes are intricately interlinked with one another. The sustainability due diligence process is the ongoing process by which a company identifies and assesses material negative impacts and documents the means by which it mitigates these negative impacts.  This information is largely key input into the double materiality assessment. However, the double materiality assessment includes additional information.

Companies should continuously update their sustainability due diligence content as new information and events arise. When it comes time for a double materiality assessment refresh, it can then bring in the most up-to-date information from its sustainability due diligence.

Furthermore, the output from the double materiality assessment can help the company structure and prioritise the information it collects in its sustainability due diligence to ensure the most material and high-priority aspects maintain the focus.

If a double materiality assessment takes two to three months to complete, how should it then be handled in the years to follow?

Double materiality assessment is supposed to be an ongoing exercise. You don’t have to start from the beginning every subsequent year – the heavy work is upfront. The first time, you set all the basic structures for the company and then conduct the actual assessment, after which it should be updated when changes are made in the company. 

If there are structural changes to the company (e.g., acquiring a new subsidiary or starting a new business activity, entering a new market or redesigning the supply chain, then this could trigger a reexamination of the double materiality assessment. Also external factors, such as significant geopolitical events (e.g., wars) or macro-economic events (like a financial crises) should trigger a refresh of the company’s double materiality assessment. 

If there are no material internal or external events, then at a minimum the DMA should be refreshed every two to three years.

“You don’t have to start from the beginning every year – the heavy work is upfront.”

Tony Christensen – Senior Manager at Position Green

There’s a long list of topics provided by the ESRS. Do you have to assess the likelihood of all those topics and subtopics regarding financial materiality?

The likelihood does not apply to the topics. It applies to the impacts and the risks and opportunities. With any given topic, there could be multiple impacts, and oftentimes there are. In the case of actual impacts, the likelihood is effectively 100%. It’s only for potential impacts and risk and opportunities where likelihood would be applied. It is worth noting that you are not analysing your gross list of topics. You start off with your gross list and then you filter through. 

How many topics might you start with and how many might end up being the subject of a deep-dive analysis?

As a concrete example, Position Green worked with a European power and gas trader on their double materiality assessment. We started with a gross list of 40 to 45, most of which are from the ESRS itself, but a few that were sector and entity-specific. After the relevancy check, we were down to 19 topics for rigorous analysis in terms of identifying impacts, risks and opportunities. Another example is a global manufacturer of turbines. This entailed a longer list due to them being involved in a broader range of sustainability matters, resulting in around 35 topics for analysis.

How do you define impact in the context of a double materiality assessment?

When we speak about impact in terms of ESRS, we’re looking at both actual impact and potential impacts, and the kind of risks we see with both of them. It doesn’t have to be an actual effect or result. When it comes to evaluating the different aspects, there are certain considerations, for example, how great the impact is and how widespread. It is worth remarking that it could be both positive and negative impact, and actual and potential impact.

How many resources in terms of people are required to complete the double materiality assessment in two to three months? 

Key variables that will drive resource requirements are: 

1. The nature of the company’s business in terms of activities, geographical breadth. 
2. The corporate structure; whether the company has several diverse business units.
3. The organization of the company and whether the relevant sustainability knowledge resides with a few individuals or if it is widely disseminated across a large number of people. 
4. The degree to which the company wants to conduct the analysis independently vs. with external support.

In small, focused businesses with relatively few relevant sustainability matters where only a handful of people are required to get adequate perspectives on all relevant sustainability matters, as few as 4 people may be required. 

In large, diversified businesses where sustainability knowledge is highly specialized across several people, 12 or more people will be required to contribute over the period of the double materiality assessment.

To use the previous example of the European power and gas trader: the company occupies a fairly exclusive position in its value chain, is located in Europe and has a small foothold in the US. 

The point person for the assessment was the CFO, who dedicated maybe 20% of their time to this project. We had about six subject matter experts within the company who we would consult with and who participated in the relevancy roundtable and the workshop, dedicating a few hours per week to support the process. We also ran about eight to ten interviews with externals and there was significant documentation to examine in order to inform IRO assessment. For a larger company such as the manufacturer of wind turbines, operating on a global scale with thousands of employees, more sustainability matters are involved. 

During which phase of the five-stage process do you include stakeholder engagement? 

The five-step process for double materiality assessment involves the identification of sustainability matters, a relevancy assessment, an impact, risk and opportunities (IRO) analysis, materiality assessment and the documentation phase. After the relevancy assessment, and as data collection for input to the IRO analysis, that’s when stakeholder engagement would occur.

How do you suggest visualising the various time horizons and your assessment?

It is always a challenge trying to capture multiple dimensions within one graphic. It’s important to stress that impact in any time horizon is still deemed material. So in some ways, it is inconsequential for the actual explicit objective of the exercise. From a communication standpoint, it’s understandable that it might be important to depict this. If you are using the matrix visual to show the materiality, one could consider adding arrows going from short term to long term to show how that position might change. Alternatively there could also be a tabular format that provides additional information for each of the material topics in terms of the time horizon.

What happens with companies that don’t initiate an ESRS or CSRD process despite being subject to the CSRD? Are there any penalties or other risks?

Firstly, limited assurance is part of the CSRD and ESRS requirements, meaning that the content of the reporting should to some extent be audited. Failure to do so results in a qualified audit report, which is not a very good thing for companies. Secondly, the CSRD is a directive and shall be implemented in national legislations. This means that non-adherence to ESRS requirements will incur penalties to the extent the directive has been included in the national legislation.

What do you do with a double materiality assessment once it’s done and how does it inform your strategy?

We see the ESRS as not only a compliance exercise, but perhaps more importantly as an impetus for companies to transform themselves. To minimize their negative impacts, maximise their positive impacts and to benefit financially from its relationship to sustainability. 

There are two lenses here that are often quite integrated with one another: (i) Impacts and (ii) Risks and Opportunities.

First, there are the impacts the company has on people and the environment. Through following the ESRS topical standards for material sustainability matters, the company will be guided to apply policies to mitigate and control its negative impacts, to place targets, set ambitions and to place measured metrics to track its performance. Last, but not least, the company will also have to explain the tangible actions it is taking, oftentimes including the capital and other resources it is contributing towards these actions. 

The second lens is the financial risks and opportunities posed to the company. By identifying, assessing and prioritising these risks the company will have collected important elements that would act as the basis for an ESG/Corporate strategy. The company will have the opportunity to use this analysis  to inform strategic decisions around its portfolio, value-chain position and/or business models. It can take decisions that will minimise negative risks and position the company to reap the benefits from financial opportunities.