Double Materiality – really costly, when done wrong

Oh, my goodness! With currently 86 disclosure requirements and over 1,000 data points to be published the European Sustainability Reporting Standards (ESRS) can feel like a jungle of data? How does one even begin to navigate this? Does everybody really need to consider everything, and how can one possibly manage it at all? Phew, and one must involve stakeholders too?

ESRS, CSRD and double materiality?  Don’t panic!

In the following, VIRIDAD will explain how to take the important first steps in the ESRS reporting process and develop a suitable implementation plan. This is because the first step is about double materiality, which then forms the basis for all subsequent steps.

Double materiality: What is the buzz all about?

The concept of double materiality is a key feature of the Corporate Sustainability Reporting Directive (CSRD) and the starting point in every sustainability journey. It is a legislation that requires companies to assess their business model and economic activities according to two dimensions:

• the impact materiality and
• the financial materiality.

‍For the impact materiality the companies assess the impact of their business model and economic activities on the environment and society (inside-out). In the case of financial materiality, the impact of society and the environment on the business model and economic activities, particularly the cash flow (outside-in), is assessed.

In the double materiality process, the ESRS topics and topics that are specific to the company are analysed in a structured manner according to these two dimensions and the risks are assessed. The aim is to identify and prioritise the most relevant topics for sustainability management and reporting. Topics that are not relevant are de-prioritised and do not have to be included in sustainability reporting.

Substantially more sustainability topics must be reported on. VIRIDAD can help!

An important new feature of the CSRD is that it is sufficient for only one of the two dimensions to be material in order to trigger reporting obligations. This ensures that the scope of reporting and sustainability management comprehensively covers the ESG agendas.

Although the basic concept of dual materiality is relatively simple, it is an abstract model that is challenging to implement in practice. This is particularly the case as many impacts and risks are difficult to grasp, for example because they are related to future developments.

In the following, we will discuss some of the challenges we have encountered in the practical implementation of dual materiality.

The Challenge with double materiality!

The assessment of relevant sustainability topics in the ESRS according to the principle of double materiality presents companies with several challenges.

The range of topics covered by the ESRS is today very broad and extends from climate protection and working conditions within the company and at suppliers to corruption and bribery. More than 100 topics are already described that need to be analysed. The range of topics is enormous and requires the involvement of all areas of the company and competences, whereby identifying the right contact person within a company is challenging. Once the right people have been identified, the necessary global understanding and knowledge is required.

Knowledge about the relevance of the topics is distributed throughout the company and must be bundled. It is necessary for everyone to develop a basic understanding so that everyone is pulling in the same direction. The transfer of knowledge is central to this and requires sensitivity on the part of ESG management in order to bring about any necessary changes. The process to achieve this is fundamental.

The process in double materiality and the ESRS is sacred and the procedure must be documented accurately and correctly. Not only because the procedure must be disclosed in the CSRD report, but also so that the steps can be repeated and further improved in subsequent years. Explanations of the data sources are important in the documentation, whereby primary data should be favoured over secondary data. This is particularly relevant when involving stakeholders.

In the case of double materiality, internal and external stakeholders must assess the issues. A comprehensive identification of relevant stakeholders and the development of a stakeholder communication strategy are necessary. Efficient ways of communication are required to ensure the necessary quality in the assessment according to double materiality.

All of these aspects come together to form a fundamentally new assessment framework. This makes the double materiality assessment extremely challenging. Furthermore, the concept is new to many and it is necessary to analyse it for the first time. However, an error-free analysis is important, as double materiality lays the foundation for the next steps and a conscientious approach is important.

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Doing it wrong will cost you dearly. Find the right partner for your sustainability reporting!

An inadequate assessment can have fatal consequences: Double materiality is not only the first step in the CSRD reporting process, but much more: it is also the basis of the sustainability topics to be reported. A mistake is very costly, as it distorts the entire subsequent reporting process and reworking is time-consuming.

Choosing the right partner is crucial, and a combination of advice and digital solution is favourable! The solution of VIRIDAD will guide you through these difficult new steps and our Software will make sure that you are compliant. See for yourself how VIRIDAD mastered the application of the double materiality in our following USER STORY. Stay tuned!

We will guide you effectively and safely through this important part of the CSRD-Reporting.

Contact us (contact@viridad.eu) to learn more about how we implement our approach together with customers.