Double materiality analysis: The basis for the implementation of CSRD and ESRS

A key requirement of the CSRD and ESRS is that organisations now need to conduct a double materiality analysis, a process that identifies which sustainability-related areas the business affects and may be affected by. The difference from previous years is that companies have used a materiality analysis that includes only one perspective. For the majority of companies covered by the CSRD, double materiality analysis is a new feature of sustainability reporting and the process may at first glance appear complicated. Let us therefore clarify the requirements at a high level and go through the key steps for successful implementation.

Purpose of double materiality
 A double materiality analysis is not only a requirement for all companies covered by the CSRD, but also forms the basis for the company's reporting and strategy. The analysis determines which areas the company should report on, as well as highlighting those areas that are less relevant or important and thus can be excluded from reporting. The material areas identified show what type of information the company should report and provide the basis for the company's continued strategic work.

Double materiality analysis: A two-dimensional perspective
The more nuanced analysis provides a comprehensive understanding of the impacts, risks and opportunities associated with sustainability aspects of the organisation. The double materiality analysis thus takes into account two critical dimensions:

• Significant impact: This aspect examines how the company's activities actually and potentially affect the environment and society. It is an "inside-out" perspective, where the company's actions and decisions are scrutinised for their impact on the environment and society.

• Financial materiality: Here the analysis focuses on how external sustainability factors can affect the financial performance of the company. It is, in contrast to the material impact, an "outside-in" perspective, where external changes and trends are analysed to understand their potential impact on the company.
  
  

Starting a double materiality analysis
A double materiality analysis involves several steps and stages. Carrying out the process is both time consuming and resource intensive and it can be difficult to know where to start. We have summarised the process below in five points:

1. Identify the value chain: Understand the company's value chain from raw material to final product and its relation to different sustainability goals. In this way, it is possible to map the company's value chain and show how the company can influence or be influenced by sustainability issues.

2. Identify and engage stakeholders: Identify and engage stakeholders who are affected by or can affect the organisation's activities. According to ESRS, there are two different types of stakeholders: affected stakeholders and users of the sustainability report. This means that companies need to identify a broad group of stakeholders, ranging from customers, suppliers and employees, to investors and community groups.

3. Identify material areas: Compile a list of potentially relevant areas of material impact and financial materiality. Include both general questions from the ESRS and specific areas that are unique to the organisation.

4. Conduct stakeholder dialogues: Based on the potentially significant issues identified, dialogues should be held with the relevant stakeholders. Different stakeholder groups can be engaged through different methods based on what suits both the group and the questions to be asked. Organise and conduct meetings, workshops, interviews or surveys with different stakeholder groups to understand where the company has the greatest impact.

5. Assessment and synthesis: Evaluate the impacts, risks and opportunities for the different sustainability issues and the financial effects. According to ESRS, materiality should be assessed based on three criteria: type of impact, severity and assessed likelihood. Financial materiality should be assessed based on risk or opportunity, the potential impact on the financial position and the assessed probability. Rank the identified impacts, risks and opportunities from high to low materiality. The result is often visualised in a materiality matrix.

For the future and next steps
After a thorough double materiality analysis, your company has a clear picture of the material areas, both from an impact and a financial perspective. This insight is not only fundamental to fulfil the reporting requirements of CSRD and ESRS, but also provides important insights for the business and strategy. The next step after a double materiality analysis is a GAP analysis. A GAP analysis identifies differences between current reporting and the requirements of CSRD and ESRS. This overview creates a common understanding of the scope and scale of the work required to fulfil all requirements.

At AVA, we specialise in financial communication and sustainability. Our experience and expertise can be critical to your company's success in navigating the complexities of a double materiality analysis. We offer tailored advice and support to ensure that you not only meet the new regulatory requirements but also leverage these insights to promote sustainable growth and strengthen your company's position in the market. Contact us to explore how we can help you transform these challenges into strategic opportunities.