What Is a Double Materiality Assessment?
Over 50,000 companies will be required to report under the EU Corporate Sustainability Reporting Directive (CSRD) regulations that specify a significantly more detailed approach to how companies measure and report on sustainability/ESG topics. At the heart of this is “double materiality” – an idea that is not new, but where the EU sets a new high bar for how to deliver it. These principles are also becoming best practices for many companies that are not (currently) required to meet the regulations. Organizations are required to consider both the “impact materiality” of a company on people and the environment and the “financial materiality” on the business’ bottom line as per the requirements:
Double materiality is designed to decide the topics on which a company must provide in-depth, public disclosures and will increase transparency for investors and civil society. What is often missed is that the explicit aim of the regulations is not just reporting, but to ensure this creates action. It is designed to shape strategy so companies become more financially resilient and will have a positive impact on society. Our approach at GlobeScan delivers both external transparent compliance and internal strategic guidance. Taking a compliance-only view wastes the value of the analysis that the compliance exercise requires.
Who Does CSRD Apply To? Is it Only European Companies?
CSRD requirements immediately affect those already subject to the current EU NFRD (Non-Financial Reporting Directive), but over the coming years, it will come to affect an estimated 50,000+ companies, including those that are not based in the EU but that have significant subsidiaries, revenues, or operations within the EU.
While many EU companies are already conducting these CSRD-compliant assessments, others will be required to prepare a CSRD-compliant report in 2026 based on 2025 data. This means that by the end of 2024 at the latest, companies will need to have completed a CSRD-compliant double materiality assessment to be able to measure their impact on each material sustainability topic in 2025. The table below indicates the rolling timeline. Many companies find that their journey starts with a readiness assessment to confirm their approach and plan accordingly.
What Will Be Required from CSRD-compliant Double Materiality?
The requirements are extensive, specifying ten topic areas that all companies must consider down to the level of 37 sub-topics and 73 sub-sub-topics, along with a detailed approach to considering aspects like the scale and scope of impact materiality and the resource and relationship implications for financial materiality.
Many companies have expressed that the regulation is not fully prescriptive. There is draft implementation guidance that was released for public feedback but this is neither final nor does it specify exactly how every part must be done. Having worked through the hundreds of pages of regulation and guidance, it is clear that many parts are left deliberately open to interpretation given the range of companies who will need to run this exercise. There is a core, common process to run (see below), but this should be fine-tuned with each company.
What Is the Benefit?
Double materiality should be a strategic exercise that is also useful for compliance. Companies should maximize the value of the time invested so it improves understanding and action for the organization and its stakeholders. Engaging with your stakeholders is a required part of the materiality process, so it becomes an opportunity not just to extract information but to improve your relationships.
What Next?
There are four steps to take:
- Understanding liability and readiness: When will your company or a subsidiary be required to report? What do you need to do to get ready and align your business? This can be done as a short module to pause and assess before going further.
- Mapping stakeholders, sources, and identifying topics: Which perspectives and information sources will you need? How will you work through the 73 sub-sub-topics and identify industry-specific topics? How can you build on any previous materiality work to streamline the process?
- Engage stakeholders to perform a detailed assessment: For both impact and financial materiality, understand the positives and negatives, key focuses across the value chain, and consider the short, medium, and long-term while working with internal and external stakeholders.
- Finalize assessment, implications, and materiality thresholds: Consolidate the findings and validate with senior management, identifying strategic implications. This must also set the materiality thresholds for which issues are material and therefore require full disclosure and is summarized in a complete record of ratings and decisions made to match the requirements for limited assurance from auditors.
Our clients have found that the initial regulations may feel intimidating, but the process then delivers significant value for their teams, building an understanding of the importance of the work and excitement about the opportunities for positive impact and value creation.
If you would like us to help you understand this area better or run your double materiality assessment, please get in touch:
- Europe: Pendragon Stuart pendragon.stuart@globescan.com,
Perrine Bouhana perrine.bouhana@globescan.com - North America: James Morris james.morris@globescan.com
- Latin America: Alvaro Almeida alvaro.almeida@globescan.com
- Africa: Anneke Greyling anneke.greyling@globescan.com
- Asia-Pacific: Victoria Gilbert victoria.gilbert@globescan.com
