This article will help you getting started with your double materiality assessment (DMA) in the Coolset app.
Step 1: Understanding the context
Step 2: General information
Step 4: Results
What is the double materiality assessment?
The double materiality assessment (DMA) forms a central element of the Corporate Sustainability Reporting Directive (CSRD), requiring companies to evaluate how sustainability issues impact both their environmental, social, and governance (ESG) performance (impact materiality) and their financial outcomes (financial materiality). Because companies have to look at both impact materiality and financial materiality, it is called the double materiality assessment.
The DMA is closely linked to the European Sustainability Reporting Standards (ESRS), which are a set of 10 topic-specific reporting requirements, each with dozens, if not hundreds of data points on which companies have to report under the CSRD. See here for an overview of the ESRS topics, sub-topics and sub-sub-topics.
The DMA has one goal: to help companies understand which of the 10 ESRS topics are material - and thus have to be reported on - in the reporting year. This is done by considering the environmental impacts and the financial risks and opportunities associated with each ESRS. We'll explain this in more depth below.
The four steps of the DMA
The DMA is split into four sections. Follow every step of the DMA and click on links to other articles for more background information.
Step 1: Understanding the context
"In this step, the undertaking develops an overview of its activities and business relationships, the context in which these take place and an understanding of its key affected stakeholders. This overview provides key inputs to identify the undertaking’s IROs." (EFRAG, Dec. 2023)
This translates to two key research phases:
A media analysis, in which you check various online source and connect them to the ESRS topics. Read our article Media analysis: How do you conduct it? for more information), and;
Stakeholder engagement, which can be done through surveys and/or interviews. Read our article Getting started with stakeholder surveys and Stakeholder engagement: Interview templates for the double materiality assessment for more information.
Coolset helps you with step 1 by providing templates for interviews and surveys, as well as articles on the media analysis.
Step 2: General information
The 'General information' section asks questions on your company's organizational structure and the process surrounding the DMA. It's based on ESRS 2: General disclosures. Questions are about:
Organizational structure and resources
Description of the process to identify material sustainability IROs
Stakeholder engagement
Assessment frequency
Media analysis
For support on answering these questions, click the 'Show assistant' button on the top right of the different sections.
Step 3: Assessment of impacts, risks and opportunities
This section is splits into an identification phase and the actual assessment and determination of the material IRO's.
Step 3A: Identification of the actual and potential IRO's
"In this step, the undertaking identifies the material IROs relating to environmental, social and governance matters across its own operations and in its upstream and downstream value chain. The outcome will be a ‘long’ list of impacts, risks and opportunities for further assessment and analysis in subsequent steps. The undertaking should use the list of the sustainability matters in ESRS 1 paragraph AR16 to support this process and to ensure completeness." (EFRAG, Dec. 2023)
When clicking on the Assessment of impacts, risks and opportunities (IROs) section, you will see the the 10 ESRS topics on the left-hand side.
Per topic, you are asked to choose which sub-topics are relevant for your company. Please base this decision on preliminary desk research and industry knowledge.
Selecting the relevant sub-topics unlocks the corresponding questions for the IRO assessment within them. You can use the 'show assistant' button on the top right to help you answer the questions.
Step 3B: Assessment and determination of the material IROs
"In this step, the undertaking applies criteria for assessing impact and financial materiality, in order to determine the material actual and potential impacts, and material risks and opportunities. This then forms the basis for determining material information, based on the ESRS topical disclosure requirements." (EFRAG, Dec. 2023)
Once you have selected all the IROs, you must threshold them based on quantitative and qualitative information. All IROs that cross a threshold value (which is determined by your company) are considered material and will lead to the corresponding ESRS datapoints having to be reported on.
Every section asks several questions on the materiality of the sub-topics from an impact and a financial materiality perspective, as required under the EFRAG framework. We explain these from both perspectives below:
Impact materiality
As per the guidelines from the EFRAG, impact materiality considers four perspectives:
Actual positive impacts
Potential positive impacts
Actual negative impacts
Potential negative impacts
Each impact category is evaluated based on several characteristics, as detailed in the tables below. Coolset's tools encompass all these impact types for each ESRS sub-topic.
These impacts are analyzed through the characteristics, each rated on a 5-point scale. These ratings are then utilized in the thresholding phase of the DMA process.
Financial materiality
As per the guidelines from the EFRAG, financial risks and opportunities are measured on two scales:
Magnitude of the risk or opportunity materializing
Likelihood of the risk or opportunity happening
Both of these characteristics are measured on 5-point scales, based on different threshold values - see the matrix below. Read more about How we calculate impacts, risks & opportunities scores.
Step 4: Results
Once you have assessed all the IROs and scored the corresponding characteristics, the results section in the CSRD tool will provide you with materiality matrixes that rank all sub-topics.
The threshold for materiality (i.e., above what score a sub-topic is material) is determined by you as a company, however it's important to keep in mind that the auditor has to validate this.
We therefore recommend choosing a threshold value of 2.5/5. Everything above that score will be marked as material and be included in the ESRS reporting process which is the next step after completing the DMA.
Reporting
"Following the materiality assessment process, the undertaking shall report the assessment process and its outcome." (EFRAG, Dec. 2023)
Reporting on the process and outcome of the DMA is essential. This report will be shared with your auditor, and will form the basis for future DMAs by your company.
What to keep in mind when filling in the double materiality assessment
While the supporting information and suggested answers will help you set up your answers, there are two main things to keep in mind at all times:
Justify your statements: When writing an answer, keep in mind that you need to back it up with a source. This can be qualitative (stakeholder insights, news reports, scientific research etc.) or quantitative (financial statements, statistics etc.).
You will be audited: An auditor will want to understand how you conclude that certain topics are material, while other's are not. Under the limited assurance auditing guidelines, an auditor needs to see “sufficient and appropriate evidence” to validate the audited company's conclusions. Failure to show this can lead to significant financial risks.
"The materiality assessment should be based upon supportable evidence and rely to the maximum extent possible, on objective information" (EFRAG, May 2024)