Documenting the Double Materiality Assessment for Your Annual Report
This article is developed in collaboration with friends at the consultant firm Greengoat.
This brief article is for anyone, whether you’re familiar with conducting a Double Materiality Assessment (DMA) or entirely new to the process. We’ll provide an introduction to the DMA, with a focus on how to properly document it in preparation for your annual report.
While EFRAG, the technical advisor to the European Commission, has published a comprehensive implementation guide for the DMA, it provides less emphasis on how to document the outcomes. Our aim is to offer concise, practical guidance to help you address that specific need.
There are 21 places in the European Sustainability Reporting Standards (ESRS) for documenting your double materiality assessment for your annual report.
Focus on what matters
The CSRD journey begins with a Double Materiality Assessment (DMA) to determine what is essential to report on. This approach ensures that your company focuses on matters relevant to those impacted by or interested in your operations. Addressing the needs of report users is both logical and effective!
The concept of materiality is assessed by analyzing two key aspects:
Impacts on stakeholders: This includes environmental, social, and ethical effects the company’s activities may have on people, communities, and the planet.
Financial implications: This covers the financial risks and opportunities tied to sustainability that the company faces.
A thorough assessment not only identifies these impacts but also highlights potential risks and opportunities. While the DMA is mandatory for reporting purposes, it also serves as a powerful tool for supporting business development and strategic planning.
So, while there are certainly risks to avoid for people, the planet, and the business, there are always opportunities to grasp as well 🎉.
Considering the whole value chain
A good understanding of who your stakeholders are and where they are located across the value chain is a basis for accurately identifying impacts.
This means considering not only workers within your own operations but also those in your suppliers’ operations, users of your products, and the communities affected by your business activities. The entire value chain is included in your scope — from raw material to end use.
The first step is to describe your value chains, detailing locations, processes, and identifying the stakeholders for each segment.
If your company operates through multiple value chains, it’s a both a good idea and a requirement for CSRD to perform this analysis separately for each one. This approach ensures that your findings are precise and tailored, helping inform not only your reporting but also your business development strategies and investment decisions.
Another important group of stakeholders to consider are those who are interested in your annual report. Engaging with them and gathering their perspectives can be done through existing channels like customer satisfaction surveys or supplier dialogues. However, businesses may often need to develop additional mechanisms specifically for the DMA process.
These stakeholder interactions can also prove valuable when working on continuous improvement efforts, as you may rely on some of these stakeholders to enhance your performance.
Once you’ve mapped your value chains and determined how to engage with stakeholders on impact assessments, the next step is to develop a method for evaluating the risks and opportunities those impacts present. It is wise to make use of your current ways to do risk assessment in your company - if you have them in place.
Many companies seek external consultants for support during these first stages of the DMA. If you’re part of an enterprise group with a common owner, it’s beneficial to collaborate with the other companies on this exercise. Smaller companies may also find value in conducting this process together with peers in other companies in similar industries.
Documentation of process, value chains, and stakeholders
For your annual report, you’ll document and disclose your process for determining materiality in ESRS 2 IRO-1.
You’ll also provide the details about your value chains in ESRS 2 SBM-1, and describe the stakeholders in ESRS 2 SBM-2.
More details on DMA process is required for some topics
For environmental and governance topics, the description of your DMA process needs to be more detailed.
For Climate you explain how your operations could be impacted in a future scenario of high emissions and how mitigation actions might influence your company’s performance.
For Biodiversity you describe how your assessment is conducted, focusing on your company’s dependence on ecosystems and the associated risks—whether transitional, physical, or systemic. Additionally, you state whether and how you have consulted with affected communities.
The three topics Pollution, Water and Marine Resources, and the Circular Economy are similar. There you explain if and how you have assessed the impacts, risks, and opportunities. Include whether you have engaged with the communities affected by these issues.
Finally regarding Governance you detail the criteria used to identify business conduct impacts, risks, and opportunities. While doing that you encompass aspects such as location, activity, sector, and transaction structure.
For each of these topics, ensure you cover both your own operations and the upstream and downstream activities within your value chain.
Documenting the topic specific DMA process
The more detailed documentation of the DMA process is done IRO-1 for each of the environmental and governance topics. These are called
for climate: (E1.IRO-1),
for pollution: (E2.IRO-1),
for water and marine resources: (E3.IRO-1),
for biodiversity: (E4.IRO-1),
for circular economy: (E5.IRO-1), and
for governance: (G1.IRO-1).
These are mandatory, no matter if any topic becomes non-material to your company.
Documenting stakeholder inputs on social topics
Specifically for social topics, if the issue is material, you’ll provide more detailed information on stakeholder interests, views, and rights in SBM-2. These are categorized as follows:
for own workforce: (S1.SBM-2),
for workers in the value chain: (S2.SBM-2),
for affected communities: (S3.SBM-2),
for consumers and end-users: (S4.SBM-2).
How it all relates to how you do business
For certain topics, you may need to provide additional details on how your strategy and business model relate to the identified impacts, risks, and opportunities. This is particularly relevant for two environmental topics — Climate (E1) and Biodiversity (E4) — as well as social topics related to your own workforce (S1), workers in the value chain (S2), affected communities (S3), and consumers and end-users (S4).
If you’ve identified material issues — whether risks or opportunities — concerning any of these topics, you should document them in SBM-3 for the respective topical standards.
These topical disclosures are connected to the broader, non-topical SBM-3 requirement in the general ESRS 2 standard, which provides a more comprehensive description of how your business model relates to the identified impacts.
It’s not strictly necessary to complete this documentation during or alongside your DMA. However, since much of this information is closely tied to your DMA findings, it’s a good idea to stay mindful of the details you’ll need to report here.
Document how you align your business to the material impacts
Where you document how you align your business to the material impacts for each topic. These are called
for climate: (E1.SBM-3),
for biodiversity: (E4.SBM-3),
for own workforce: (S1.SBM-3),
for workers in the value chain: (S2.SBM-3),
for affected communities: (S3.SBM-3),
for consumers and end-users: (S4.SBM-3).
The general description goes into the ESRS2. SBM-3.
Your final set of material aspects for the reporting period
Finally, once you have a solid understanding of the risks and opportunities facing your business, you’ll have a corresponding set of material Disclosure Requirements to include in your annual report.
Yeah! 💪
You’ll list these material disclosure requirements in ESRS 2 IRO-2, outlining what needs to be reported.
In this section, you should also explain why certain areas may have been considered not material, providing context for those decisions.
If you’re using The Cards, you can mark the non-material cards by toggling the “material” switch. You can also add relevant notes directly on the card, explaining why certain cards are considered non-material.
Now, you’ve prepared the required information for your annual report related to the DMA. You also have a refined set of cards to focus on for your ongoing work. The information is structured in accordance with the European Sustainability Reporting Standards (ESRS).
Great job! 👍💪
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