Double materiality analysis – What should you know?

What is double materiality analysis?

Double Materiality analysis is an approach required for ESG reporting that considers two perspectives:

• Impact materiality, or how the company affects the environment and/or society.
• Financial materiality, or how the environment and/or society affects the company.

This approach provides a holistic view of the company’s relationship with the environment, indicating both its responsibilities and the potential risks and opportunities associated with sustainability.

Why is double materiality analysis crucial in the context of CSRD and ESRS?

The CSRD and ESRS standards prioritize transparency and accurate reporting of companies’ sustainability impacts. The reasons why double materiality analysis plays a key role in this process are:

• Regulatory requirements – Companies covered by CSRD must present in their ESG reports what factors are applicable to them from both a financial and environmental/social perspective.
• Report credibility – Transparency of the analysis results builds trust among investors, customers and other stakeholders.
• Risk management – By identifying relevant issues, a company can more effectively prepare for potential ESG risks, such as changing climate regulations or consumer expectations.
• Growth opportunities – Double materiality analysis also identifies business opportunities or sectors with increased potential, such sustainable agriculture or digitization of manufacture processes.

How do you conduct a double materiality analysis?

A double materiality analysis should be well planned and systematic. Here are the steps to consider:

1. Identifying ESG topics – start by analyzing which ESG topics are relevant to your industry and company. Consider, issues such as:
   • regulations (e.g., CSRD, ESRS, EU Taxonomy),
   • industry guidelines (e.g., GRI, SASB),
   • market trends,
   • stakeholder expectations.
2. Engaging stakeholders – consult key stakeholders such as customers, employees, investors, regulators or local communities. Their perspective will help you understand which ESG issues are most important to them. Dialogue with stakeholders is key in double materiality analysis, as it enables companies to understand the expectations of groups that influence and are influenced by the organization. Engaging stakeholders builds trust, increases transparency and efficiency, and long-term collaboration helps better manage the risks and opportunities of social and environmental change, improving reputation and providing added value for all parties.
3. Assessing environmental and social impact – analyze what effects your activities have on the environment and society, e.g.: greenhouse gas emissions, water and raw material consumption or human and workers’ rights.
4. Assessing financial materiality – identify what ESG risks and opportunities may affect your company’s operations, such as:
   • Regulatory risks (e.g., penalties for excessive emissions),
   • An increase in operating expenses,
   • Evolving market expectations.
5. ESG data gap analysis – the gap analysis is based on the findings of a previously conducted double materiality analysis and stakeholder dialogue. This process allows companies to accurately identify gaps between current sustainability efforts and regulatory requirements, industry best practices and stakeholder expectations. 
6. Integration with ESG report and company strategy – the conclusions of your double materiality analysis should be reflected in both the ESG report and the company’s sustainability strategy.

Challenges in double materiality analysis:

• Data collection – Companies often struggle to obtain accurate information about the environmental and social impacts of their operations. For example, manufacturing companies may struggle to monitor CO2 emissions during the various stages of production because they lack the right tools to measure them.
• Stakeholder engagement – Understanding the needs of different stakeholder groups, such as employees, local communities or environmental organizations, can require a great deal of time and resources. For example, it may be difficult for an organization to get the views of local residents on the environmental impact of its operations, which can delay the decision-making process.
• Regulatory complexity – Companies must keep track of changing regulations, such as the ESRS (European Sustainability Reporting Standards), which can vary by country or industry. For example, a company operating in the European Union may find it difficult to adapt ESG reporting to new transparency requirements that change from year to year.

Double materiality analysis is vital to ensure the compliance of ESG reporting with the CSRD and ESRS standards. It enables companies to understand both their impact on the environment and the risks and opportunities arising from global sustainability trends.

If your company is preparing for ESG reporting in accordance with CSRD and ESRS, and double materiality analysis seems challenging, our experts are here to help you! Get in touch so we can start working to develop effective and compliant solutions.