A Guide to Double Materiality Assessment

The European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) is already a reality for large listed companies of more than 500 employees — and it’s looming large on the horizon for many more. As such, corporates are scrambling to understand a critical element of this emerging framework: the double materiality assessment (DMA).

A double materiality assessment (DMA) is a critical step in achieving compliance with the Corporate Sustainability Reporting Directive (CSRD). With companies currently reporting under the Non-Financial Reporting Directive (NFRD) needing to submit their first reports as early as 1 January 2025 for the 2024 financial year – and the rest soon to follow – implementing a DMA has become a matter of urgency for those who haven’t yet started.

From ingredient producers and agricultural businesses to food manufacturers, retailers, and restaurant chains, every link in the supply chain faces the reality of expanded sustainability disclosures. Over 50,000 companies will likely have to comply with CSRD’s reporting requirements, and a DMA is an essential step in achieving compliance. The directive applies to:

EU and non-EU entities with securities listed on an EU-regulated market
Unlisted EU companies that exceed certain asset, revenue, and workforce size thresholds in two consecutive years
Unlisted EU companies that are the parent of a group that exceeds certain asset, revenue and workforce size thresholds in two consecutive years

In this article, we will dive into the DMA, an essential assessment process foundational to meeting CSRD reporting requirements.

What is Double Materiality?

Double materiality is a concept that recognises that while financial materiality and impact materiality may in some cases be mutually exclusive, in most cases they are inextricably intertwined. It’s a two-sided approach that will reshape how businesses assess and communicate their sustainability impacts and risks to align with reporting standards.

This dual lens significantly expands reporting requirements. The double materiality approach will require companies to assess and disclose their real-world impacts on the social and environmental ecosystems in which they reside, in addition to the financial implications of material sustainability risks and opportunities.

🤔 Remind me again…
Do you have a high-level overview of CSRD? Check out our CSRD explainer!

Double materiality and ESG

At its core, double materiality is a new model for corporate Environmental, Social, and Governance (ESG) disclosures. Instead of assessing sustainability matters and ESG factors separately from financial materiality, double materiality considers that these matters require a two-pronged perspective:

How the company impacts the environment and society through its activities (the ‘inside-out’ perspective, or impact materiality).
How sustainability issues affect the company’s development, performance, and position (the ‘outside-in’ perspective, or financial materiality)

The CSRD mandate, along with the accompanying European Sustainability Reporting Standards (ESRS), cements double materiality as a fundamental principle for ESG reporting. It’s a pivotal shift for the entire ESG and financial reporting landscape that demands a more balanced and integrated approach to sustainability disclosures.

The purpose of a double materiality assessment

The purpose of a DMA is to identify which of the 10 topics or ESG matters outlined in ESRS are material — significant to your operations and stakeholders — for your business.

The ‘double’ aspect refers to the need to consider both financial materiality (outside-in) and impact materiality (inside-out). Topics identified to have material impact must be reported in the final CSRD report, keeping in mind that a corporate sustainability or ESG matter can be material from an impact perspective, a financial perspective, or both.

What makes a sustainability or ESG matter ‘material’?

According to the ESRS, Impact materiality is assessed against the criteria of severity and likelihood, with severity based on the scale, scope, and irremediable character of negative impacts, as well as the scale and scope of positive impacts. An issue is material from a financial perspective if it could affect the organization’s ability to create value in the short-, medium-, or long term.

A matter is deemed ‘material’ when it meets the criteria defined for impact materiality, financial materiality, or both.

The 10 ESG matters in double materiality assessment

The ESRS outlines ten sustainability or ESG matters that companies must assess for materiality:

Climate change
Pollution
Water and marine resources
Biodiversity and ecosystems
Resource use and circular economy
Own workforce
Workers in the value chain
Affected communities
Consumers and end-users
Business conduct

None of these 10 topics are universally required for disclosure. However, it is highly unlikely that climate change would not be deemed material for those involved in the food and beverage value chain.

To claim that climate change is immaterial to your business (and therefore omit all disclosure requirements related to ESRS E1), you’d need to provide a detailed explanation of the conclusions of your materiality assessment. This explanation must also include a forward-looking analysis assessing whether climate change might become material for your business in the future.

💡 What is ESRS E1?

ESRS E1 is a data-intensive reporting standard for climate change disclosures. It’s structured in nine parts, which you can read about here.

For any other topics deemed immaterial, companies need only provide a brief conclusion of the materiality assessment for that topic. This emphasis on climate change is a clear indicator that the CSRD considers it the most important ESG matter.

Double materiality in the context of the CSRD

While the European Financial Reporting Advisory Group (EFRAG) has published implementation guidance, the CSRD does not mandate a specific process or sequence of steps for conducting a DMA. While this may make the process feel vague, if not a bit daunting, this flexibility allows companies to tailor their approach to their unique circumstances.

Conducting your assessment will take time, and likely involve consulting a wide array of resources. You’ll want to consider the time investment for the following as you plan your approach:

Reviewing previously conducted assessments, if available, to leverage existing insights.
Connecting with stakeholders, including suppliers, customers, and local communities, to understand their perspectives on material sustainability matters and ESG factors.
Assessing potential material Environmental, Social, and Governance (ESG) impacts on supply chain partners, both upstream and downstream.

Consulting industry-specific materiality guidance resources, such as those provided by the International Financial Reporting Standards (IFRS) or the Sustainability Accounting Standards Board (SASB), for sector-specific insights.

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Find out how the CSRD reporting solution by CarbonCloud makes it easier for you.

How do I conduct a double materiality assessment?

Because there is no specific process mandated by CSRD, the steps you take to perform your DMA are ultimately up to you. However, your double materiality approach should accurately reflect your business’s facts and circumstances and consider the full scope of ESG matters.

In addition to your own operations, your assessment should consider sustainability risks and opportunities upstream and downstream from you in the value chain, including Scope 3 data. As an example, food brands should look at the ESG matters material to the ingredient producers they work with (upstream) as well as the distributors and retailers that transport and stock their products (downstream).

This is where engaging with stakeholders is crucial. A platform such as CarbonCloud that is constructed for supplier engagement can be useful — collecting Scope 3 data for your sustainability disclosure with manual methods can prove to be an elusive process.

Here’s a high-level look at how you can approach a double materiality assessment:

Define relevant stakeholders

Engagement with stakeholders should inform the assessment process.
While the European Sustainablilty Reporting Standards (ESRS) do not mandate specific behaviour in regard to stakeholder engagement, doing so is consistent with the practice suggested by the international instruments of due diligence referenced in the CSRD.

Take each topic (sustainability matter) one at a time

Identify any associated impacts (inside-out perspective) — positive or negative, and actual or potential — for each topic, sub-topic, or sub-sub-topic (e.g., the subtopics of climate change are mitigation, adaptation, and energy).
Define any risks and opportunities derived from these impacts.
Define any risks and opportunities derived from dependencies (outside-in perspective).
Add identified Impacts, Risks, and Opportunities (IROs) information to a spreadsheet.

Define a threshold for when an IRO is material

There are no set rules for what the threshold should be, so you’ll need to determine criteria that align with your business goals and stakeholder expectations.

💡 Judgement is involved here. While most companies already have a pre-established definition of what a financially material issue is, impact materiality tends to be less definitive. Be sure to have appropriate justifications prepared alongside your defined impact materiality threshold.

Score each IRO

Score each actual IRO based on the severity of the impact — this is based on the scale (level of seriousness), the scope (how widespread the issue is), and the irremediable character (how difficult it is to fix the resulting harm of an impact).
Score each potential IRO based on the severity and likelihood of potential negative impact.
Equal importance should be given to impact materiality and financial materiality.
The materiality assessment process should also consider the impact on all affected stakeholders — not just the needs of users.

Identify and disclose material topics and IROs

The impacts, risks and opportunities with a score exceeding your pre-defined threshold are considered material.
Disclose material IROs in your final CSRD report, mapping them back to the relevant sustainability matter (topic, sub-topic, or sub-sub-topic).
You’ll need to include a description of the processes you used to identify material impacts, risks and opportunities, as well as the thresholds and criteria you used.

As you can see, double materiality reporting requires a systematic approach that engages stakeholders, meticulously evaluates impacts across the value chain, and applies well-defined materiality thresholds to identify the most significant sustainability topics.

What role does data play in double materiality?

Data is core to a double materiality assessment. The ESRS guidance states that the assessment should be based on ‘supportable evidence and rely to the maximum extent possible on objective information.’

Including upstream and downstream data in your assessment, in addition to your own operations, is no easy task. That’s quite a lot of data to collect, organise, analyse, and draw decision-useful insights from. Reporting challenges will be compounded for companies that lack the necessary infrastructure, systems, and data management capabilities to handle the volume and complexity of sustainability data required.

Food and beverage companies will require data to map their supply chain — CarbonCloud has the Scope 3 data you need for your climate change assessment.

Types of data needed for CSRD

With climate change singled out as the most important sustainability matter, you’ll want to give extra care to collecting the data points needed for ESRS E1, which covers climate change mitigation, adaptation, and energy.

Ultimately, all sustainability matters need to be assessed from both a financial and impact perspective to determine which are material to your business. This will guide the specific data points you need to disclose.

According to IFRS and SASB guidance, sustainability matters most likely to have material impact on the food and beverage industry include:

Climate change (ESRS E1)
Water and marine resources (ESRS E3)
Biodiversity and ecosystems (ESRS E4)
Resource use and circular economy (ESRS E5)
Workers in the value chain (ESRS S2)
Consumers and end-users (ESRS S4)

This is not to say other ESG matters won’t be relevant to your company — these are merely the most likely to be material for businesses in the food and beverage value chain.

Double materiality applications in the real world

To illustrate the practical implications of double materiality reporting, let’s explore three sustainability topics from the food and beverage value chain:

Circular economy and food beverage retailers

🌍 Impact materiality: Retailers’ operations and product offerings significantly impact resource consumption, waste generation, and the transition towards a circular economy, affecting the quality of environment and availability of resources for communities.

💼 Financial materiality: Implementing circular business models and reducing waste can lead to cost savings, improved resource efficiency, and better compliance with environmental regulations, positively impacting financial performance.

Overlap? Making positive changes to the business policies and actions relevant to a circular economy — an economic system based on the reuse and regeneration of materials or products — addresses both financial risk (e.g., resource scarcity, regulatory penalties) and the impact perspective (e.g., resource scarcity, packaging waste, and pollution).

Biodeversity loss and the agricultural industry

🌍 Impact materiality: Agricultural practices, land use, and pesticide application can contribute to habitat destruction, species decline, and ecosystem degradation.

💼 Financial materiality: Biodiversity loss can disrupt ecosystems crucial for agricultural productivity, leading to supply chain disruptions, increased costs, and financial risks for businesses in the food and beverage value chain.

Overlap? Preserving biodiversity is vital for ensuring long-term agricultural supply chain sustainability as well as mitigating damaging environmental impacts, protecting soil health, and safeguarding the flora and fauna that maintain balance in our ecosystems.

Climate change and ingredient producers

🌍 Impact materiality: Greenhouse gas emissions from agricultural practices, transportation, and energy use contribute to climate change, leading to an increased frequency of extreme weather events that can negatively impact ecosystems — socially and environmentally.

💼 Financial materiality: Climate change can disrupt crop yields, water availability, and supply chains, posing significant financial risks to ingredient producers reliant on agricultural commodities.

Overlap? Addressing climate change through emissions reductions, adaptation strategies, and sustainable sourcing practices is material from both a financial risk (e.g., building resilience into supply chains) and environmental impact perspective (e.g., slowing the rate of warming).

As the above applications demonstrate, the overlap between impact materiality and financial materiality is considerable.

What does it mean for companies in the food and beverage value chain?

Assimilating the concept of double materiality as required by the CSRD signifies a deeper integration of sustainability into business models across the food and beverage sector. Companies can no longer view sustainability as a siloed function. Rather, sustainability must be interwoven into their core operations, risk management, and value creation processes.

Just remember, double materiality is still a relatively new concept. You’re in good company with the other 50,000 or so corporates performing a DMA for the first time. This new model for ESG disclosures is an occasion for learning and an opportunity for companies in the food and beverage value chain to gain a more comprehensive understanding of their risks, opportunities, and real-world impacts.

A new era of corporate sustainability reporting for food and beverage companies

It’s a new era of sustainability reporting. Conducting a double materiality assessment may not be an easy lift, but it’s a foundational step to complying with CSRD reporting standards and meeting the evolving expectations of stakeholders and regulators.

Ultimately, conducting a DMA will help you better understand the risks and opportunities most relevant to your business, enabling you to make more informed decisions that drive long-term value creation. Nothing bad can come from that, right?

Still have questions? Please feel free to contact our team of experts – we’re here to help.