Running a double materiality assessment

What are the steps in a double materiality assessment?

The ESRS do not prescribe a process, but EFRAG's implementation guidance on materiality assessment, IG 1, describes one that most companies follow:

• A. Understand the context: the business model, activities, locations, value chain and the stakeholders affected, using existing sources such as risk registers, due diligence and stakeholder feedback.
• B. Identify impacts, risks and opportunities: actual and potential, negative and positive impacts on people and the environment, and risks and opportunities with financial effects, using the ESRS list of sustainability matters as a checklist rather than a limit.
• C. Assess and determine materiality: score each item against thresholds the company sets, and decide which are material.
• D. Report: describe the process and the material items, and map them to the disclosure requirements that apply.

See double materiality explained.

How are impacts, risks and opportunities scored?

For negative impacts, severity combines scale, how grave the impact is; scope, how widespread; and irremediable character, how hard it is to put right. Potential impacts are also weighted by likelihood, except that for potential human rights impacts severity takes precedence, so a severe but unlikely harm can still be material. Positive impacts are scored on scale, scope and, if potential, likelihood. Risks and opportunities are scored on the potential size of their financial effects, against thresholds linked to measures such as profit or equity, and their likelihood. Many companies use 1 to 5 scales and a threshold, but the method and thresholds are the company's own and must be explained; see materiality thresholds and scoring. See also impact materiality and financial materiality.

Double materiality assessment: a textile company's water topic

A textile company that dyes fabric assesses five items under water. It scores scale, scope and irremediable character from 1 to 5 and averages them, multiplies potential impacts and financial items by likelihood, and treats a score of 3 or more as material.

The wastewater discharge is an actual impact, so it is assessed on severity alone, 3.3, above the threshold. The workers' exposure to chemicals scores only 1.7 after likelihood, but it is a potential human rights impact with severity of 4.3, so severity takes precedence and it is material. Drought is a material financial risk, because a drought would stop the dyeing lines and the company rates it likely over the medium term. Community water stress and the water-saving technology fall below the threshold, and the company records why, so the conclusion can be checked and revisited next year.

What is the top-down approach?

The revised ESRS allow companies to start from their business model and strategy and conclude directly on sustainability matters that are clearly material or clearly not material, without scoring every possible impact. Detailed assessment is then needed only where the answer is not obvious. A textile company would not need to score climate change in detail to conclude it is material, but it might need to for biodiversity. The conclusions and reasons must still be documented. See the revised ESRS.

How are stakeholders involved?

Engagement with affected stakeholders, such as workers, communities and their representatives, informs the impact side, and investors, lenders and the company's own risk function inform the financial side. Engagement does not have to mean surveys of everyone: existing grievance mechanisms, supplier audits, union dialogue and expert input often give better evidence. The assessment should show how the input shaped the results. See stakeholder engagement for materiality.

What should be documented and disclosed?

Companies disclose how they identified and assessed impacts, risks and opportunities, the thresholds used, and the material items and how they interact with strategy and the business model; these were disclosure requirements IRO-1 and SBM-3 in the 2023 ESRS. Internally, they keep the evidence, scores and reasons, including for items found not material, because limited assurance covers the process. The assessment is reviewed each year and updated when the business, value chain or evidence changes. See impacts, risks and opportunities and sustainability assurance. See ESRS 2 general disclosures.

This guide is general information. It is not tax or legal advice for your situation.