Double Materiality Assessment - Guide from start to finish

This article is a comprehensive recap of our webinar exploring the concept of Double Materiality Assessment (DMA). This topic falls under the Corporate Sustainability Reporting Directive (CSRD) mandating companies to disclose their environmental and social impacts.

Want to check the full 40 minutes Webinar? ➡️ Check the recording 📹

All our advice is based on our digestion of the ERFAG’s guidance, as well as our hands-on experience working with clients.

Key points that will be covered:

• DMA definition: Distinction between impact and financial materiality and its role in ESG

• Conducting the DMA: Step-by-step process (value chain mapping, stakeholders, IROs, materiality thresholds & scoring) and its connection to sustainability reporting

• Hands-on use cases based on experience with clients

Double Materiality Assessment for CSRD compliance: Definition

The Double Materiality Assessment process (DMA) is a concept in sustainability reporting that considers two essential perspectives: impact materiality and financial materiality. Impact materiality emphasizes the company's influence on the environment and society, focusing on how its operations and actions affect the broader ecological and social landscape. Financial materiality, by contrast, examines how environmental and social factors can influence the company’s financial performance, such as its revenues, costs, or risks. In essence, impact materiality explores the company’s effect on the world, while financial materiality delves into how changes in the world affect the company.

This process is aimed at identifying the sustainability issues that are most relevant to a specific company, considering its distinctive context, such as the nature of its operations, its business model, and the geographic regions where it operates. By tailoring the analysis to these unique factors, the DMA helps ensure a focused and meaningful understanding of sustainability priorities. It will be the foundation stone of your ESG reporting.

🌹ROSE ADVICE: A straightforward way to think about financial materiality is to ask yourself: Could this issue, in any way, have the potential to influence my cash flows positively or negatively?

3 steps to perform the Double Materiality Assessment following the ESRS guidelines

The Double Materiality Assessment process under the ESRS (European Sustainability Reporting Standards) guidelines involves three structured steps. 

First, context setting requires mapping your unique value chain—upstream, operations, and downstream—and identifying key stakeholders. This ensures your assessment reflects your company's specific circumstances and legal context. 

Second, assess Impacts, Risks, and Opportunities (IROs) by linking sustainability matters to your operations. We’ll see how to use the ESRS framework to classify impacts as positive or negative, and identify risks and opportunities across the value chain. 

Finally, define thresholds and scoring to determine materiality, using structured criteria like scale, scope, and remediability for impact materiality and monetary consequences for financial materiality.

Step 1 - Context setting: Your unique value chain and stakeholders

Begin by mapping out your company’s specific context. This involves a thorough examination of your entire business landscape, including your current operations, strategic initiatives, financial forecasts, and any potential future developments, such as the introduction of new technologies, products, or entry into emerging markets.

Map your value chain by identifying your business area

• Upstream: This includes all activities that occur before your business can operate. These might involve the production of raw or intermediary materials, transportation logistics, energy generation, packaging, and any other necessary preparatory processes.

Example:

• ‍Own Operations: This encompasses all activities that are directly under your company’s control, including production, administration, and internal processes.

Example:

• ‍ Downstream: Everything occurring after the own operations activities from the gate of the company to the end customer and product disposal.

Example:

🌹ROSE ADVICE: When mapping your value chain, start with a simple initial version and refine it over time. Be sure to incorporate considerations of the legal environment and industry standards into your planning. Aim for a functional version that evolves and improves incrementally, with a target of achieving a comprehensive and robust framework by 2026.

Map your stakeholders

The primary goal of stakeholder mapping is to determine which stakeholders have an interest or perspective on specific topics relevant to your business. This process is essential, as the ESRS requires companies to disclose how stakeholder views and interests are taken into account in their decision-making and sustainability reporting.

Common stakeholder groups include employees, customers, suppliers, investors, the general public, and even the environment itself. For an effective mapping process, leverage existing engagement tools and data sources, such as employee surveys, customer feedback, supplier dialogues, incident reports, and whistleblower disclosures. These resources provide valuable insights into stakeholder expectations and concerns.

When certain information is unavailable, it’s important to fill the gaps. You can achieve this by conducting targeted interviews or designing specific surveys tailored to gather the indispensable insights.

🌹 ROSE ADVICE: Stakeholder mapping can feel daunting, but it doesn’t need to be overly complex. Start by prioritizing direct stakeholder dialogue whenever feasible, as it provides the most accurate and actionable insights. If direct interaction isn’t possible, consider using proxy data, such as market trends or industry benchmarks, to infer stakeholder interests and expectations. The key is to build a foundation of understanding that you can refine and expand over time.

Step 2 - Defining Impact, Risk & Opportunity (IROs)

Sustainability matters are the broader environmental, social, and governance (ESG) issues relevant to a company, whereas the IROs are the specific instances of these sustainability matters within the company's operations.

Sustainability matters are divided into sustainability Topics, Sub-topics (Climate change adaptation, Energy, Pollution of Air, Marine resources, Working conditions etc…), Sub-Subtopics (Extraction and use of marine resources, Land degradation, Health & Safety, Adequate wages, Diversity etc…).

The list to start from is listed in Appendix A, AR 16 from the ESRS. As you are performing the DMA, it will be your job to identify, within each Sub-Topic and Sub-Sub-Topic, how these sustainability matters are reflected specifically in your company and its entire value chain. The result will be a list of Impacts (Positive and Negative), Risks and Opportunities, unique to your company, and tied to sustainability matters.

Each topic is categorized by business area (upstream, operations, downstream) and classified as a positive or negative impact, risk, or opportunity, with an assigned time horizon (actual or potential).

🌹ROSE ADVICE: Go consistently through the list of items in the delegated act- AR16 - sustainability matters list. For a systematic approach, begin by mapping your value chain and identifying key stakeholders before reviewing sustainability matters.

Step 3 - Setting Thresholds & Scoring (before disclosures)

According to the DMA guidance, setting thresholds is a structured process through which companies determine whether each IRO (Impact, Risk or Opportunity) qualifies as material. This step plays a crucial role in the overall evaluation of both impact materiality and financial materiality, as it sets the foundation for prioritizing sustainability issues based on their relevance and significance.

Impact materiality 

The evaluation of impact materiality involves analyzing three key factors:

• Scale: This refers to the depth or intensity of the impact, evaluating how significant the consequences are for the environment or society.

• Scope: This measures how widespread the impact is, considering its geographic reach or the number of people affected.

• Remediability: For negative impacts, the ease or difficulty of reversing or mitigating the damage is also assessed. This criterion highlights the potential for long-term or permanent harm when remediation is limited.

To standardize the assessment, a scoring system is used. Each criterion is rated on a scale from 1 to 5, with the total score for negative impacts reaching a maximum of 15 points (5 × 3). For positive impacts, where remediability is not applicable, the highest possible score is 10 points. These scores are then compared to pre-established thresholds, which are designed to factor in the likelihood of each impact occurring.

Financial materiality 

Financial materiality focuses on evaluating the magnitude of environmental and social risks and opportunities in terms of their monetary consequences. This includes potential gains or losses arising from these factors. Similar to impact materiality, a 1-to-5 scale is applied to assess both risks and opportunities separately.

In both cases—whether assessing impact or financial materiality—it is essential to evaluate not only the magnitude but also the likelihood of these events happening. The combination of these factors helps establish thresholds that determine the materiality of each issue, ensuring that only the most critical ones are prioritized for reporting.

Concrete Examples of Application

• Natural disasters caused by climate change: Such events can disrupt supply chains, representing a financial risk with potentially severe monetary impacts. However, these occurrences are generally rare, meaning they would score high in magnitude but low in likelihood.

• Oil in water due to a tanker accident: This scenario qualifies as a negative impact with extremely high severity, given the long-lasting pollution caused to water systems. The scope is localized, but the challenge of remediation is massive, making it a significant environmental concern. Its high likelihood of occurrence further raises its score.

• This same tanker accident also constitutes a financial risk, as it can lead to substantial fines and reputational damage. While such outcomes may be less probable, they remain critical to consider due to their potential financial implications.

(Zoom in for a better look)

Each issue is scored and benchmarked against the defined thresholds. Items scoring close to the threshold are particularly important to validate, and we strongly recommend involving relevant stakeholders to ensure the accuracy and relevance of these assessments.

From Materiality to CSRD Reporting

At this stage, the list of IROs has been narrowed down and you’ve obtained a good materiality overview. The material items form the basis for defining your sustainability matters, categorized into topics, subtopics, and sub-subtopics. These serve as the foundation for your CSRD disclosures. The next step in the process is to map the materiality at the level of specific Disclosure Requirements (DRs).

🌹ROSE ADVICE: Remember, non material topics require thorough documentation to support their exclusion. If an issue scores below the threshold, ensure there is solid evidence—such as scientific research or stakeholder input—that justifies the rationale behind this decision. Proper documentation will strengthen the credibility of your assessment and reporting.

ROSE’s unique perspective on DMA - The first essential step in sustainability reporting

At ROSE, we view the Double Materiality Assessment (DMA) as not just the starting point but the cornerstone of a successful sustainability reporting journey. Recognizing the complexity of sustainability requirements, we leverage cutting-edge technology to make the process not only more efficient but also more engaging for businesses. By streamlining workflows and automating repetitive tasks, ROSE empowers organizations to focus on strategic decision-making rather than being bogged down by administrative hurdles.

Our approach is built on close collaboration with our clients. We dive deep into the intricate web of regulatory requirements, such as those outlined by EFRAG’s Implementation Guidance for Materiality Assessment—widely acknowledged as the definitive reference for DMA best practices. By tailoring our solutions to align with each client’s unique business model, sector, and strategic objectives, we ensure that their sustainability efforts are both impactful and compliant with global standards.

At ROSE, we champion a pragmatic philosophy of sustainability reporting:

• Start: Take decisive action by beginning with what’s achievable today, no matter how small the step may seem.

• Move: Progress steadily by addressing immediate priorities, balancing quick wins with long-term vision.

• Iterate: Continuously refine reporting processes, adapting to evolving regulations, stakeholder expectations, and organizational growth.

This iterative approach not only builds confidence but also ensures that businesses remain agile and prepared for the future. The goal is to achieve meaningful results while laying the groundwork for continuous improvement over time.

To truly unlock the potential of DMA, ROSE encourages clients to think beyond compliance. While meeting regulatory thresholds is vital, we also emphasize using the DMA as an opportunity to identify strategic implications, enhance stakeholder engagement, and future-proof the business. This involves leveraging insights gained from the assessment to inform broader sustainability strategies, ensuring they are actionable, measurable, and aligned with corporate goals.

What’s next?
Completing the Double Materiality Assessment is only the beginning. As the foundation of your sustainability reporting, it paves the way for identifying material sustainability matters, setting disclosure priorities, and aligning with frameworks like the CSRD, the current most demanding regulation in a constantly changing regulatory environment. 

For a deeper dive into the steps that follow the DMA process, explore this article.

Source: EFRAG's Implementation guidance for Materiality assessment (considered as source of truth in terms of DMA best practices).