The Double-Materiality Assessment (DMA)

The Double-Materiality Assessment (DMA) is a crucial tool for sustainability professionals in navigating the complexities of the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS). This assessment framework takes into account not only the impacts of a company's operations on the environment and society but also the potential impact of environmental and social issues on the company itself. By considering both aspects of materiality, companies can better understand the risks and opportunities related to sustainability in their business operations.

The DMA helps companies identify and prioritize the most material sustainability impacts, risks and opportunities for their organization. By conducting a thorough assessment of both internal and external factors, companies can determine which environmental and social issues are most material to their business. A sustainability issue can be material from an impact perspective or from a financial perspective, even though these two are often connected. This analysis enables companies to focus their efforts on addressing these key issues, leading to more effective sustainability strategies and reporting practices.

According to the Commission Delegated Regulation 2023/2772, section 3.4,  a sustainability issue is material when it relates to the company's significant actual or potential effects on people or the environment, whether positive or negative, in the short, medium, or long term. These effects include those linked to the company's own activities and its supply chain, including its products and services, as well as its business relationships. In this regard, business relationships refer to all connections in the company's supply chain, not just direct contracts.

A negative impact is informed by the the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. While for actual negative impacts, materiality is based on the severity of the impact, for potential negative impacts it is based on the severity and likelihood of the impact, including its the scale, scope, and irremediable character of the impact.

On the other hand, section 3.5 explains that a sustainability issue is considered material from a financial perspective if it causes or is likely to cause significant financial effects on a company. This happens when a sustainability issue creates risks or opportunities that have a significant impact, or are expected to have a significant impact, on the company's growth, financial situation, performance, cash flows, ability to get funding, or cost of capital in the short, medium, or long term. These risks and opportunities can come from past or future events. The financial importance of a sustainability issue is not limited to what the company can control but also includes significant risks and opportunities related to business relationships outside the company's financial statements.

Organizations and sustainability professionals are required to perform a due diligence where they assess the material impacts, risks and opportunities to their organization. The goal of the due diligence is to identify, prevent, mitigate and account for how the organization addresses the actual and potential negative impacts on the environment and stakeholders. This should be an on-going practice that shapes the strategy, the business model, the activities, the business relationships, and the operating, sourcing and selling contexts of the organization.

How can you determine if a topic is material for your organization the the DMA method? The ESRS do not impose any specific materiality assessment process as no one process would suit all organizations and their different economic activities, organisational structures, locations of operations or  value chains. However, the chart in the following page can give you some guidance to design your own process.

Furthermore, the DMA allows companies to better manage their risks and improve their long-term sustainability performance. By considering the double materiality of sustainability issues, companies can anticipate and mitigate potential risks to their business operations, such as regulatory changes, supply chain disruptions, or reputational damage. This proactive approach not only helps companies avoid potential pitfalls but also positions them as leaders in sustainable business practices.

In addition, the DMA encourages companies to engage with stakeholders and build trust in their sustainability efforts. By transparently disclosing the results of their materiality assessments and demonstrating a commitment to addressing key sustainability issues, companies can enhance their reputation and credibility among customers, investors, and other stakeholders. This can lead to increased brand loyalty, improved access to capital, enhanced relationships with key partners and ultimately to improved long-term sustainability performance and a stronger, more resilient business.

The Impact on environmental and social factors (inside-out perspective)

In this subchapter, we will explore the impact of corporate social responsibility and environmental sustainability reporting on both environmental and social factors from an inside-out perspective. As sustainability professionals, it is crucial to understand how our actions and decisions can influence the world around us.

One of the key environmental factors that the CSRD and the ESRS focus on is climate change. By measuring and reporting on greenhouse gas emissions, energy consumption, and water usage, companies can better understand their environmental footprint and take steps to reduce their impact on the planet. This information allows sustainability professionals to identify areas for improvement and implement strategies to mitigate climate change.

In addition to environmental factors, the CSRD and ESRS also focus on the impact on social factors such as employee well-being, community engagement, and human rights. By reporting on social indicators such as employee turnover rates, diversity and inclusion initiatives, and community investment programs, companies can demonstrate their commitment to social responsibility and transparency. This can lead to increased employee satisfaction, improved community relationships, and a more positive brand image.

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