# Double Materiality Assessment (DMA) — Methodology and Templates

## Overview

The Double Materiality Assessment is the mandatory first step in CSRD compliance (ESRS 1, paras. 19–56). Every in-scope company must complete a DMA before deciding which ESRS topical standards to report on. The DMA determines what is reported; it cannot be completed retrospectively.

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## Two Perspectives Explained

### 1. Impact Materiality (Inside-Out)
*Does the company have actual or potential impacts on people or the environment?*

**Scope:** Own operations + upstream and downstream value chain

**Actual impacts:** Currently occurring
**Potential impacts:** Could occur in the future (assess likelihood)

**Positive impacts:** Benefits to people or environment (e.g., jobs created, carbon sequestration)
**Negative impacts:** Harm to people or environment (e.g., pollution, unsafe working conditions)

**Significance assessment formula:**
- *Negative actual impacts:* Scale × Scope × Irremediability
- *Negative potential impacts:* Scale × Scope × Irremediability × Likelihood
- *Positive actual impacts:* Scale × Scope
- *Positive potential impacts:* Scale × Scope × Likelihood

**Definitions:**
| Criterion | Definition |
|-----------|-----------|
| Scale | Severity of the impact on people or environment |
| Scope | How widespread (number of people affected / geographic area) |
| Irremediability | Difficulty of restoring pre-impact state |
| Likelihood | Probability of potential impact occurring |

### 2. Financial Materiality (Outside-In)
*Does the sustainability matter create risks or opportunities affecting the company's finances?*

**Financial effects include:** Revenue, costs, assets, liabilities, cash flows, access to finance, cost of capital

**Time horizons:** Short-term (<1 year), medium-term (1–5 years), long-term (>5 years)

**Assessment criteria:**
- Magnitude: How large could the financial effect be? (quantify where possible)
- Likelihood: How probable is the financial effect?

**Sources of financial risks and opportunities:**
- Physical risks (acute: extreme weather; chronic: temperature, sea-level)
- Transition risks (policy/regulation, technology, market, reputational)
- Opportunities (energy efficiency, new markets, brand value, talent attraction)

### The Materiality Threshold
A topic is **material** if it meets EITHER the impact materiality threshold OR the financial materiality threshold (or both).

There is no prescribed numerical threshold — companies set their own thresholds, which must be justified and disclosed (ESRS 2 IRO-1).

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## DMA Process — Step by Step

### Step 1: Understand the Context (ESRS 1, para. 45)

**Activities:**
1. Map the business model: products/services, markets, geographies
2. Map the value chain: key suppliers (tier 1 and beyond), distribution, customers, end-users
3. Identify the company's key activities, assets, and relationships
4. Identify sector-specific sustainability risks using industry references (ESRS sector standards when published, SASB, GRI sector standards)

**Output:** Business context document / value chain map

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### Step 2: Identify Actual and Potential Impacts (ESRS 1, paras. 46–48)

**Sources of impact identification:**
- Internal: operations review, incident data, management interviews
- External: stakeholder engagement, industry benchmarks, peer analysis, ESG ratings

**Stakeholder engagement (ESRS 1, para. 22):**
ESRS requires meaningful engagement with affected stakeholders and users of sustainability reporting. Stakeholders to engage:
- Workers (own and value chain)
- Local communities
- Customers / consumers
- NGOs and civil society
- Investors and financial institutions
- Regulators

**Output:** Long list of potential impacts per ESRS topic area

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### Step 3: Assess Significance of Impacts

Rate each identified impact on each criterion using a 1–5 scale (or equivalent):

**Impact Scoring Matrix:**

| Score | Scale | Scope | Irremediability | Likelihood |
|-------|-------|-------|----------------|-----------|
| 1 | Minimal | Very local / few individuals | Easily remediable | Very unlikely (<5%) |
| 2 | Low | Local / small group | Mostly remediable | Unlikely (5–25%) |
| 3 | Moderate | Regional / significant group | Partially remediable | Possible (25–50%) |
| 4 | High | National / large group | Mostly irreversible | Likely (50–75%) |
| 5 | Severe | International / systemic | Irreversible | Very likely (>75%) |

**Severity score (negative actual):** Scale × Scope × Irremediability (max 125)
**Severity score (negative potential):** Scale × Scope × Irremediability × Likelihood (max 625)

**Materiality threshold:** Company-defined (example: severity ≥ 27 for actual impacts; ≥ 50 for potential impacts)

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### Step 4: Identify Financial Risks and Opportunities

For each ESRS topic, assess whether there are associated financial risks or opportunities.

**Financial Risk/Opportunity Identification Template:**

| ESRS Topic | Risk/Opportunity Type | Description | Time Horizon | Potential Financial Effect |
|-----------|----------------------|-------------|-------------|--------------------------|
| Climate (E1) | Physical risk (acute) | Flooding of key manufacturing site | Short-term | Asset damage, business interruption |
| Climate (E1) | Transition risk | Carbon pricing increases operating costs | Medium-term | Higher fuel/energy costs |
| Water (E3) | Physical risk (chronic) | Water scarcity in production region | Long-term | Supply disruption, increased costs |
| Workforce (S1) | Opportunity | Employer brand attracts talent | Short-term | Lower recruitment costs, retention |

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### Step 5: Assess Financial Significance

Rate identified risks/opportunities:

| Rating | Magnitude | Likelihood |
|--------|-----------|-----------|
| Low | <1% of EBITDA | <25% |
| Medium | 1–5% of EBITDA | 25–75% |
| High | >5% of EBITDA | >75% |

**Financial materiality score:** Magnitude × Likelihood → topic is financially material if score exceeds threshold.

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### Step 6: Determine Materiality — Topic by Topic

Apply the materiality determination matrix:

| ESRS Topic | Impact Material? | Financially Material? | Overall Materiality | Report? |
|-----------|-----------------|----------------------|-------------------|---------|
| E1 Climate | Yes (Scope 3 GHG) | Yes (carbon pricing risk) | **MATERIAL** | Full ESRS E1 |
| E2 Pollution | No | No | Non-material | Omit (brief statement) |
| E3 Water | Yes (operations in water-stressed area) | No | **MATERIAL** | Full ESRS E3 |
| S1 Own Workforce | Yes | No | **MATERIAL** | Full ESRS S1 |
| G1 Business Conduct | No | Yes (compliance risk) | **MATERIAL** | Full ESRS G1 |

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### Step 7: Document the DMA (ESRS 2 SBM-3 + IRO-1)

**Mandatory disclosures about the DMA process:**

*ESRS 2 IRO-1 — Description of the process to identify and assess material IROs:*
- Scope of assessment (own operations / value chain depth)
- Methodology and criteria used
- How stakeholders were engaged
- Timeline and frequency of DMA
- How the results inform strategy and reporting

*ESRS 2 SBM-3 — Material impacts, risks and opportunities:*
- Complete list of material topics identified
- How material IROs interact with business model and strategy
- Current and anticipated financial effects

**Materiality Statement:** Brief explanation for each ESRS topic found non-material (why it was excluded).

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### Step 8: Validate and Update

- DMA must be updated at least annually
- Trigger for mid-period review: significant business change, new regulation, emerging risk, stakeholder concern
- Changes to materiality conclusions must be disclosed

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## Sector-Specific Guidance

### High-Likelihood Material Topics by Sector

| Sector | Typically Material |
|--------|-------------------|
| Energy / Utilities | E1 (Climate), E2 (Pollution), E3 (Water), G1 (Business Conduct) |
| Financial Services | E1 (financed emissions), G1 (Business Conduct), S4 (Consumers) |
| Manufacturing | E1 (GHG), E2 (Pollution), E5 (Circular Economy), S1 (Workforce), S2 (Value Chain) |
| Retail / Consumer Goods | E1, E5 (packaging/waste), S2 (supply chain labour), S4 (consumers) |
| Agriculture / Food | E3 (Water), E4 (Biodiversity), E2 (Pollution), S2 (Value Chain) |
| Construction / Real Estate | E1 (building emissions), E5 (materials), E4 (land use), S3 (communities) |
| Technology | S1 (Workforce), S4 (data protection/consumers), G1 (Business Conduct) |
| Mining / Extractives | E1, E2, E3, E4, S3 (communities), G1 |
| Healthcare / Pharma | S4 (consumers), S1 (workforce), G1 (business conduct), E1 |

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## DMA Documentation Templates

### Impact Register Template

| ID | ESRS Topic | Impact Description | Direction | Scope | Time Horizon | Scale (1-5) | Scope (1-5) | Irremediability (1-5) | Likelihood (1-5) | Severity Score | Material? |
|----|-----------|-------------------|-----------|-------|-------------|------------|------------|----------------------|----------------|---------------|-----------|
| I-001 | E1 | Scope 3 GHG emissions from product use | Negative | Downstream | Long-term | 5 | 5 | 4 | 5 | 500 | YES |
| I-002 | S1 | Gender pay inequity among employees | Negative | Own ops | Short-term | 3 | 3 | 3 | 4 | 108 | YES |
| I-003 | E4 | No operations near biodiversity areas | n/a | — | — | 1 | 1 | 1 | 1 | 1 | NO |

### Financial Risk/Opportunity Register Template

| ID | ESRS Topic | Type | Description | Time Horizon | Magnitude | Likelihood | Financial Score | Material? |
|----|-----------|------|-------------|-------------|-----------|-----------|----------------|-----------|
| F-001 | E1 | Transition risk | EU ETS carbon costs increase | Short-medium | High | High | HIGH | YES |
| F-002 | E3 | Physical risk | Water scarcity affects key plant | Long-term | Medium | Medium | MEDIUM | YES |
| F-003 | S1 | Opportunity | ESG leader attracts talent | Short-term | Low | Medium | LOW | NO |

### DMA Summary Table

| ESRS Standard | Topic | Impact Materiality | Financial Materiality | Overall Material | First Reporting Year |
|--------------|-------|-------------------|----------------------|-----------------|---------------------|
| E1 | Climate Change | ✓ | ✓ | ✓ | FY 2025 |
| E2 | Pollution | ✗ | ✗ | ✗ | — |
| E3 | Water & Marine | ✓ | ✓ | ✓ | FY 2025 |
| E4 | Biodiversity | ✗ | ✗ | ✗ | — |
| E5 | Circular Economy | ✓ | ✗ | ✓ | FY 2025 |
| S1 | Own Workforce | ✓ | ✗ | ✓ | FY 2025 |
| S2 | Value Chain Workers | ✓ | ✗ | ✓ | FY 2025 |
| S3 | Communities | ✗ | ✗ | ✗ | — |
| S4 | Consumers | ✗ | ✓ | ✓ | FY 2025 |
| G1 | Business Conduct | ✓ | ✓ | ✓ | FY 2025 |

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## Common DMA Pitfalls

**1. Scope too narrow:** Limiting the DMA to own operations only; ESRS requires value chain consideration where material.

**2. Stakeholder engagement inadequate:** Consulting only investors; ESRS requires engagement with affected stakeholders (workers, communities).

**3. Financial materiality neglected:** Conducting only impact assessment; financial risks/opportunities must be assessed separately.

**4. Thresholds not justified:** Setting arbitrary thresholds without documenting the rationale; thresholds must be disclosed in IRO-1.

**5. DMA done retrospectively:** Completing the DMA after deciding what to report; the DMA must drive reporting decisions.

**6. Over-exclusion:** Excluding topics from reporting without adequate justification; ESRS requires a brief explanation for excluded topics.

**7. Static DMA:** Treating DMA as a one-time exercise; it must be reviewed at least annually.

**8. Climate auto-excluded:** Climate change (E1) is presumed material for most companies; requires robust justification and strong evidence to exclude.