Double Materiality Assessment: A Practical Guide to CSRD IRO

The first hurdle in CSRD compliance is converting the double materiality assessment required by ESRS 1 into a "basis for judgment that can be approved by the board of directors." The European Commission (EU) explains that the first wave of companies must apply the new rules from fiscal year 2024 and report in 2025. Companies outside the EU may be subject to these rules from fiscal year 2028, necessitating the early development of disclosure frameworks.

A double materiality assessment is a mechanism that evaluates sustainability matters along two axes: impact materiality (IMA) and financial materiality (FMA). IMA examines the actual or potential impacts of business activities on people, the environment, and society. FMA examines the risks and opportunities that such matters pose to corporate value, cash flow, cost of capital, and financing. Since a matter can be subject to ESRS disclosure if it is significant on just one axis, the traditional focus on "whether there is a financial impact on investors" is insufficient. Many companies have already established financial materiality assessments for ISSB/TCFD compliance, but applying only those to CSRD assessments often leaves out external impacts such as human rights, biodiversity, and water risks.

For practical processes, the EFRAG IG1 "Materiality Assessment Implementation Guidance" is the most user-friendly. Finalized on May 31, 2024, IG1 is non-authoritative guidance, but as practical procedures to support ESRS-compliant reporting, it outlines a flow: Step A to identify business, value chain, and stakeholders; Step B to identify actual and potential IROs; Step C to assess materiality; and Step D to determine disclosure targets. Rather than creating a perfect scoring model from the start, it is easier to withstand audits by creating IRO ledgers for each factory, procurement unit, sales region, and major customer, and linking them to supporting documentation.

It is also necessary to clarify the differences from GRI 3. GRI 3 is a single-materiality standard that determines an organization's most significant impacts on the economy, environment, and people, and identifies material topics in four steps. ESRS can use GRI's impact assessment as a starting point but adds FMA to it. Therefore, for companies already compliant with GRI, it is practical not to discard the existing material topic list, but to expand it into a double materiality ledger by adding columns for financial risks and opportunities to each topic.

The schedule shifted from 2025 onwards. In its "Stop the Clock" directive on April 14, 2025, the European Commission (EU) postponed the application for the second and third waves of companies originally scheduled to report from fiscal year 2025 or 2026. Furthermore, the Omnibus I political agreement on December 9, 2025, aimed to simplify disclosure burdens, including CSRD. On the other hand, the 2024 fiscal year reporting for the first wave of companies remains, and it cannot be said that the fiscal year 2028 compliance for Japanese companies outside the EU should be excluded from preparations. Comparisons must be made based on the premise that ISSB/SSBJ focus on financial materiality, while CSRD focuses on double materiality.

Corporate planning and sustainability managers should first determine: 1) the application scope for the company, EU subsidiaries, and branches; 2) the department responsible for the IRO ledger; 3) IMA/FMA assessment criteria; 4) approval history at board meetings; 5) Scope 3, human rights, and occupational safety data collected from business partners; and 6) a roadmap for assurance compliance by fiscal year 2028. Each IRO should include the originating department, affected stakeholders, time horizon, existing controls, supporting evidence files, and the next review date. It is important to design double materiality assessment not as a one-time survey, but as a continuous process that connects corporate risk management, procurement review, and internal controls.