CSRD double materiality requires companies to assess both financial materiality and impact materiality for Scope 3 emissions, expanding reporting boundaries to include value chain activities that affect either financial performance or environmental/social outcomes.
Understanding Double Materiality
Two-Dimensional Assessment
-
Financial Materiality (Outside-In)
- Climate risks affecting business value
- Transition risks from carbon pricing
- Physical risks to supply chains
- Stranded asset considerations
-
Impact Materiality (Inside-Out)
- Company’s effect on climate
- Value chain emissions contribution
- Product lifecycle impacts
- Supplier engagement effectiveness
Scope 3 Reporting Implications
Expanded Category Coverage
- All 15 GHG Protocol categories must be assessed
- Materiality thresholds determine reporting depth
- Primary data requirements for material categories
- Supplier engagement mandated for key emissions sources
ESRS E1 Requirements
Material Scope 3 Categories → Detailed Disclosure
├── Quantitative targets
├── Transition plans
├── Primary data %
└── Assurance readiness
Practical Implementation
Materiality Assessment Process
- Map value chain emissions by category
- Assess financial risks from carbon exposure
- Evaluate impact significance using ESRS criteria
- Document decision rationale for audit trail
- Update annually based on changes
Data Collection Strategy
- Tier 1 suppliers - Direct engagement required
- PCAF methodology for financed emissions
- CDP supply chain program participation
- Emission factors from recognized databases
Compliance Challenges
Common Gaps
- Incomplete supplier data - Implement engagement programs
- Complex value chains - Use spend-based estimates initially
- Downstream emissions - Model product use scenarios
- Data quality scores - Document uncertainty levels
Assurance Preparation
- Evidence documentation for all assumptions
- Calculation methodology transparency
- Internal controls for data collection
- Third-party verification of key suppliers
Reporting Best Practices
SFDR Alignment
- Principal Adverse Impacts (PAIs) integration
- Taxonomy alignment for Scope 3 activities
- Science-based targets including value chain
- Climate scenario analysis with Scope 3 sensitivity
Stakeholder Communication
- Investor-grade metrics with clear boundaries
- Progress tracking against base year
- Supplier scorecards showing engagement
- Industry benchmarking for context
Double materiality fundamentally changes Scope 3 reporting from voluntary best practice to mandatory comprehensive disclosure, requiring robust data management systems and strategic supplier engagement programs to meet CSRD compliance requirements.