Step A in thedouble materiality assessment processis theinitial stagewhere an organization establishes a foundational understanding of itsbusiness context, activities, and stakeholder relationships. This step is critical in identifying how the entity interacts with environmental, social, and governance (ESG) matters and lays the groundwork for further impact and financial materiality assessments.
Thedouble materiality conceptin the ESRS framework requires organizations to evaluate both:
Impact materiality– How an organization’s activities impact people and the environment.
Financial materiality– How sustainability matters influence the organization's financial position, performance, and cash flows.
Identifying the business environment:Understanding industry-specific sustainability challenges, regulatory requirements, and stakeholder expectations.
Recognizing affected stakeholders:Engaging internal and external stakeholders to determine which sustainability matters are relevant.
Defining dependencies and risks:Evaluating the organization’s dependencies on natural, social, and human capital, and how these can influence business outcomes.
Understanding sector and geographical relevance:Assessing which sustainability issues are most significant based on where the company operates.
Key Aspects of Step A in Double Materiality Assessment:Step A does not yet involve selecting specific disclosure requirements (Step B) or conducting a financial materiality assessment (Step C). Instead, it provides thecontextual frameworknecessary for subsequent steps in the materiality process.
Commission Delegated Regulation (EU) 2023/2772, ESRS 1, Section 3.1– Defines stakeholders' role in materiality assessment.
EFRAG Compilation Explanations January - November 2024– Provides guidance on applying double materiality and the importance of Step A.
EFRAG IG 1 Materiality Assessment, Chapter 2.2– Outlines Step A as the process of understanding business activities, stakeholders, and sustainability context.
Official References:Thus, the correct answer isC. Understand the organization's context, activities, and stakeholders.
