How the ESRS revisions reshape your double materiality assessment process

The recent revisions to the ESRS fundamentally reshape how companies approach the double materiality assessment (DMA).

In this article, we break down the essential methodological shifts and structural changes, ensuring your reporting is aligned with the new, principles-based DMA requirements.

Methodological shift and simplification

The new guidance moves away from a bottom-up approach, towards a top-down approach. Where the old DMA approach involved exhaustively checking every single reporting item (formerly AR 16 list), the new method starts from the relevant topic or sub-topic based on analysing the company's business model and strategy. This shift allows companies to immediately identify the most likely impacts, risks and opportunities (IROs), thereby making the DMA more integrated with the company's core operations.

This top-down method is explicitly encouraged as more pragmatic. Further streamlining the process, the former detailed AR 16 list has now been replaced by ESRS 1 Appendix A, which only includes topics and sub-topics. While sub-sub topics have been removed, they are not forgotten; they are consolidated into the sub-topic level.

Clarity on gross vs. net impact assessment

The revisions clarified that the starting point for assessing impact materiality is always the gross basis, meaning that companies must assess the potential or actual severity of the impact before considering any mitigation or prevention actions in place. For any negative impact that has already occurred, remediation actions taken shall not be considered when assessing its initial materiality; the assessment remains based on the gross severity of the actual consequences. If an impact is material, companies must then separately disclose the remediation actions and their outcomes.

However, an exception for potential impacts allows companies to assess a net or reduced impact. This is only applicable if the company has supportable evidence that implemented mitigation or prevention actions genuinely reduce the severity or likelihood of a potential negative impact. Even if a company maintains significant ongoing effort to contain a potential impact below the materiality threshold, the underlying impact must still be assessed as material.

Aggregation, disaggregation and non-obscurement

Companies must ensure that their aggregation or disaggregation choices do not obscure any information that is material. If an assessment shows that IROs vary significantly across the business, the consolidated group starting point requires the company to disaggregate the information. This variation often occurs due to differences by topic, sector, subsidiary, country, location or site. Companies must log the specific facts and circumstances that led to the decision to disaggregate.

The level of information gathered must be reported at the level where the variations arise; for example, significant water consumption risk in Country A requires water metrics to be disaggregated and disclosed for this country.