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Double Materiality Requirements in the Revised ESRS: Simplification or Complication?
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Alan Greenspan once famously said, “If I seem unduly clear to you, you must have misunderstood what I said”. As I revisited the double materiality assessment (DMA) requirements and guidance across the Revised ESRS 1, ESRS 2, the new Non-Mandatory Illustrative Guidance (NMIG), and the Basis for Conclusion, the former Fed Chairman’s words sarcastically echoed in my mind.
Complexity Creeps Back In
Every attempt to answer the question “Is the DMA simpler now?” ends with a “yes, but.” Some parts of the process are indeed more straightforward (goodbye sub-sub topics!), yet new layers of complexity have been introduced (hello Gross vs. Net). There are well-intentioned principles, such as avoiding undue cost or effort, but their practical implications are ambiguous. The “practical considerations” section also feels opaque – leaving a back door open for assurance providers to demand more information, regardless of reasonableness.
In practice, companies will still need to:
- Conduct a DMA.
- Update the DMA annually.
- Identify and assess Impacts, Risks, and Opportunities (IROs).
- Disclose IROs.
- Disclose governance oversight of material IROs.
- Undergo assurance on their DMA.
As you can gather, I remain unconvinced that the Revised ESRS meaningfully simplify the DMA process, despite this being one of EFRAG’s key simplification levers. I tested this sentiment with the members of our Harbor community of sustainability professionals, and found that it largely resonated.
To be clear, this is not a criticism of the EFRAG Technical Expert Group or Sustainability Reporting Board. I know many of them personally, and I have no doubt they are earnestly trying to make the standards clearer and more manageable. But the combination of political pressures and tight timelines has led to outcomes better suited to headlines, like a “68% reduction in datapoints” (which, as EFRAG’s Chiara Del Prete herself acknowledges, is not a reliable measure of ESRS demands) – than to real improvements for practitioners.
A simpler DMA is still possible
It’s not all doom and gloom. There is still time for EFRAG to deliver a truly simplified DMA. At Datamaran, after extensive engagement with our Harbor community, we recommend the following:
1. Embrace a “fair presentation” regime. Take a principle-based approach with less detailed requirements (see the next points for more details).2. Reconsider the Gross vs. Net debate. Overworked rules risk generating time-consuming disputes internally and with auditors. A blanket rule, assessing all impacts on a gross basis, would simplify matters while allowing exceptions where companies provide justification.
3. Reinstate decision usefulness. It is unclear why the Revised ESRS departs from this well-established criterion in condition (b) under the new materiality of information paragraph 21. A clearer test would be: “Information is material when omitting, misstating, or obscuring it could reasonably be expected to influence decisions that primary users of general-purpose sustainability statements make, including decisions about the undertaking’s material impacts, risks, and opportunities.”
4. Clearly state the company’s exclusive role in making judgments. Only the undertaking should make the following judgment calls:
- Value chain areas where material IROs are likely to arise.
- The number of IROs identified and assessed.
- What constitutes “reasonable and supportable information available without undue cost or effort”.
5. Strengthen Paragraph 48. Replace “may” with “shall” to provide clear direction.
6. Remove the bottom-up approach. It is unnecessary and more burdensome than the top-down approach.
7. Delete “unless more investigation is necessary” from AR 18. This adds ambiguity and opens the door to excessive demands.
For those interested in the technical details, I’ve expanded on these points in the supporting document "Why the Revised ESRS Are Not Delivering a Simpler DMA." I have also submitted this feedback to EFRAG during the public consultation that closed today.
Like many, I will be watching closely when the final revisions are published at the end of November. There is still an opportunity for EFRAG to address these concerns and deliver a framework that truly simplifies the DMA, while maintaining the robustness that stakeholders and regulators expect.
To help sustainability professionals navigate these changes, Datamaran publishes an Omnibus Tracker exclusively for Harbor Plus community members – providing timely updates and insights on all the moving parts.