Environment & Sustainability

Double Materiality and DNSH criteria

The two fundamental ESG principles at a glance

6 minutes 8/12/2022

As Europe presses ahead with its post-COVID recovery, the Green New Deal and sustainable finance initiatives, sustainability management and reporting are focusing more directly on ESG (Environment, Social and Corporate Governance) criteria. Two concepts are becoming increasingly important for sustainability management and reporting: Double Materiality and Do No Significant Harm. In this article, you will find the key information and examples on how to integrate these fundamental ESG principles into your strategy.


Double Materiality: Outside-in & Inside-out

In 2019, the European Commission was the first to formally describe the concept of Double Materiality in the context of sustainability reporting, and the need to get a full picture of a company’s impacts. Double Materiality is central to the European Commission’s proposed Corporate Sustainability Reporting Directive (CSRD), while it also closely aligns with the materiality approach in the GRI Standards.

Materiality analyses are not new to sustainability management. They represent a robust and frequently used instrument for determining the significance and relevance of sustainability topics for a company. First and foremost, a company should concentrate on the topics that are considered “of material importance”. But what exactly does this mean? Different interpretations do exist, including between reporting standards.

The upcoming revisions to sustainability reporting (EU CSRD) will integrate two perspectives within the context of the concept of Double Materiality:

Outside-In Perspective

The Outside-In Perspective considers the impact of external topics on the company and/or its financial results, e.g., in the form of stakeholder expectations or due to technological changes.

Examples of impacts in terms of the Outside-In Perspective:

  • Costs of climate change adaptation
  • Insurance costs
  • Raw material availability and prices
  • Recycling and energy costs
  • Demographic change
  • Population structure
  • Value change
  • Equality
  • Urbanization
  • Conflicts in supplier countries
  • Migration
  • Political regulation

Inside-Out Perspective

The Inside-Out Perspective considers the company’s impact on sustainability topics, e.g., contribution to climate change.

Examples of impact in terms of the Inside-Out perspective:

  • Greenhouse gas emissions
  • Water consumption
  • Air pollution
  • Energy use
  • Biodiversity
  • Working conditions
  • Employee rights
  • Trade union rights
  • Occupational health and safety
  • Human rights
  • Corruption
  • Bribery

Double Materiality in environmental management

In relation to the Environmental factor of ESG, the concept of Double Materiality means taking into consideration how business activities impact the environment as well as how environmental topics impact a company. The impacts of environmental topics on the company include, for example, the strategic importance of the energy transition with reference to energy price changes or when the company is a supplier to an OEM (Original Equipment Manufacturer) with Scope 3 activities that requires the company to implement climate protection measures. The impacts of business activities on the environment include, for instance, potential or actual impact of air emissions or wastewater polluted with hazardous substances or groundwater pollution due to the release of contaminated slurry from settling basins.

ESG-Materiality Matrix

Materiality analyses are usually implemented in the form of matrices or portfolio diagrams. In ESG management, a materiality analysis could show the impact according to the Environment, Social, and Governance factors differentiated by color in quadrants. The respective quadrants represent intersections of the two axes - the Outside-In (X-axis) and the Inside-Out (Y-axis):

Why is a materiality analysis of sustainability issues so important? 

  • Reporting on material sustainable development issues can improve financial performance, increase stakeholder engagement, and provide more robust reporting.
  • Identifying financially material issues is incomplete if organizations do not first assess sustainability impacts.
  • Focusing on organizations' impact on people and the planet, rather than financial materiality, contributes to achieving the United Nations Sustainable Development Goals.

The DNSH Principle: Do-No-Significant-Harm

In the past, it was not uncommon for an alleged solution to a sustainability problem to cause other problems or impair attainment of other targets. Consider the “food versus fuel” dilemma, which is a prime illustration of this problem: the use of biomass as a biofuel or for bio-based materials stands in competition with crop cultivation for food production – and is thought to be amplifying the global hunger crisis. This is a classic example of conflicting goals.

One way of handling conflicting goals in the context of sustainability is the Do No Significant Harm principle (also abbreviated to DNSH). It means that measures and activities must contribute to attainment of one sustainability target without adversely affecting attainment of other sustainability targets. The following audit questions can be used to conduct a DNSH assessment:

DNSH control questions

Do you affect attainment of any of the 6 environmental objectives?

  • Climate change mitigation

    • Could the measure lead to significant greenhouse gas emissions?
  • Climate change adaptation

    • Will the measure amplify adverse effects of climate change?
    • Will those effects affect the measure itself or people, nature or property?
  • Sustainable use and protection of water and marine resources

    • Would it be safe to assume that the measure will damage the good environmental status or the good ecological potential of bodies of water?
  • Transition to a circular economy

    • Could the measure lead to a significant increase in waste that requires treatment? (except for non-recyclable hazardous waste)
    • Could it lead to significant inefficiencies in the use of resources? (e.g. due to reduced durability or operating time, reduced ability to dismantle, repair or retrofit, reduced recyclability or higher hazardous substance content)
    • Could it result in significant or long-term environmental damage with reference to the circular economy?
  • Pollution prevention and control

    • Could it lead to a significant rise in the emission of hazardous substances into the air, water or ground or cause other environmental damage?
  • Protection and restoration of biodiversity and ecosystems

    • Could the good status or resilience of ecosystems be significantly damaged?
    • Could it damage the conservation status of habitats or species?

While evaluating the answers to the control questions, companies should consider each environmental goal separately. There are two steps of DNSH assessment. 

1. At the first step, companies are invited to answer the questions for each of the environmental objectives. If the answer to any of the questions in the list above is “no” (i.e., the goal does not require a 'substantive DNSH assessment'), then companies are asked to provide a brief justification, why the objective does not require a substantive DNSH assessment. One of the following arguments should justify their "no": 

  • The measure has no or insignificant foreseeable impact on the environmental goal 
  • The measure is 100% trackable 
  • The measure makes a significant contribution to the environmental objective under the Taxonomy Regulation 

2. If the answer to any of these questions is “yes”, then companies are invited to proceed to the second step and provide a substantive analysis and justification that their measures and actions contribute to one or more of the environmental objectives, without contradicting any of them.. 
If no justification is provided, the Commission may consider that the measure is associated with possible significant harm. 


Outlook: Two ESG concepts for your sustainability management

The EU Green Deal is targeting the financial sector's leverage to achieve the European Union's climate targets. It is likely that your company might feel this leverage sooner or later and will have to contribute to the green transformation. However, sustainability cannot be integrated into corporate strategy overnight, and optimizing existing strategy in terms of ESG and EU Taxonomy is usually a long-term undertaking. Start early! By integrating the concepts of DNSH and Double Materiality in a timely manner, you set the course for Taxonomy-alignment and comprehensive ESG reporting. Both can make or break your access to the financial market in the future. Evaluate and optimize your business actitvities based on the two basic principles of ESG, and identify the potential for optimization to achieve sustainable economic success. In doing so, you will contribute to the success of the UN Agenda for Sustainable Development and the Sustainable Development Goals (SDGs).