5 pitfalls in the double materiality assessment process

Find out which pitfalls to avoid when performing a double materiality assessment for CSRD reporting.

In brief:

• The obligations that CSRD entails for companies within the EU aim at greater transparency and more uniform sustainability reporting.
• It is vital to start the double materiality assessment on time as it requires considerable resources and time.
• Companies that know how to avoid the possible pitfalls can benefit from the mandatory reporting.

The European Corporate Sustainability Reporting Directive (CSRD) requires companies to report on impacts, risks, and opportunities in terms of the environment, social aspects, and good governance (ESG). The European Union thereby aims to achieve more transparent sustainability reporting, reduce greenwashing, and facilitate more targeted investment in truly sustainable companies. The reporting must be done in a separate section of the annual report, according to the framework drawn up in the European Sustainability Reporting Standards (ESRS).

For large listed companies, i.e. companies and groups with more than 500 employees, the sustainability reporting must be carried out for the first time in accordance with the ESRS for the financial year 2024 (to be published in 2025). This reporting must also be checked by a company auditor. For most other companies, i.e. the smaller listed companies and the non-listed companies of a certain size, a first audit of reported data must be carried out for the financial year 2025 (to be published in 2026). That is closer than it seems, given that the preparations for this sustainability report should not be underestimated. One of the crucial aspects of that preparation is the double materiality assessment.

For a large number of companies, sustainability reporting will be a new exercise. For a more limited number, it will sound more familiar, e.g. companies that have already done voluntary reporting up to now. This may have been done through a separate sustainability report, prepared in accordance with a generally accepted reporting standard such as the Global Reporting Initiative (GRI). Specific key performance indicators (KPIs) may also have been drawn up in accordance with a generally recognized framework (such as the greenhouse gas protocol) or they may have applied their own criteria. But even for these companies, CSRD will require quite a few adjustments. For example, CSRD demands a much broader stakeholder survey, an assessment of impacts, risks, and opportunities (via the double materiality exercise), including a short-, medium-, and long-term action plan, taking into account the entire value chain.

Double materiality assessment in a nutshell

The purpose of the double materiality assessment is to arrive at an ordered list of sustainability topics that are reflected in the reporting and also form the basis of the company's sustainability strategy. What is distinctive is that two types of topics are important:

• Topics with which the company has an impact on the environment (people and environment) (e.g. emissions), the so-called impact materiality.
• Topics from the immediate environment that have financial effects on the company (for example, flooding or policy decisions). These are things that can represent material risks or opportunities from a financial point of view. This is called financial materiality.

The topics are identified based on an analysis of possible impacts, risks, and opportunities. Various sources are used for this, such as a stakeholder survey, review of press articles, studies, sector data, academic input, etc. The result is a longlist of possible impacts, risks, and opportunities that are then assessed on their importance or materiality. This involves assessing both impact materiality and financial materiality.

After validation by the management, a start can be made on setting up the necessary data collection around the specific topics, which is essential for the final reporting. It goes without saying that this whole process can easily take a few months.

The biggest pitfalls in the double materiality assessment

The double materiality and everything that goes with it, not to mention the full reporting, entails a lot of work. What are the main pitfalls for most companies?

1. Starting too late, without a clear plan and goal;

2. Underestimation of the workload involved in the process;

3. Incomplete stakeholder selection and survey;

4. Substandard documentation of and communication about the process;

5. Losing sight of the fact that reporting is an annual obligation, of which the dual materiality is a dynamic part.

How can a company avoid these pitfalls?

1. Start on time with a clear plan

We notice that the ‘sense of urgency’ is not yet present everywhere in business. And yet for just about all companies covered by CSRD, it is high time to start preparing the reporting and, more precisely, the double materiality assessment.

It is understandable that companies are focusing their energy and resources primarily on their operations and more urgent obligations. But this reporting requires a timely and structured approach, including a roadmap with deadlines, deliverables, and who is responsible for what. January 1, 2025, is much closer than people think, so waiting comes with risks.

2. Free up enough of the right resources

Companies that are somewhat larger and/or have previous experience in sustainability reporting may already have one or more employees working on sustainability. Smaller companies where this is not the case are advised to appoint someone (or a team for the somewhat larger entities), or to employ external specialists to manage the implications of CSRD and thus the double materiality assessment. Determine clearly who is responsible, including at the level of the board of directors, and, if necessary, have a separate spokesperson for internal and for external stakeholders. Also give the designated person or team sufficient time, and do not see it as an extra task on top of an already existing set of tasks. Robust implementation will pay off because it allows you to focus on the right challenges, make the right decisions to attract resources and people to meet those challenges, and thus have an impact and contribute to the realization of the goals of the EU Green Deal.

So, go to specialist consultants if you do not have your own team. They will support you in one or more steps of the process, or help take a critical look at the different phases within the process. This is also an important piece of advice that we give to all companies. Remain critical at all times, because often people think they are doing a good job, while a critical outsider can see more quickly where the gaps are or where adjustment is needed.
 

4. Document and communicate

Carefully document the process from the outset. This is not only important to ensure that the entire process runs smoothly. It is also important during the audit to be able to demonstrate what steps have been taken, the context in which the company operates, which stakeholders have been interviewed, what considerations have been taken into account, and what decisions a company has made. This also requires a description of the company strategy and the way in which ESG is incorporated, the due diligence process followed, etc.

Keep the whole process alive within the company and among external stakeholders by communicating regularly. This increases the buy-in of all parties involved.

5. It is an annual and dynamic reporting exercise

CSRD reporting is an annual exercise, and that also applies to the assurance aspect (initially ‘limited assurance’). But that does not mean you have to start from scratch every year. Of course, data has to be collected annually for the defined topics, and the actions taken must be updated. But if the methodology used in the initial reporting is well designed, as with financial reporting, the effort required to prepare the sustainability reporting will level off over the medium term.

For CSRD reporting, the double materiality assessment and its output is audited by a company auditor, within an assurance engagement. A company must therefore be able to submit proof of the double materiality exercise to the auditor. This includes the process followed to determine the completeness of the impacts, risks, and opportunities, and the criteria of the materiality exercise that ultimately result in the topics to be reported. So, if something has changed in the business operations, business locations, or other aspect that has an impact that goes beyond updating data or the status of an action plan, the annual update is a larger job.

See the mandatory materiality assessment and reporting as a positive thing

Approached negatively, the mandatory double materiality assessment and associated reporting may feel like EU-imposed occupational therapy. This is certainly not the intention of the European legislator, whose aim with CSRD is to achieve greater transparency, promote innovation, and inspire companies to tackle sustainability challenges with an eye to the future. We should not forget that CSRD is one of the action points of the EU Green Deal, whose objective is to make the European Union a low-carbon economy. This in turn opens the way to new technologies, innovation, new markets, and thus the creation of sustainable employment.

In addition, it can pay off for companies to deal positively with this entire mandatory exercise in which they report on sustainability topics in a structured and audited way. After all, the double materiality assessment obliges companies to think about the short- and long-term impact at the start of the exercise, and again each year, for all stakeholders who may be affected by their activities.

This gives a company faster insight into necessary changes, which can shorten the path to making targeted investment decisions. Transparent and structured reporting on the right topics can also convince investors more quickly to partner up with companies. Last but not least, transparent reporting that is widely supported by all stakeholders can also contribute to the sustainable and good reputation of your company.