Pitfalls companies should avoid when conducting a CSRD-aligned double materiality assessment

Understanding the CSRD Double Materiality Assessment Process

March 28, 2024

The European Union’s Corporate Sustainability Reporting Directive (CSRD) is a highly impactful regulation that will transform how your company reports sustainability information. By design, the CSRD, in part, aims to raise sustainability reporting standards to the same level as corporate financial reporting by mandating disclosures of certain environmental, social and governance topics.

To comply with the CSRD, your company will need to identify its material sustainability impacts, risks and opportunities. The required approach for doing so is a “double materiality” assessment, which broadens the concept of materiality from a sole focus on financial materiality to one that includes a view of your impact on stakeholders and society.

To make the determination of whether a sustainability matter is material from a financial or impact perspective or both, companies will likely need a greater understanding of sustainability matters in their value chain to measure and assess financial and impact materiality. This is likely to be new for many companies.

Common materiality assessment mistakes and how to overcome them

In this environment, it is therefore important for companies to avoid common pitfalls when designing and performing their materiality assessment. To assist, we have outlined some common pitfalls observed when companies conduct a materiality assessment. We list these pitfalls and key insights so that you can avoid making similar mistakes.

When conducting an initial materiality assessment, some companies focus solely on producing one rapidly, without considering the need to document details about the process and sources of information used or the level of detail that will need to be disclosed about the material impacts, risks and opportunities identified. Companies that shortcut the materiality process may be exposed to compliance risk and may eventually experience challenges when preparing the report itself. Performing a thorough materiality assessment and documenting the process can save your company time and resources over the longer term, even if assessment processes need to be refined over time.

Companies invite compliance risk when they analyse sustainability matters at the topic level and/or without defining impacts, risks and opportunities and where in the value chain the impact or financial materiality takes place.

The ESRS requires that other entity-specific topics identified by prior reporting and industry-specific frameworks be considered in materiality assessments.

Most companies have yet to fully integrate sustainability matters into their reporting frameworks so they will need a combination of tools for the assessment of impacts, risks and opportunities. Scoring tools, web scraping, interviews, workshops and peer benchmarking are all mechanisms to evaluate impacts and the level of risk and opportunity. None of them, however, is sufficient by itself.

Performing an impact materiality assessment is, in many cases, a company’s first step, and it often triggers materiality for many sustainability matters and can drain internal enterprise engagement for the financial materiality assessment. Impact materiality and financial materiality are equally important and meeting either can scope in an impact, risk or opportunity.

Running the materiality assessment via a single function in a siloed manner could result in incomplete reporting outputs and potentially lead to long-term issues. Failure to engage both enterprise and subsidiary entity stakeholders, for instance, could result in critical components of the value chain being scoped out, a missed risk, or approaches between group and legal entities being misaligned.

Given the limited time to report, it will be helpful to involve your assurance practitioner early as you develop your materiality assessment and documentation approach. If potential concerns about the process and available documentation arise, having your auditor involved upfront will allow for sufficient time to align expectations before the start of the assurance engagement.

How can we help?

At PwC Malta, our Sustainability team has the expertise to help you with various endeavours such as ESG reporting, developing Sustainability, Decarbonisation and Net Zero strategies, and the implementation of sustainable technology and digital solutions. For more information, please reach out to our sector leaders below.