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

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. Additionally, the development of reporting content will leverage inputs from the double materiality assessment and a more expansive approach considering all the elements could actually prove to be a more efficient process in the end.

Companies invite compliance risk when they analyze 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. Considering subtopics and mapping to specific components of the value chain is essential to improving the coverage and accuracy of the materiality assessment, producing decision-useful disclosures and streamlining the reporting process.

The ESRS require that other entity-specific topics identified by prior reporting and industry specific frameworks be considered in materiality assessments. Additionally, disclosure of sector-specific information is critical as it provides investors and other stakeholders with important information about the impacts and financial implications of sustainability matters. The ESRS broadly allows companies to include disclosures based on other frameworks (IFRS or GRI, for example) as long as they are clearly labeled as such in reporting.

Most companies have yet to fully integrate sustainability matters into their strategic planning, reporting frameworks, risk management and third-party due diligence — and align all that with ESRS guidance on time horizons. 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.

The use of peer benchmarks, data or scoring from voluntary reporting generated prior to the enactment of the CSRD or reporting based on the Non-Financial Reporting Directive (the CSRD’s predecessor) may result in gaps that could lead to questions during the assurance process and potential noncompliance.

Performing an impact materiality assessment is in many cases a company’s first step, which 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. A less robust evaluation of financial materiality could result in both over and under scoping. For example, some risks or opportunities may be overlooked while others could be incorrectly assessed as financially material. Additionally, when evaluating both types of materiality, positive and negative impacts cannot be netted. Impacts, risks and opportunities should be evaluated on a gross basis.

Understanding the scope of your materiality assessment and clearly articulating the boundaries that have been set is critical. For example, for financial institutions, providing specificity into the evaluation of the downstream value chain from a revenue and balance sheet perspective will provide clarity on your basis of preparation. This may be particularly applicable for those with complex downstream value chains.

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) legal entity stakeholders, for instance, could result in critical components of the value chain being scoped out, a risk being missed or approaches between group and legal entities being misaligned. Additionally for banks and insurers, failure to align financial materiality assessment with the company’s existing risk management framework could lead to conflicting reporting and risk management approaches which may lead to scrutiny from prudential supervisors.

Robust documentation of the materiality assessment is critical. Many elements of your materiality assessment methodology — the policies and procedures used to identify and/or develop and apply applicable criteria, any tools and technology, key assumptions, and the level of governance — will need to be disclosed in your basis of preparation and reporting.

Given limited time to report initial disclosures, 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 documentation available arise, having the auditor involved upfront will allow for sufficient time to align on expectations prior to the start of the assurance engagement.