Mistakes to avoid as you assess impacts, risks and opportunities

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

Publication
7 minute read

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. Even if your company has reported nonfinancial data in the past, you will likely need to expand the nature and extent of your disclosures.

To comply with the CSRD, your company will need to identify its material sustainability impacts, risks and opportunities. The required approach for doing that 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. Impact and financial materiality are not mutually exclusive. Material risks and opportunities are generally derived from the impacts and dependencies on natural, human and social resources. In addition, for most material impacts, a material risk and/or opportunity may emerge over time. This assessment requires viewing materiality from two perspectives.

Financial materiality: This “outside in” view focuses on how sustainability matters may pose either a prospective material risk or opportunity that could affect a company’s financial performance and position over the short, medium and long term. Sustainability matters are considered material for primary users of a company’s financial reports if omitting or misstating the information could influence the users’ decisions.
Impact materiality: This “inside out” view focuses on the actual or potential short, medium and long-term impacts on people or the environment that are directly linked to a company’s operations and its value chain. These impacts can be both positive and negative.

This two-pronged perspective adds a level of complexity to materiality assessments. The European Sustainability Reporting Standards (ESRS), which detail the reporting requirements for companies in scope of the CSRD, require that companies independently assess if a sustainability matter (a topic, sub-topic or sub-sub-topic) is material from a financial or impact perspective or both. A sustainability matter needs to be material from only one of the two perspectives to require disclosure. To make those determinations, companies will likely need a greater understanding of sustainability matters in their value chain to measure and assess financial and impact materiality. These steps are likely new for many companies.

Common materiality assessment mistakes and how to overcome them

For now, there isn’t consensus on practices and implementation guidance recently proposed by EFRAG may describe some flexibility in how to approach materiality assessments. In this environment, it is important for companies to avoid common pitfalls when designing and performing their materiality assessment. This will establish the critical foundation for the CSRD reports.

To assist, we have outlined some common pitfalls we have observed as companies conduct a materiality assessment. We list these pitfalls and key insights so that you can avoid making similar mistakes and be well prepared for any questions that may arise from senior management, audit committees, or during the assurance process.

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.

What your company should do now to prepare for the CSRD’s disclosure requirements

The ESRS guidelines outline a wide range of requirements and should not be underestimated in terms of their complexities. It’s imperative that companies start to prepare for their reporting obligations now by gaining an understanding of those requirements (including which sustainability matters are material), the processes needed to obtain the data from across your value chain and the development of a reporting system.

Contact us

Kevin O’Connell

Sustainability Reporting and Assurance Leader, PwC US

Ron Kinghorn

Sustainability Strategy and Operations Leader, PwC US

Brittany Mancuso Schmidt

Financial Services Climate Change and Sustainability Leader, PwC US

Audit and Assurance services Consulting Tax services Newsroom Alumni US offices Contact us

© 2017 - 2024 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

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

Common materiality assessment mistakes and how to overcome them

What your company should do now to prepare for the CSRD’s disclosure requirements

How PwC can help

{{filterContent.facetedTitle}}

{{item.title}}

Contact us