06 June 2024
Three Lessons Learned from CSRD-Aligned Double Materiality Assessments
Beginning next year, a significant number of companies in the EU, roughly 11,000, will publish their first Corporate Sustainability Reporting Directive (CSRD) reports. This number is set to increase to approximately 50,000 companies by 2029. The CSRD requires companies to evaluate which of the 1,150+ data points covered by the European Sustainability Reporting Standards (ESRS) are required disclosures for the organization. To narrow down this daunting list of disclosure, an organization should conduct a double materiality assessment to identify material impacts on people, society, and the environment (impact materiality) as well as the risks and opportunities that financially affect the organization (financial materiality).
Morrow Sodali has conducted materiality assessments on behalf of our clients for over 18 years, refining our methodology as new standards and regulations emerge. The CSRD-aligned double materiality assessment is one of the most advanced forms of materiality assessments, requiring companies to follow strict guidelines and consider pre-defined criteria. Reflecting on the CSRD-aligned double materiality assessments completed with our clients to date, we want to share the insights learned working through the ESRS requirements.
Learning #1: Setting Proper Expectations for the Workload
The double materiality assessment prescribed under the ESRS is a complex, in-depth process. We have found that clients need to reserve substantially more time for a CSRD-aligned double materiality assessment than what was previously required for simpler materiality assessments. Some of the more time-consuming activities include:
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Identifying stakeholders and subject matter experts (SMEs) to engage. This process typically requires cross-department collaboration and communication, which can result in a long lead time. However, finding the right stakeholders up front will save time in the long run. For instance, if the correct SMEs are not engaged initially, there may be additional rounds of review and input needed later.
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Bringing SMEs up to speed on the concept of double materiality. Since this is a new concept, our team has found value in providing training on the CSRD and its requirements to the Board, management, and SMEs. This helps to combat any misinformation or outdated information that stakeholders may have encountered and can assist in getting buy in on the importance of the double materiality assessment to the company’s ESG program and CSRD reporting. In addition to yielding better results in the assessment, this education builds a strong foundation from which we anticipate clients can more easily maintain and refresh their double materiality assessment in subsequent years.
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Scoring the impacts, risks, and opportunities. In a CSRD-aligned double materiality assessment, companies are required to dig deeper than the topic level down to the associated impacts, risks, and opportunities. There could be well over a hundred impacts, risks, and opportunities for relevant SMEs to discuss and score. Robust discussion might make it difficult to get through all the items at hand, requiring additional time for offline reviews and follow-ups. In some cases, that meant talking to entirely new SMEs to collect supporting data and documentation. Documentation is critical at this juncture, as an audit trail is required for the assurance provider to follow on how the materiality decisions were made.
Learning #2: Identifying Optimal Stakeholder Engagement Pathways
The ESRS and EFRAG’s guidance on stakeholder engagement are not prescriptive – rather, it is up to each company to decide how and when to capture stakeholder viewpoints. For this reason, engaging with stakeholders in the double materiality assessment process can take a variety of forms. A few insights we’ve learned so far:
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The stakeholder engagement pathways used in the double materiality assessment process are best driven by the client’s goals, timeline, and relationships. In particular, the company should consider the stakeholders’ importance and ability to engage on ESG topics. The engagement process can be tailored to meet the differing needs of clients and stakeholder groups, with a mix of desktop research, surveys, and interviews. When stakeholder groups cannot be contacted via direct engagement, in-depth desktop research can be used to ensure those viewpoints are represented. In developing a stakeholder engagement plan, we look to the AA1000 Stakeholder Engagement Standard as a guide for best practice.
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Contrary to popular belief, sending out mass surveys is not required. Rather than trying to gather responses from hundreds of stakeholders, who may not even understand what they are being asked, we prefer to focus on collecting high-quality responses to drive the analysis. By targeting specific stakeholders and using tailored outreach approaches, we can gather higher quality data, which contributes to more robust analysis and higher confidence in the results.
Learning #3: Determining Appropriate Scoring Scales and Thresholds
An essential part of the materiality assessment is individually scoring each impact, risk, and opportunity within the identified key ESG topics across specific scoring criteria. The CSRD does not prescribe specific scales and thresholds for the scoring criteria, instead permitting companies to define these for themselves with the intent of aligning more broadly with the company’s risk management program. While we use EFRAG’s Materiality Assessment Implementation Guidance as a starting point, we’ve found that the scoring system must be adapted to fit the company.
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Scoring the impacts, risks, and opportunities may differ based on which SMEs are involved in the scoring process. The same SMEs may not have the knowledge or expertise to rate impacts, risks and opportunities for all topics, necessitating different groups of people for different sets of topics. Individual risk tolerance and personal biases can affect how scoring scales are applied in developing the final data set of impacts, risks and opportunities scores. For this reason, we conduct a statistical analysis of the data set to identify potential sources of bias and adjust thresholds to account for the way SMEs interpret the scoring criteria.
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Following the development of an initial list of material and non-material impacts, risks, and opportunities, risk management and other executives should assess the output. In our experience, executive buy-in and review has been critical as it has led to further conversations, data collection, and the occasional re-evaluation of an impact, risk, and opportunity.
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Materiality is both an art and a science. Because of the subjectivity involved in scoring the impacts, risks, and opportunities, a binary system of “material” and “not material” is not enough for classification. Using a tiered system for classifying impacts, risks and opportunities allows companies to account for items that may not be material yet for external reporting purposes but need to be flagged for internal monitoring and strategy.
Are You Ready To Get Started?
Morrow Sodali can help you conduct a CSRD-aligned double materiality assessment to identify your company’s material impacts, risks, and opportunities. Following on the understanding of topics and impacts, risks, and opportunities material to your organization, we can also help identify the relevant reporting requirements and assess your company’s reporting preparedness. Reach out to us to learn more about how our Global ESG and Sustainability team can help you catalyze action on the CSRD and other emerging ESG regulations.