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Insights From theory to practice: Lessons learned from the initial implementation of the double materiality assessment

From theory to practice: Lessons learned from the initial implementation of the double materiality assessment

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​​​​​​​​​​​​published on 11 December 2024 I reading time approx. 5 minutes


With the aim of understanding both the financial effects in connection with sustaina­bility aspects (financial materiality) and the social and ecological effects of their business activities (impact materiality), companies are obliged by the ESRS to carry out a double materiality assessment. The results of the double materiality assessment determine the content of the report and therefore represent the central starting point in the process of preparing a CSRD-compliant sustainability report. This poses challenges in terms of practical implementation and requires a fundamental rethink in terms of data analysis and reporting.

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In 2024, numerous companies went through the double materiality assessment process for the first time. What have these companies learned from the first implementation phase? In this article, we summarize key lessons learned and best practices for the double materiality assessment.

Step 1: Defining the scope and analyzing the company context

​What needs to be done?

To begin with, the company should analyze and understand its context. This includes, for example, its activities, value chains, stakeholders, business relationships, geographical circumstances and regulatory requirements. The findings from this phase help to define the overarching framework for the next steps and enable a targeted determination of the key impacts, risks and opportunities for the individual company. Ideally, the stakeholder analysis is used in this step to determine when and how the stakeholders should be involved.

What “lessons learned” can be drawn from the initial implementation?

  1. ​The early definition and involvement of stakeholder experts increases efficiency and promotes the willingness to cooperate in later project phases.
  2. The time and effort required depends heavily on the structure of the company and the complexity of the value chain – a detailed and robust scoping facilitates the definition of work packages and responsibilities.
  3. Early coordination with the auditor on the specific planned approach for conducting the materiality assessment prevents delays in the subsequent audit process.
  4. A systematic inventory of the measures implemented in the area of ESG and the existing stakeholder dialog formats can serve as useful input for later project phases.

Step 2: Creation of the longlist of potentially relevant sustainability aspects

What needs to be done?

The longlist serves as a starting point for the further assessment of the materiality of the sustainability aspects in the subsequent steps. When compiling the list of potentially relevant sustainability aspects as a basis for identifying impacts, risks and opportunities, the company must take into account the list of sustainability aspects in ESRS 1 AR 16. Consideration must also be given to additional company- and industry-specific sustainability aspects. These must be included in the list if the company comes to the conclusion that it considers certain aspects to be relevant, but these are not sufficiently covered by the list in ESRS 1 AR 16.

What “lessons learned” can be drawn from the initial implementation?

  1. ​When identifying additional industry- and company-specific topics, care must be taken to ensure a clear distinction between ESG-related topics and topics that are more appropriate for financial reporting (e.g. corporate performance).
  2. Additionally identified industry- or company-specific topics are often already covered by certain (sub-)sub-topics of the ESRS 1 AR 16 list (e.g. product safety, which could be located under S4) – a critical comparison of the additionally identified topics with the ESRS 1 AR 16 list and a closer look at EFRAG's ESRS data point list can help to avoid inefficient duplication.

Step 3: Identification of sustainability-related impacts, risks and opportunities

​What needs to be done?

As part of the materiality assessment, not only potentially material sustainability aspects are systematically identified, but also the specific sustainability-related impacts, risks and opportunities (IROs) associated with them. Both the company's upstream and downstream value chain and the time horizon in which the IROs are expected to occur must be taken into account. The term “impacts” can refer to both positive and negative as well as actual and potential impacts. Furthermore, the company must examine how it is influenced by its dependencies on the availability of natural, human and social resources at appropriate prices and in appropriate quality. These dependencies, as well as impacts, can result in financial risks and opportunities in connection with sustainability aspects.

What “lessons learned” can be drawn from the initial implementation?

  1. ​Specific IROs must always be identified in order to meet the ESRS requirements; identification and assessment at the level of sustainability aspects is not sufficient.
  2. Positive effects in particular should always be critically scrutinized: Is it really a positive impact on people and the environment or rather a measure against a negative impact?
  3. The classification of IROs into positive/negative and potential/actual impacts or risks and opportunities should be clearly documented and validated in a review loop – the evaluation criteria to be applied later depend on this.
  4. Different formats and options for involving stakeholders or stakeholder experts are possible. However, it should always be ensured that the perspectives of the identified relevant stakeholders are adequately represented. The principle of “quality over quantity” applies here.

Step 4: Assessment of sustainability-related impacts, risks and opportunities

​What needs to be done?

The assessment of the identified impacts, risks and opportunities is necessary to determine which sustainability aspects are material for the company. The assessment factors to be applied differ depending on the type of IRO: negative impacts are assessed according to their severity, which is made up of three factors: scale, scope and irremediability. In the case of positive impacts, the factors scale and scope are used; in the case of potential positive or negative impacts, the likelihood of occurrence is also included in the assessment. Risks and opportunities are assessed using a combination of the likelihood of occurrence and the potential extent of the financial effects. The ESRS do not contain any specific guidelines for the definition of scales, but these should preferably be determined on the basis of quantitative information. However, as this is often difficult in practice, the use of qualitative scales is also permitted. In the course of the assessment, the company continues to determine suitable threshold values in order to derive the material IROs.

What “lessons learned” can be drawn from the initial implementation?

  1. ​The applicable assessment factors should be assessed individually for each IRO (e.g. scale, scope, irremediability). An aggregated assessment (e.g. of severity) obscures important information and makes traceability more difficult.
  2. Scales for financial materiality should, where possible, be adopted from financial risk management. Harmonization of the assessment framework facilitates the integration of sustainability-related risks and opportunities into the existing risk management system.
  3. An additional validation loop of those IROs that are close to the materiality threshold increases assurance and should take into account the requirement of ESRS 1 AR 11 (“Any of the three factors – severity, scope and immutability – can make a negative impact severe. In the case of potential negative impacts on human rights, the severity of the impact takes precedence over its likelihood of occurrence”).
  4. Different formats and options for involving stakeholders or stakeholder experts are also possible here – this step is also particularly suitable for structured involvement of subsidiaries.

STEP 5: Deriving the key Sustainability Aspects

What needs to be done?

The material sustainability aspects are derived from the associated material IROs. In order to derive the material data points in a targeted manner, it is recommended that the material sustainability aspects be compiled at the level of the sub-topics or, if available, the sub-sub-topics. The company must ensure that no material information is lost through the aggregation of information from different levels or from several locations. 

What “lessons learned” can be drawn from the initial implementation?

  1. ​With regard to the presentation of the material topics, the ESRS do not make any concrete specifications – however, the various options (e.g. matrix, list) differ in terms of their information content.
  2. If at least one material IRO is assigned to a (sub-/sub-sub-)topic, the (sub-/sub-sub-)topic is material.

Step 6: Deriving the material data points

What needs to be done?

Once the material sustainability aspects have been identified, the material ESRS data points are derived, and the content of the report is specified. Here, it is important to filter out only the data points that are actually material for reporting – taking into account mandatory information that must be disclosed regardless of materiality. Based on the derived data points, a detailed gap analysis can then be carried out in the next step.

What “lessons learned” can be drawn from the initial implementation?

  1. ​The EFRAG data point list (IG 3) can be used to derive the material data points.
  2. A look at the phase-in provisions for certain disclosure requirements (ESRS 1 Appendix C) may be worthwhile in order to reduce the workload in the first reporting year.
  3. Using the decision tree in ESRS 1 Appendix E, non-material data points can be sorted out.
  4. Disclosure requirements in the topic-specific standards that are related to ESRS 2 IRO-1 must always be reported regardless of the results of the materiality assessment, just like all other relevant data points of ESRS 2.

Conclusion: The double materiality assessment as the basis for sustainable reporting

The double materiality assessment is more than just a formal requirement – it forms the strategic core of a CSRD-compliant sustainability report. Companies are obliged to take an in-depth look at the financial, corporate policy, social and environmental aspects of their business activities and evaluate them on the basis of facts. The first implementations in 2024 have shown that this process offers both challenges and opportunities. In particular, a clearly structured approach, the early involvement of relevant stakeholders and the auditor as well as the iterative improvement of the process and systematic validation of the results promote the efficiency and quality of the assessment.
 
Adaptability remains a key success factor: companies should use the insights gained in a targeted manner to further develop strategies, processes and methods for future reporting cycles. In this way, the double materiality assessment not only helps to fulfill regulatory requirements, but also becomes a driver for sustainable transformation.​

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