Focus on dual materiality: expert insights from auditing and consulting

published on 6 September 2024 | Reading time approx. 4 minutes

The path to the first CSRD-compliant sustainability report begins with a major task: carrying out a double materiality analysis. In this initial step, the key sustainability aspects and therefore the main content of the report are determined. Many companies face considerable challenges here due to the extensive requirements. But how do auditors and consultants view the topic?

Particularly in view of the mandatory content review introduced by the CSRD, the effort involved in carrying out a robust double materiality analysis should not be underestimated: What specific requirements need to be met? How can the materiality analysis be documented in an audit-proof manner? And how can the report content ultimately be derived from the material sustainability aspects? Many companies are currently asking themselves these and other questions in view of the novelty of the regulations, the lack of best practice examples and uncertainties in interpretation.

Exchanging information with auditors and consultants can provide a remedy and offer valuable support. In addition to comprehensive technical expertise, their cross-industry experience gives them in-depth insights into the numerous materiality approaches currently represented on the market. Dr. Christian Maier, auditor, and Anna Wilhelm, ESG consultant and Sustainability Auditor^IDW, will shed light on the topic of materiality analysis for you from the perspective of auditors and consultants.

Question 1: What role does the materiality analysis play in the reporting process?

The consultant says:
“In the reporting process, the materiality analysis is of central importance as it helps to identify the relevant sustainability aspects that are of greatest interest to the users of sustainability reporting. The in-depth analysis of the company's own business activities and the upstream and downstream value chain makes it possible to focus the sustainability report specifically on the aspects that are most important both for the company itself and for its stakeholders. Through a precise materiality analysis, we can ensure that the report not only reflects the company's strategic goals, but also adequately addresses the expectations and needs of stakeholders. This enhances the credibility and relevance of the report and helps the company to communicate its sustainability strategy effectively.”

The auditor says: 

“The materiality analysis plays a fundamental role in the reporting process as it forms the basis for the content of the report. It ensures that a company must take a close look at its sustainability-related impact on people and the environment (impact materiality) as well as its financial risks and opportunities associated with sustainability aspects (financial materiality). It is important here that the sustainability report is not misunderstood as a marketing tool but is placed on an equal footing with financial reporting by the CSRD and must therefore fulfil certain quality characteristics. These include relevance, truthful presentation, comparability, verifiability and comprehensibility. A robust and audit-proof materiality analysis of clients is necessary so that auditors can verify compliance with legal requirements. This is crucial for compliance with CSRD requirements and for the creation of transparent and meaningful sustainability reporting.”

Question 2: What is the process for conducting a CSRD-compliant double materiality analysis?

The consultant says:
“Here we follow a clearly structured and practice-orientated approach. In addition to the requirements of the ESRS and the implementation guidelines issued by EFRAG, we always take the specific circumstances of the company into account when designing the details. Firstly, the company context is comprehensively analyzed, including the upstream and downstream value chain as well as relevant internal and external factors. For example, the locations of the company and its suppliers, certain raw materials used within the company or the value chain, or important business relationships are analyzed in more detail. The resulting findings are then incorporated into the further process of identifying significant impacts, risks and opportunities. In this step, we also determine which stakeholders or stakeholder representatives should be consulted at which point in the process - the principle of quality over quantity applies here. The starting point for the IRO identification is then the longlist of potentially relevant sustainability aspects provided in ESRS 1 AR16, which is expanded to include industry- or company-specific aspects if necessary. The previously defined stakeholders or stakeholder experts, who can act as their representatives, then identify the relevant impacts, risks and opportunities along the entire value chain. The assessment is carried out using clearly defined scales that are intended to enable an assessment that is as objective as possible - when assessing risks and opportunities, for example, we like to use the scales used in financial risk management. Finally, the material IROs are determined using a threshold value, the material sustainability aspects are compiled and finally validated, ideally by the management. A traditional matrix is still often chosen for illustration in the report, but a presentation in list or table form offers a higher information content. Companies can use the results of the materiality analysis for the targeted further development of the sustainability strategy, so that ideally information on concepts, measures and targets relating to the material aspects can already be disclosed in the first report.”

The auditor says: 

“When reviewing the approach to the materiality analysis, we primarily ensure that the relevant requirements of the ESRS are met. These include, for example, that specific IROs must be identified and assessed for the respective sustainability aspects, that the value chain is considered in addition to the company's own business activities or that the IROs are assessed using the assessment criteria prescribed for the respective IRO type. As the standard does not provide any specific requirements in many places and leaves room for interpretation, it is often up to the company to decide how to organize certain process steps in detail. From an auditor's point of view, it is therefore crucial that the exact procedure and the decisions made are documented in a complete and comprehensible manner.“

Question 3: What happens after the key sustainability aspects have been identified?

The consultant says:
“Once the material aspects have been identified, the key ESRS data points are derived. Here it is advisable to use the Excel list provided by EFRAG, which contains all ESRS data points and can also be used for the subsequent gap analysis once the data points have been derived. As no official 1:1 mapping between the material sustainability aspects and the data points is currently available, we use our own reconciliation logic that considers the requirements of the ESRS. We use this as the basis for deriving the data points and specify where there is still a need for adjustment in view of the formulation of certain IROs.”

The auditor says: 

“When mapping the material sustainability aspects to the ESRS data points, care must be taken to only filter out those data points that are also material for reporting. For example, it is not correct to disclose information on the handling of animal welfare in the reporting on standard G1 if this aspect was not identified as material in the materiality analysis. At the same time, there are some data points on which reporting is mandatory, i.e. independent of the results of the materiality analysis, and which therefore must not be excluded. Due to the high relevance of this step for reporting, the planned procedure should be agreed with the auditor at an early stage.”

Question 4: What are the biggest challenges in carrying out the materiality analysis?

The consultant says:
“In our experience, it is often the time required that is significantly underestimated. The steps outlined above already suggest that carrying out the materiality analysis requires a great deal of coordination - the inclusion of various stakeholder groups, specialist departments, foreign subsidiaries or external experts can take a lot of time under certain circumstances. In addition, there are internal review and validation loops, which should also be given high priority in view of the enormous relevance of the results of the materiality analysis for reporting. Companies that are required to report from the 2025 financial year onwards and have not yet started the materiality analysis should therefore waste no more time and initiate the sustainability reporting project as quickly as possible.”

The auditor says: 

“In addition to the tight timeframe for implementation, a key challenge lies in the comprehensible documentation of the process. Although the ESRS do not set any specific requirements for the documentation, this is essential regarding the content review and should ideally be carried out during the process. Ultimately, based on the documentation, we need to understand how exactly the identified material aspects came about, who was involved in which step of the process and which specific decisions were made in the individual steps, for example regarding the definition of threshold values, the inclusion of subsidiaries or the chosen calculation logic.”

Conclusion: What needs to be considered to make the materiality analysis process efficient and audit-proof at the same time?

The consultant says:
“In order to make the materiality analysis efficient and audit-proof, it is important to develop a clear structure and a well-thought-out schedule right from the start. Involving all relevant stakeholders at an early stage and utilizing the tools and guidelines will help to ensure that the process runs smoothly. It is also advisable to carry out regular interim validations and document the results on an ongoing basis to ensure a transparent and verifiable analysis.”

The auditor says: 

“As the results of the materiality analysis determine the content and core statements of the sustainability report, we scrutinize the process for determining the material sustainability aspects in detail. However, if the processes have already been set up, the data collected and the report prepared, but the auditor raises objections to the procedure, a subsequent revision of the materiality analysis is difficult and can lead to lengthy delays in the audit process. To ensure that the audit process runs as efficiently and smoothly as possible, it is therefore important to coordinate the procedure with the auditor at an early stage. This can be done, for example, as part of an audit accompanying the preparation of the financial statements and applies regardless of whether an external consultant has already been brought on board or not. Ambiguities and uncertainties in interpretation can thus be eliminated in good time and the auditor's feedback can be considered in the further process. This also ensures that the materiality analysis adequately fulfils its function as an instrument for determining the material sustainability-related impacts, risks and opportunities for the company and thus also creates long-term benefits for the company.”

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Christian Maier

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Anna Wilhelm

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+49 89 928780 216

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Focus on dual materiality: expert insights from auditing and consulting

Question 1: What role does the materiality analysis play in the reporting process?

Question 2: What is the process for conducting a CSRD-compliant double materiality analysis?

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Question 3: What happens after the key sustainability aspects have been identified?

Conclusion: What needs to be considered to make the materiality analysis process efficient and audit-proof at the same time?

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