Double materiality assessments

Essential lessons from the first cycle

Alex Hindson, Partner and Head of Sustainability, Consulting, Kate Stimson, Senior Manager, Consulting and Simona Villa, Manager, Consulting

Conducting double materiality assessments can be a time-consuming process. How can organisations best leverage that investment for the future?

In the European Union, the Corporate Sustainability Reporting Disclosure (CSRD) is now live and organisations are required to conduct a Double Materiality Assessment (DMA). These assessments are part of an ongoing business process, and so firms need to consider how they adopt and embed this process as part of a wider sustainability change management programme. However, adopting this in practice is challenging and requires careful planning.

Organisations are expected to conduct a DMA as part of their CSRD implementation. Its immediate purpose is to determine how many sustainability matters within the European Sustainability Reporting Standards (ESRS) that a firm is required to report against, based on their significance to its operation. However, DMAs are not just about compliance and reporting. Another outcome is that DMAs support organisations to determine which are the most important aspects of their Environment, Social and Governance (ESG) profile, and where to focus their limited resources on driving improvements in performance and mitigation efforts.

Lessons from organising and facilitating materiality assessments

We reflect on several practical considerations which have proved to be helpful in managing DMA process implementations.

Maximising the efficiency data gathering

Materiality assessments are constructed based on management judgements and experience. Interviewing key stakeholders is a vital step to take, but senior management time is precious. As such touch points with subject-matter experts needs to be carefully curated. Recognising this challenge and preparing well in advance is key in this regard.

Scoping workshop

Our experience suggests that using a steering group, such as members of an existing sustainability committee, to curate the process is helpful. Firms need to be prepared before approaching managers for their time and we suggest following the steps below:

pre-determine a longlist of ESG issues for consideration and target this for interview
develop a targeted list of external stakeholder groups for consideration
assign ESG issues and stakeholder groups to subject-matter experts for consideration by using focused interviews to reduce the scope of each manager’s input to the process
consider pre-populating impact assessments to help participants engage in the process. Nothing is as intimidating as a blank sheet
determine how to address materiality for a specific entity within a group where a group materiality assessment is also required.

Briefing subject-matter experts

Like any risk assessment process, it is important to spend time briefing participants on the purpose of the interviews, the outcomes required and what is expected from them. Again, time preparing is well-spent.

Calibration workshop

Inevitably whenever interviewing a group of five to 10 managers, there will be difference in perception with respect to the magnitude of exposures and their likelihood. We have found in practice that bringing the outcomes back to the steering group is helpful to ensure the outcomes are validated and ranking is calibrated prior to being presented to executive management for sign-off. It ensures that the relative positioning of different ESG factors is seen ‘in the round’.

Document as-you-go

DMA outcomes are subject to external audit review as part of the CSRD reporting process. In order to withstand a limited assurance scrutiny, it is critical that the process used to create the final analysis is carefully documented and that the organisation followed this process in creating and approving its DMA. The easiest way to do this, is to ‘document as you go’ and capture all the steps followed, as they occur.

Link to impact, risk, and opportunity (IRO) assessments

IRO assessments are a core component of CSRD reporting, and it is expected that firms will cover all material sustainability matters within the assessments. The IRO assessments and DMA are interconnected, with one informing another. Therefore, firms must ensure that they are aligned. Organisations which have found a sustainability matter to be material to the organisation may be required to showcase this via their risk or impact management.

Recommendations for embedding DMA into the organisations’ reporting processes

There are a number of steps organisations should take to ensure their DMA remains is ‘living breathing document’ include:

Debate the outcomes with the executive committee and board
For any change management programme to be successful, it requires executive and board sponsorship, and implementation of a DMA is no different.
Executive teams and boards should receive education sessions regarding relevant sustainability regulations which puts DMA into context.
The outcomes of the process, once they have been carefully calibrated, need to be shared with the executive to ensure buy-in to the findings and resources required to address the requirements of the relevant ESRS standards.
Assign accountability for maintaining the DMA process
The first time a DMA is completed, it is typically managed by a project team, possibly with external support. However, DMA studies will need to be repeated periodically, especially if there are significant changes in the business model.
Ownership for the DMA process and ensuring it is kept up to date needs to be assigned within the overall sustainability accountability matrix to ensure this is embedded into appropriate teams’ plans.
Ensure a robust audit trail
DMA assessments are going to be increasingly subject to external scrutiny, by external auditors amongst others. It is important that the judgements and assessments captures within the scoring and rationale has a robust audit trail, so it is clear how the information was produced and what subject-matter experts were consulted and how their views determined.
It will be increasingly important to track and manage changes to the assessment over time.
Evaluate the costs and benefits of a system
Organisations should consider pros and cons of housing their DMA evaluation within an IT system such as GRC tool. Such tools are effective at managing audit trails and enabling subject-matter experts to revisit and update their judgements periodically.
The trade-off may be between increasing the size of a sustainability or reporting team and investing in technology. Thinking this through early on may provide upfront savings.
Consider how to engage external stakeholders
The process we have described is an effective means of conducting an initial DMA evaluation and relies on using internal subject-matter experts to provide perspectives on what the key external stakeholder groups may believe is important in terms of your organisation’s ESG profile.
However, as your approach matures it is inevitable that you will need to conduct stakeholder engagement and outreach to gather more information and to test your assumptions. This is something to invest in gradually, given the time and expense involved in implementation.

Materiality assessments are increasingly part of the sustainability reporting landscape. The CSRD reporting requirements have driven a maturing of this process, but organisations should expect other reporting frameworks to adopt similar approaches shortly. Having a robust reproducible process in place, will ensure firms stay ahead of further requirements to explain their sustainability areas of focus.

Through our practical and experienced team, our Consulting team continues to support our clients in setting their own agenda to address rapidly changing sustainability and climate-related reporting requirements.

Please contact Alex Hindson or your usual Crowe contact for more information.