Reflections From 1 Year of Double Materiality Assessments
While sustainability materiality assessments have been a core part of BRODIE’s service offer since the beginning, February marks one year since we completed our first ‘double materiality’ assessment as required by the EU’s Corporate Sustainability Reporting Directive (CSRD). This milestone has inspired me to share some of our key learnings from working with a number of partners (and at least three iterations of the EFRAG double materiality guidance) over the past 12 months.
1. It’s deeper, and different, to what you have done before.
An early step on most companies’ sustainability journey is to complete a materiality assessment, so it is likely that your company will have completed this exercise in the past. You may also have a ESG report that aligns with the GRI framework – which includes its own version of double materiality.
‘Double materiality’ as the EU and EFRAG (who has been tasked by the EU to develop the accompanying guidance and standards to the CSRD) is different. It is most likely deeper and more complex than anything you have done before:
It involves mapping your value chain and genuinely looking at your impacts across it;
You also need to engage a wide variety of internal and external stakeholders for their view on your impact;
It ultimately will need to be endorsed by your executive management (as they will need to review and sign off your CSRD-compliant reporting, which is ultimately based on the outcomes of your double materiality); and what is ‘newest’ of all,
It requires an assessment of the financial impact of a wide range of environmental, social and governance topics on your business – including on cash flow, human resources, relationships with financial actors, and your capital investment.
Which leads us to reflection two…
2. Map your (internal) stakeholders and engage them early.
Double materiality is not something that can be completed by the sustainability team alone – you will need to work with a broad range of stakeholders to really understand the impact and ensure the robustness of your assessment.
This might include your legal team, human resources, procurement teams, investor relations, product development etc. You will find the most important team to engage however is the finance team – not always a natural partner of sustainability functions.
You will need to work with the finance team on very practical elements, like setting thresholds for what is deemed ‘financially material’ to the business, and the assessment (or review of the assessment) rating the financial impacts (e.g. how many £/$/€ would it cost the business if there was a human rights violation in the supply chain or if weather patterns caused by climate change impacted on resource use). You may even want to complete the double materiality assessment as a joint enterprise/project between the sustainability and finance teams for the ultimate impact.
One lesser acknowledged benefit of working with your finance team, is that they are well-versed in collecting and analysing detailed data sets and producing limited assurance-ready reporting – having an ally in the finance team and learning from their experience can help demystify the process.
External stakeholder engagement is essential to the process too – ensure you include the key categories recommended by EFRAG and are representative of your whole business (e.g. if 50% of your business is outside the EU, aim for 50% of the stakeholders you engage to be non-EU too). How you source these stakeholder inputs can be done in a number of ways – desk research, survey, interviews, workshops – work out what is the best approach for you and your stakeholders.
3. Keep an eye on assurance.
One of the key aims of the CSRD is to have transparent, robust and comparable data across the single market – one of the ways to deliver this is through limited assurance of CSRD reports. While some more mature companies have received limited assurance of their key sustainability data for years (e.g. Unilever, Nestle, Kingfisher plc), for most companies this will be a new, and huge, step in the evolution of its ESG reporting.
Data quality and consistency will need to improve – but for many companies that part of the assurance process will be a couple of years off (the majority of companies will come within scope of CSRD FY 2025-2026).
Your double materiality assessment however will be the first step of the process that is assured (e.g. the data you report will depend on the ESRS disclosures you have deemed material, which is determined through your double materiality assessment).
The main takeaway here is to document the process you followed throughout the assessment, and how this links to the EFRAG guidance on double materiality assessment. At BRODIE we produce a double materiality ‘handbook’ at the end of each assessment which outlines each step in adequate detail to enable limited assurance when the time comes.
4. It’s new, it’s complex and everyone is still figuring it out together.
This reflection is less tangible, and doesn’t have a specific recommendation, but it is worth stepping back and reflecting that this is the first time you are doing this type of assessment. It will be the first time your peers are doing it too – it’s unlikely they are doing it any better than you.
Some of the guidance is still in development – it is a classic example of ‘building the plane while flying it’ (insert your own more sustainable metaphor here).
No company has yet nailed the ‘perfect’ approach, and to be frank, some of the guidance is quite complex and impenetrable for the average stakeholder. There will be confusions and frustrations along the way. If you don’t ‘get it’, it’s ok.
At BRODIE we simplify the process as best we can and use a tailored approach that resonates with your stakeholders – we have reviewed and improved our approach following each double materiality assessment, and are really confident in the approach we have now landed on.
But, we cannot guarantee that you will not find the directive and the guidance frustrating all the same, so we can also be there any time you need to have a little moan about things along the way!
5. Look for the broader opportunities.
At its heart, double materiality is just a compliance exercise. But, you don’t need to see it that way. While the assessment asks you to (literally) look for the opportunities, as well as impacts and risks; possibly the biggest opportunity is the ‘hook’ it gives you to begin and/or deepen conversations with your (internal and external) stakeholders on sustainability.
Examples of positive opportunities we have seen in practice in some of the assessments we have worked on over the past year:
Interviewing investors for their views on both sides of the materiality (impact and financial) may illicit particular sustainability areas they use to assess investments, where they would like to see more activity from you, and/or areas they see as a particular risk to your business (and their investment).
Opening or deepening conversations with customers on the sustainability of your product/service could open new sales channels and/or help you find out what might give you a preferential placement (e.g. think of retailers ‘sustainable ranges’).
A broader range of internal functions taking ownership of different areas – this can become particularly clear if the executive board reviews and signs off the double materiality assessment – e.g. if human rights and working conditions moves up the agenda, they will want to see procurement and human resource teams taking ownership of KPIs here.
6. Double materiality is just the start of the journey.
Without underestimating the work required at each step, once you are clear you are in scope, CSRD compliance is essentially a three-step process:
a. Complete your double materiality assessment
b. Determine the disclosures and KPIs
c. Collect data and report the disclosures
Double materiality is the keystone on which all the other steps build – you cannot begin to determine your disclosures or collect data until you have determined the key material issues (or ‘topics’, ‘sub topics’ and ‘sub-sub topics’ in CSRD parlance).
Disclosures can be qualitative or quantitative – building new policies or starting to collect new data will not happen overnight. BRODIE’s experience helping our clients set up data collection systems suggests that 1-3 years is required to embed good and consistent data practices across a large organisation.
So, even if you do not technically need to produce a CSRD-compliant report for another year or two, you should probably think about beginning to build the data and activity behind those disclosures as soon as possible.
Written by Emma Ryan, February 2024
Emma is Principal Consultant at BRODIE Consulting.
Ready to start your double materiality assessment? Or still trying to figure out the new legislative landscape and how it impacts on your business? Reach out to the BRODIE team – we have a broad range of experience – from government to corporate to third sector – that helps us to decode the alphabet soup of regulations and understand the best tailored approach for each business. We have had a wide range of experience across sectors in the past 12 months, completing legislative gap assessments, double materiality, CSRD disclosure mapping and reporting. Let’s chat through how we can best help you – hello@brodiepartners.com