How not to do a double materiality assessment? – Rethinking stakeholder engagement in-light of ESRS requirements

Elizabeth, a community manager at an environmental NGO, was sitting in front of her computer, sipping coffee as she opened her mailbox on a sleepy Tuesday morning.  As every day since the EU decided to make sustainability reporting mandatory, her inbox was filled with dozens of surveys, sent by large corporates to gather input to their double materiality assessments. „How on Earth am I supposed to know what are Very Specific Metal Parts Inc.’s impacts on water? I don’t know where their sites are, I don’t know who their suppliers are, and I have no idea what these metal parts are used for!”, sighed Elizabeth as she clicked delete on e-mail number 4532.  

In the meantime, on the other side of the planet, Yu scrolled through his phone in his lunch break at one of Tech-IT Inc.’s 25 manufacturing sites. A notification popped up: Global Sustainability wanted his input on Tech-IT Inc.’s impacts on society and the environment. Yu got mildly curious, and clicked on the survey.  Dozens of sustainability topics appeared, and Yu was asked to rate them according to the severity of the impacts. „What do they mean by climate change adaptation anyway? And what the heck is biodiversity conservation? And what do they mean by scale, scope and irremediability?”, wondered Yu, as he randomly clicked on numbers on a 1-5 scale for dozens of questions.

Let’s dive into what is wrong with these scenarios!

Materiality assessment as we used to do it

Materiality assessment in the sustainability (or, before sustainability became cool, the CSR) sphere was as much about marketing, good intent-signalling and relationship-strengthening as about actually figuring out the company’s key impacts on people and the environment. Materiality matrices typically showed how important sustainability matters were to external stakeholders and the business – and that is not to be confused with the severity of impacts.  

Naturally, if you wanted to figure out how important a topic is for an external stakeholder you had to ask as many of them (something approaching a representative sample) as possible. The questions were also easy to answer - everybody has a feeling about the importance of topics, and that opinion doesn’t need to reflect the actual, objective impact that topic has on the world.  

What is wrong with that?

To answer questions regarding how concerned you are about a specific sustainability matter as, for example a key customer of a food company, you don’t need to know the details about the value chain and the operational circumstances of that company. You can say that your biggest concern is, for example packaging – because consumers shopping in your stores are pushing you to sell more sustainably packaged food. If 700 customers will say the same, packaging will emerge as the most important sustainability topic, even though packaging contributes less than 5 per cent to the GHG emissions of this particular food company, and the waste generated in their sourcing and production is significantly more harming to the environment, both in terms of pollution and volumes. In such a case, arguably, the actual impact of the company on the environment has very little do with what customers find important.

As conducting and disclosing materiality assessment used to be voluntary, the methodology underlying the very visual materiality matrices presented in beautiful sustainability reports was not typically audited by third parties. This, on the one hand, lead to a very laissez-faire application of existing standards, and on the other hand, a lack of transparency into materiality assessment methodologies. For example, the GRI materiality assessment methodology has been asking for assessing the severity of impacts, nevertheless, most companies doing a „GRI inspired” materiality assessment usually surveyed lots of stakeholders about what do they consider important. The matrices based on the results used to live in the silo of sustainability/CSR reporting teams, hardly ever crossing the interest threshold of the company’s higher management, and seldom influencing the company’s strategy.

Importance of topics DOES NOT equal severity of impacts

With CSRD, and especially the requirements related to the double materiality assessment, the EU seems to want to change all this.

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“Importance to stakeholders” is replaced by severity of impacts

A company’s impacts need to be assessed and ranked according to their severity. The severity of impacts does not equal the importance of certain topics to stakeholders, it relates to the gravity of the impact. CSRD wants companies to base their impact assessment as much on objective and science-based evidence as possible. This does not mean that stakeholders’ opinions regarding sustainability matters is not taken into consideration. For example, if your customers think that packaging is the most important sustainability-related matter at a food company, then this will be relevant for the financial materiality assessment: if the food company does not work on more sustainable packaging, it risks losing their customers.  

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Quantity of stakeholder responses is replaced by quality of responses

CSRD wants companies to map and understand the severity of their impacts on people and the environment. Asking hundreds of customers who do not know anything about your company’s value chain or the environmental and social aspects of your company’s operations would not be helpful in doing that. Asking a few, but knowledgeable proxies (or using results from scientific studies, LCAs, PEFs) would give a much better and substantiated view of your company’s impacts. Similarly, to map and understand your sustainability-related risks and opportunities expertise is also needed. Just imagine that you would ask external stakeholders to rate your general strategic risks based on their impressions – how useful would that be?

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Materiality breaks out of the silo

To conduct an informative, ESRS-aligned double materiality assessment companies need to involve multiple functions across their organisations. Involving expert credible proxies from different functions does not only improve the quality of information, it also means that the materiality of sustainability matters is breaking out of the ESG/CSR/sustainability reporting silo. If you need to involve finance, procurement, customer managers and the executive management, suddenly many people formerly not closely involved with sustainability matters gain awareness of the double materiality assessment process and also the results.

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Double materiality as a map for actions

The DMA breaks out of the silo with big ambitions: to inform the company’s sustainability strategy and sustainability actions. The ESRS-aligned DMA has a better chance than their materiality assessment predecessors, as companies need to report their policies, actions and targets related to their material sustainability matters. Which means that they need to have policies, actions and targets in place – and in many case, companies will need to develop these, before they are able to report on it. This is also why it’s of crucial importance to choose the credible proxies right. The quality of the assessment needs to be solid and fact-based, if the company is to allocate resources based on it.

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Opaque methodologies are replaced by transparency

The ESRS do not prescribe a double materiality methodology (to the despair of many), but they require companies to be very transparent about the methodology they work out for themselves, based on the elements in the standards and the implementation guidelines. Being transparent also means disclosing the limitations of your methodology or data gathering process. As scary as that sounds it can also be just as freeing as being naked in a German sauna – when everybody else is also naked, you don’t mind it that much. However, being honest about limitations is not enough to be compliant with CSRD, the methodology also needs to be audited (on the limited assurance level), which ensures that companies will be a little more aligned to the letter and spirit of the standards than in case of many voluntary sustainability reporting standards.

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If you want to learn more about how to do your double materiality assessment, download our CSRD Handbook here!

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