Understanding the nuances of Environmental, Social, and Governance (ESG) is more critical than ever in today’s complex business environment. At Intire, we help organizations conduct a Double Materiality Assessment (DMA), a procedure that ensures companies are not only accounting for financial risks, but also the broader impact of their operations on the environment and society. During our experience in executing, advising and reviewing double materiality assessments, we have encountered several significant pitfalls that could comprise the effectiveness of the assessment. In this blog, we delve into three of them.
Pitfall 1: Interpretation Differences
Correctly interpreting abstract ESG themes is one of the primary hurdles in executing a DMA. For instance, while the topic of water pollution may seem straightforward, defining this issue accurately is crucial. A long list of potential ESG topics based on the European Sustainability Reporting Standards (ESRS) framework is often used, without fully grasping the nuances of each. Hence, clarity in definitions is vital on ESG topic level, resonating with the specific context of your business. By failing to define these abstract ESG topics clearly, companies risk misaligning their sustainability efforts with actual impacts. As a result, different values will be assigned to an ESG topic during the materiality assessment, due to internal mutual misinterpretation between colleagues or departments within the company. By ensuring that all ESG topics are well-defined at the subject level, so companies can better assess their materiality and its implications for their operations and reporting.
Pitfall 2: Distinguishing Between IROs
Another common pitfall lies in distinguishing between the impact, risk, and opportunity (IRO) of a certain topic. Organizations need to distinguish between impacts, risks, and opportunities related to the identified ESG topics. It is essential to distinguish between impact materiality and financial materiality in this stage. While financial materiality addresses how external ESG issues affect the organization’s financial performance, impact materiality focuses on how the organization’s actions affect the environment, society, and broader stakeholders. If the definitions of IROs are ambiguous or incorrectly applied in this stage, the resulting long-term policies can be lacking or incomplete. Imagine a company that discusses water pollution and describes ‘improving water quality’ as a financial opportunity, it confuses impact and opportunity by overlooking that this is a positive impact on the environment and society first and foremost. Hence, organizations require a clear differentiation between their IROs in order to fully grasp the financial risks, and avoid missing out on opportunities to leverage its positive impacts.
Pitfall 3: Linking IROs to ESRS Topics
The third common pitfall is the failure to properly link the identified IROs to their corresponding ESRS topics. In the DMA process, each impact, risk, and opportunity, should be accurately categorized based on the relevant topic. Misaligning IROs with the ESRS framework can lead to inconsistencies, missed insights, or an incomplete representation of the company’s ESG performance, ultimately diminishing the effectiveness of your ESG reporting. If the Double Materiality Assessment identifies significant risks related to water consumption for instance, but fails to associate it with the appropriate ESRS topic, you may miss out on vital insights that could enhance your reporting and improve your organization’s sustainability strategy. Furthermore, if an IRO is under the wrong topic, then the outcome in the form of ESRS policies or metrics are not fully inherent to the company and therefore lack to provide good insights, further weakening the value of your analysis.
Conclusion
Navigating the complexities of a DMA can be challenging, but by being aware of these pitfalls – misinterpretation and correctly defining ESG topics, misclassifying impact, risk, and opportunity, and inadequate alignment with ESRS – your organization can significantly enhance its ESG strategies. Intire is committed to guiding clients through this process, recognizing the importance of having expert support. Our team is knowledgeable in the subtleties of DMA, and can support your organization to identify and address these pitfalls effectively. Do not hesitate to contact us if you are struggling with the intricacies of ESG reporting or embarking on a DMA journey. Let’s work together to ensure your organization is prepared for the future, with a clear understanding of your impacts, risks, and opportunities to help you turn sustainability into a strategic advantage.
Interested to know more? Reach out to us to see how we can best help your organization navigate the dilemmas of the CSRD.
