8 myths about double materiality

The concept of dual materiality (DW) and its analysis is on everyone’s lips in sustainability reporting. No wonder – after all, it serves as an introduction to reporting in accordance with the ESRS (European Sustainability Reporting Standards). It can now be found in almost every sustainability service.

However, as is so often the case with new and complex topics, there are many misleading myths surrounding double materiality and the associated process. In this article, we want to dispel the most common assumptions and provide a clear overview of what is and is not possible in a double materiality analysis.

As part of the double materiality analysis, so-called IROs (Impacts, Risks & Opportunities) are determined, each of which is then assessed according to its materiality. For more in-depth information on double materiality, we recommend our webinar recording or our blog post.

Table of contents

1. The result of the double materiality analysis must be presentable in a matrix.
2. The double materiality analysis only needs to be carried out once.
3. The documentation of the process of the double materiality analysis is of secondary importance, only the result counts.
4. The double materiality analysis can be carried out independently by the sustainability team or finance team/risk team.
5. You do not need to be familiar with the ESRS to be able to carry out the double materiality analysis.
6. If you carry out the double materiality analysis together with external support, you choose the most cost-effective offer.
7. All data on all ESRS topics must already be available in order to carry out the double materiality analysis in the first year.
8. The double materiality analysis only determines the scope of the actual sustainability declaration in accordance with the ESRS, but the content of the DW is no longer required for the actual ESRS report.

1. the result must be representable in a matrix.

Wrong: Experience with the GRI (Global Reporting Index) often leads to the wish that the double materiality can also be presented in a 4×4 matrix. In the ESRS, however, the ESRS sustainability aspects and the ESRS sustainability topics to be reported are divided into material and non-material. Impact X is not rated as more material than impact Y.

2. the double materiality analysis only needs to be carried out once.

Incorrect: At least one review of the previous year’s double materiality analysis should be carried out in good time before each preparation of the annual ESRS sustainability statement. Alternatively, there could be changes in the market or in world events that trigger or could trigger direct or indirect financial impacts on the company in the context of the ESRS sustainability aspects.

The following scenarios may result in a change in the materiality of the identified IROs:

1. a major merger and acquisition transaction that leads to a new activity, entry into a new sector or a significant change in business activity;
2. a significant change in the main suppliers or practices in the supply chain;
3. a global event such as a pandemic or the establishment of a new material business relationship that is likely to have a severe impact on human rights; and
4. a change in social conventions, scientific knowledge or user needs that could affect the severity level (e.g. if the level of public awareness of a sustainability issue increases significantly compared to previous periods or new studies reveal evidence of the toxicity of a substance).

(Source: Implementation Guidance – Materiality Assessment, status 12/2023)

3. The documentation of the double materiality analysis process is of secondary importance. Only the result counts.

Wrong: One of the focal points of the ESRS is the detailed documentation of the processes and methods used. In the case of the double materiality analysis, it is not only the result that counts, but also how the company arrived at this result. This makes it easier for the auditor to understand why something was done and how it was done.

Tip: In the double materiality analysis with Code Gaia, you and your team are guided step by step through the process of double materiality analysis. Document the entire process and its results directly in our software in an ESRS-compliant manner, without any prior knowledge or time-consuming familiarization with the rules and regulations. Examples and training content, as well as the support of our experts and partners, are available to you. We also offer accompanying workshops on request.

4. the double materiality analysis can be carried out independently by the sustainability team or finance team/risk team.

Not recommended. In principle, either the sustainability department or the finance or risk department can carry out the double materiality analysis alone. However, when identifying and assessing the materiality of a company’s impacts, the effects of the company on the environment and its surroundings are considered. A well-trained sustainability team can be a great advantage here. When identifying financial risks and opportunities, internal risk departments are often the most familiar with assessing risks. Cooperation between the sustainability department and the risk department therefore makes a lot of sense.

5. You do not need to be familiar with the ESRS in order to carry out the double materiality analysis.

Wrong: If a company is obliged to publish a sustainability statement in accordance with the European Sustainability Reporting Standards or wants to do so voluntarily, there is no getting around reading the standards. The good news is that more and more software solutions are available on the market to make the implementation and preparation of the ESRS sustainability statement as uncomplicated as possible. However, the next section explains what you need to bear in mind.

6. If you carry out the double materiality analysis together with external support, you choose the most cost-effective offer.

Not recommended: Many software or consulting solutions only cover the contents of the ESRS very superficially.

Reporting companies should ensure that the software provider refers directly to the relevant sections in the ESRS and also discloses its methodology for dual materiality. If companies save too much here at the beginning, in the worst case they will have to carry out the double materiality analysis again in the same year due to methodological errors or gaps.

At Code Gaia, we have fully integrated and decoded all European Sustainability Reporting Standards in our platform. How we went about this is described in detail in this blog post .

To this end, we have developed our own sound methodology in the form of the Code Gaia approach to double materiality. The approach was developed by our sustainability experts in the period from June to December 2023. During this time, it was applied in real cases at companies conducting an ESRS-aligned materiality assessment for the first time. The approach therefore draws on this practical experience as well as input from environmental impact assessment (EIA) and accounting theory.

7. All data on all ESRS topics must already be available in order to carry out the double materiality analysis in the first year.

Partly false: The better a company’s data situation is with regard to the ESRS sustainability aspects, the easier it is to verify and assess the identified IROs. Nevertheless, the ESRS is not about making everything perfect as a company in terms of sustainability and data quality, but about achieving the best possible transparency. It is therefore not absolutely necessary for a company to already have a detailed data situation in order to start with the double materiality analysis. However, over the course of a reporting year, the company should gradually improve and refine its data quality and scope.

8. The double materiality analysis only determines the scope of the actual sustainability declaration in accordance with the ESRS, but the content of the DW is no longer required for the actual ESRS report.

Incorrect: Although companies define the reporting scope of the ESRS sustainability statement by carrying out the double materiality analysis, the IROs identified in the DW are queried again in various places, such as in the topic-related standards, and often in greater detail.

Conclusion

In this article, it should be made clear that it is important to understand that the double materiality analysis is not only carried out once, but must be updated regularly to take account of changes and new developments. In addition, the process should be carefully documented, as the ESRS require detailed documentation of the methods and processes used.

Cooperation between the sustainability department and the risk department can be extremely beneficial when conducting the double materiality analysis. Finally, it is essential to know the ESRS in order to carry out the analysis correctly and it is advisable to consider the quality of the methodology when selecting external support rather than just the price.

Arrange a no-obligation introductory meeting with Code Gaia now to find out more about our support services for double materiality analysis.

You can also listen to this podcast episode with Stefanie Höpler in conversation with Code Gaia CEO Markus Adler.