ESG reporting obligation for SMEs – attention to the double materiality assessment

As a result of the proposed new legal framework, around 3,500 companies in Switzerland will become subject to direct comprehensive reporting requirements with regard to sustainability over the next few years. Many of these companies will also be indirectly affected as part of the value chain. The European directives on non-financial reporting (CSRD/ESRS) and the EU Supply Chain Act will also have a far-reaching impact and, above all, will indirectly affect Swiss companies of all sizes.  

The key role of the double materiality assessment 

Many Swiss SMEs already have to complete a double materiality assessment or will have to do so in the foreseeable future. Their sustainability strategy and downstream “non-financial reporting” focus on this double materiality assessment. 

Companies must reassess social and environmental issues that are important to them according to double materiality. This is illustrated below in visual form: 

There is a significant difference compared to the previous practice (NFRD – Non-Financial Reporting Directive). Sustainability issues are no longer assessed solely on the basis of their financial impact on the company (outside-in), but also according to their impact materiality (inside-out). 

A sustainability issue is considered to be significant if it is material from a financial and/or impact perspective. Under this approach, the concept of double materiality prevents one-sided reporting. Companies that previously only addressed sustainability issues that have a financial impact on their own operations must now also target sustainability issues that have no financial impact on their business, but that have a negative impact on the environment. 

Complex, interdisciplinary implementation 

Completing a double materiality assessment is complex, interdisciplinary and requires the involvement of various stakeholders. In principle, it can be broken down into the following three steps:  
  

Requirements analysis: understanding the context and identifying stakeholders  

• Analyse your company’s activities upstream and downstream (value chain). 

• Check the legal and regulatory environment of your area of activity. 

• Identify all important stakeholders (internal and external) and involve them in the entire process. 
    

Identifying potentially material topics and reviewing their impact, risks and opportunities (IRO) 

• Create a list of potentially material sustainability issues in ESG areas. 

• Then choose the “top-down approach” and evaluate the topics you have identified according to IRO. 

• And/or choose the “bottom-up approach” to identify material topics based on IRO. 
    

Analysing the material topics from the perspective of double materiality and drawing up a final list of sustainability issues to be reported on 

• Analyse sustainability issues according to impact materiality.  

• Analyse sustainability issues according to financial materiality. 

• Finalise the list of sustainability issues to be reported on. 

The double materiality assessment is at the heart of a company’s sustainability strategy and non-financial reporting. Identifying key stakeholders and involving them in the entire process in a targeted, permanent manner are vital to ensure a successful and effective assessment. 

Focus on stakeholder involvement  

Suitable stakeholders must be involved at an early stage and at various times. It does not make sense to consult all stakeholders on all issues. It is advisable to divide participants into groups according to the subjects that are relevant to them. Stakeholders should be allowed to contribute via individual interviews or group discussions. Standardised questionnaires are unsuitable, distort results, reduce quality and lead to misuse or control of the results.  

Gross consideration applies 

Negative and positive effects must be considered separately and reported on individually. This explicitly excludes net consideration, which can, on the contrary, be regarded as systematic greenwashing. Negative effects must not be overshadowed by positive effects or even offset by net positive effects. Of course, material positive aspects may or must also be reported on, but downstream of the negative “potential” effects. 

Integrated management approach – governance 

In order for a company to implement and maintain a successful sustainability strategy, it is crucial for the strategy to be put into practice, upheld and implemented at all levels. It should be in the form of a cycle and represent an integrative management approach.  

The utilisation of synergies across all elements of corporate management and all hierarchical levels leads to a comprehensive understanding of relevant risks. This improves process transparency, data quality, reporting and cost-effectiveness. 

Conclusion 

The ordinance on reporting obligations in relation to corporate sustainability will ensure that around 3,500 companies in Switzerland will be subject to comprehensive sustainability reporting requirements over the next few years. Many of these companies are also likely to be indirectly affected as part of the value chain. 

The double materiality assessment is the core element of the reporting. This assessment is complex, interdisciplinary and should be approached carefully. The focus is on the involvement of stakeholders and the gross consideration of impacts. Our specialists will be happy to help you with this process if you require any assistance.