Double materiality has become a cornerstone in corporate reporting since it was introduced in the EU Corporate Sustainability Reporting Directive (CSRD) in 2023. This framework considers the financial implications of sustainability issues on a company (outside-in perspective) and the company’s impact on people and the environment (inside-out perspective).
To meet CSRD compliance and enhance sustainability performance, companies must understand and implement double materiality assessments. This blog explores the concept of double materiality and its role in CSRD and offers a step-by-step guide for assessment.
The concept of materiality originated in accounting. Defined by organizations such as the IASB and SEC, it refers to the significance of financial information in influencing the decisions of investors, creditors, and management. Materiality determines whether such information should be disclosed in financial statements.
In sustainability reporting, materiality encompasses two primary perspectives.
Environmental and social impacts
The Global Reporting Initiative (GRI) introduces “material topics” in GRI 3 Standards as an “organization’s most significant impacts on the economy, environment, and people.” These topics are considered from the view of multiple stakeholders, such as investors, employees, customers, suppliers and local communities. GRI provides guidance on identifying, disclosing, and managing material topics.
Financial implications of risks and opportunities
The International Sustainability Standards Board (ISSB) defines materiality as the influence of sustainability-related financial information on the decisions of general-purpose financial report users. It emphasizes the impact of sustainability risks and opportunities on a company’s financial performance and investors’ ability to make informed decisions.
The Taskforce on Climate-related Financial Disclosures (TCFD), whose work is now integrated into the ISSB, also provides recommendations for disclosing financial risks and opportunities related to climate change.
The European Sustainability Reporting Standards (ESRS) introduce “double materiality” as the guiding principle for CSRD disclosures. It assesses the significance of sustainability matters to determine the information to disclose, by unifying the two dimensions of materiality from earlier frameworks.
The two perspectives are interconnected, and their inter-dependencies should be considered. While impact materiality should be assessed first as it can affect financial materiality, a company’s dependencies on natural, human, and social resources can also be sources of risks or opportunities. A sustainability matter is considered material if it meets the criteria of impact materiality, financial materiality, or both.
The 12 ESRS final standards include two cross-cutting standards (ESRS 1 and ESRS 2) and ten topical standards across environment, social, and governance.
The general disclosure standard ESRS 2 is relevant to double materiality disclosure requirements and has four reporting areas:
All companies must conduct a double materiality assessment, identifying significant impacts, risks, and opportunities. The assessment process and outcome must be disclosed in companies’ sustainability statements along with their general governance and strategy.
For material issues identified through either an impact perspective or financial perspective, or both, companies must disclose their policies and actions to manage the IRO, as well as relevant metrics and targets, in the general disclosure.
Disclosure on each topical standard (ESRS E1-E5, S1-S4, G1) is optional and determined by the double materiality assessment. For material topics, companies should follow the topical disclosure requirements on governance, strategy, IRO management, and metrics and targets.
Download our ESRS brief below for a summary of key requirements and preparation guidance:
Companies can perform a double materiality assessment in five steps, following the ESRS implementation guidance and industry best practices.
The first step is to understand the assessment context, including the operational boundary, upstream and downstream value chain, activities, and business relationships.
Stakeholders play a critical role in the assessment and should be identified and engaged early in the process. Relevant stakeholders typically include employees, investors, suppliers, consumers, local communities, and public authorities. The ESRS also suggests considering nature as a “silent stakeholder” and utilizing ecological and species data to inform materiality assessment.
Companies should identify potential sustainability matters relevant to their business. While the ESRS provides a list of sustainability matters for topical standards (ESRS 1 AR 16), companies should also consider their specific circumstances when determining material matters.
For each sustainability matter, companies need to identify actual and potential impacts (both positive and negative), as well as associated risks and opportunities. This step often involves stakeholder engagement, expert input, and scientific analysis.
Companies can follow the ESRS criteria as a starting point to assess different types of impacts:
To identify specific material impacts, disaggregate data by country and site/asset location when necessary.
ESRS aligns closely with GRI on impact assessment and disclosure. Companies can use GRI Universal Standards as a basis to assess impact materiality under ESRS and leverage the interoperability index to streamline reporting for both frameworks.
While qualitative analysis, incorporating stakeholder input, is crucial, a data-driven approach using granular life cycle assessments can offer a deeper understanding of material issues and data points. Combining both methods would enable companies to meet reporting requirements and proactively manage their social and environmental impacts.
In addition to the impacts identified in the previous step, companies should consider their resource dependencies and the sustainability performance of business partners to identify potential financial risks and opportunities. ESRS instructs three steps:
ISSB’s first two standards align with ESRS financial disclosures and climate reporting. Companies can reference IFRS S1 for additional guidance to assess material risks and opportunities and leverage the interoperability guidance to streamline reporting for both frameworks.
The ESRS requires companies to use “appropriate quantitative and/or qualitative thresholds” without providing prescriptive guidance. Companies can leverage stakeholder input, a materiality matrix, industry benchmarks, data analysis, and scenario planning in an iterative process to establish the thresholds.
The ESRS mandates companies to disclose their materiality assessment process, outcome, and management actions, including:
A granular, data-driven double materiality approach can transform sustainability into a strategic growth driver, helping companies meet regulatory requirements while gaining a competitive advantage.
Aligned Incentives has applied double materiality perspectives in real business contexts since 2016, with companies as different as HPE and Lockheed Martin. We integrate data-driven impact and financial analysis with stakeholder engagement to assess and report on double materiality. Typical steps include:
