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Double Materiality in CSRD

By Shivani Rajpal

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The Corporate Sustainability Reporting Directive (CSRD) marks a major shift in the concept and practice of sustainability reporting. One core feature – the focus on "double materiality" – requires organizations to disclose not only their impacts on environmental and social matters but also the dependencies between sustainability and their financial performance. This approach promises increased transparency and accountability in corporate sustainability reporting – but what does it mean, and how can companies embrace double materiality in a meaningful way?

What is double materiality?

Double materiality, as the name implies, consists of two dimensions

  1. Impact materiality

  2. Financial materiality


Neither of these so-called “single materiality” lenses is new, but ESRS is the first to bring them together formally in a mandatory reporting framework.

Impact materiality, which has been a core element of reporting under the Global Reporting Initiative (GRI) for decades, focuses on the company’s impacts outward – that is, how an organization’s activities across the value chain impact society and the environment, either positively or negatively.

Financial materiality looks at effects in the other direction – the risks and opportunities for the business that arise from environmental and social issues. For example, potential costs or even new business opportunities from climate change.

Bringing these aspects of materiality together in a double materiality approach isn’t a simple matter of looking for the sustainability issues (or, sustainability matters, as they are called in ESRS) that are common across both dimensions.

In fact, while applying ESRS, sustainability matters can be material from an impact perspective, a financial perspective, or both. This means, for one, that positive and negative impacts of the company’s activities on the environment and people, regardless of their effects on the company’s bottom line, can be considered material.

For example, consider negative impacts on communities in which a company operates. ESRS doesn’t require that these impacts have a material negative effect on (in other words, constitute a material risk to) the company’s financial performance. These impacts could be material by virtue of their effects on the environment or people alone.

But in many cases, impact materiality and financial materiality are indeed interrelated. For example, not effectively managing sustainability impacts can lead to financial risks for the organization, such as customer loss due to reputational damage from mismanaged ESG issues or even increased costs due to increased employee turnover due to lack of training and development. The opposite is also true. By managing sustainability impacts effectively, organizations can capture new opportunities, including inroads into new markets, customers, and employees.

Financial risks or opportunities can, of course, also arise from sustainability-related dependencies not directly linked to its own impacts, such as limited access to resources due to biodiversity loss or ecosystem damage. These independent but often interrelated sustainability drivers help explain why it’s critical to apply both dimensions of materiality, both within your own operations, as well as across the value chain.

How can companies apply double materiality?

Despite the clear requirement that companies use the concept of double materiality, there is no “one-size-fits-all” approach to performing a double materiality assessment.

There are, however, core principles that must be followed to ensure the essence of both dimensions is applied by the organizations. A process that companies can follow, building on EFRAG guidance, follows.

Understanding the organization’s context

The context in which the company operates is critical to understanding material sustainability matters. This includes its activities and business relationships, the context in which these take place, and an understanding of its affected stakeholders.

This requires understanding several concepts:

  • Activities and business relationships across the  value chain of the organization. Understanding the activities and the business relationships across the full value chain is the starting point of identifying the impacts, risks, and opportunities of the organization. This includes understanding the implications of a company’s core business processes upstream, in its own operations, and downstream, for example, from sourcing inputs and materials, to manufacturing, to use and disposal of products.

  • External context. Companies don’t exist in a vacuum. The legal and regulatory landscape, competitive landscape of the organization, its market context, and broader sustainability trends and developments all have implications for sustainability impacts, risks, and opportunities.

  • Stakeholders – Stakeholders play a crucial role in the materiality analysis. ESRS focuses on two types of stakeholders: affected stakeholders and users of the sustainability statement. Both can and should be included in the assessment to ensure companies are truly reflecting their perspectives and voices.


TIP Much of this context may already be provided in existing sustainability and financial reporting, investor analysis and ratings, or developed through ongoing stakeholder engagement. The focus here is to capture these insights and their implications for sustainability.

Identifying possible impacts, risks, and opportunities (IROs)

A distinguishing characteristic of ESRS is the focus on IROs – impacts, risks, and opportunities – which go a level deeper than the sustainability matters such as “climate change” to drive to the actual nature of the effects and where they arise.

Building on an understanding of the organization’s context, companies can consider which sustainability matters could be material. But we can’t stop at top-line topics such as pollution or even collective bargaining. This step in double materiality requires assessing sustainability matters to identify actual and potential impacts, risks, and opportunities throughout their value chain. For example, GHG emissions in operations and GHG emissions in the upstream supply chain may imply different impacts, risks, or opportunities.

The goal from this step is to develop the long list of IROs that we can then test in the next step. Relevant internal and external stakeholders should be engaged during this step so that their perspective is taken into account.

Tip: Break out IROs separately if they impact different parts of the value chain or if they are positive or negative. An example: positive impacts through community engagement efforts versus negative impacts on community health through upstream suppliers. Impacts (positive and negative), risks, and opportunities are assessed using different criteria, so defining them at the right level in this phase will help in the next step.

Determining material IROs (and material sustainability matters)

Following ESRS guidance for impact and financial (risk and opportunity) materiality, companies need to define the criteria and thresholds for what will be considered material.

In this step, the organization assesses the long list of identified impacts, risks, and opportunities, the organization by using assessment criteria and applying materiality thresholds. This is done differently for impact and financial materiality.

Determining impact materiality (impacts)

For actual impacts, scale and scope (“severity”) are included for both positive and negative impacts. For potential impacts, the criteria of likelihood is added.

Severity of the actual or potential impact can be assessed by the following criteria:

  • Scale – How grave the impact is (or, beneficial, in the case of positive impacts)

  • Scope – How widespread the impact is. For example, how many individuals have been affected by the impact, or what is the extent of the environmental damage caused?

  • Irremediable character (for negative impacts) – The extent to which the negatively affected environment or people be brought back to their original state

All identified impacts must be rated based on these criteria, but the way they are defined specifically and the thresholds for materiality are determined by the organization.

Determining financial materiality (risks and opportunities)

A sustainability matter is material from a financial perspective if it triggers or could reasonably be expected to trigger material financial effects on the company. This is assessed by the following criteria:

  • Likelihood – How likely is it that the risk or opportunity will arise for the organization?

  • Magnitude – What is the magnitude of the financial effects of the risk or opportunity?

All identified risks and opportunities must be rated based on these criteria. Based on the result from the application of the criteria, the organization develops thresholds to determine the most material topics based on financial materiality.

Bringing together the final material IROs and sustainability matters

Finally, the organization compiles the integrated list of their material impacts, risks and opportunities, and reports on both the process (IRO-1) as well as resulting IRO-level outcomes (SBM-3). The associated material sustainability matters then form the basis for assessing which topical standards, disclosure requirements, and data points will ultimately be included in the sustainability statement.


As mentioned above, there is no one way to apply the materiality process. Each organization must develop a “fit-for-purpose” approach that fits their context and maturity.

What is important is that the organization documents each step that they follow, as that is required to address the required disclosures from ESRS 2, and will be important for assurance.

More Information

To learn more or access additional information and tools to support your double materiality assessment visit the CSRD Hub.

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