Double Materiality
The analysis of both how sustainability topics affect the company and how the company's activities affect the environment and society.
Double materiality is a core principle of the CSRD and the ESRS framework. It requires companies to assess sustainability topics from two perspectives simultaneously. The first perspective — financial materiality — asks whether a sustainability issue poses risks or opportunities that could materially affect the company's financial position, performance, or cash flows. The second perspective — impact materiality — asks whether the company's activities have significant impacts on people or the environment, whether positive or negative, actual or potential.
A topic is considered material for CSRD reporting purposes if it is material from either or both perspectives. This is a significant departure from traditional financial reporting, where only investor-relevant information is considered material. Double materiality forces companies to look outward — at their footprint on the world — not just inward at their own financial exposure.
Conducting a double materiality assessment requires systematic stakeholder engagement, analysis of the company's value chain, and structured evaluation of sustainability topics against defined criteria. The assessment must be documented and will be subject to external audit. The results determine which ESRS topics a company must report on in full — making it the strategic foundation of the entire CSRD reporting process.
Legal Basis
CSRD Directive (EU) 2022/2464; ESRS 1 (General Requirements, paragraphs 29–60); EFRAG Materiality Assessment Implementation Guidance
Practical Example
A textile retailer conducts its double materiality assessment. From a financial materiality perspective, it identifies climate-related supply chain disruptions and rising raw material costs as material risks. From an impact materiality perspective, it identifies working conditions in its supplier factories in Southeast Asia and the water consumption of cotton farming as material negative impacts. Both dimensions together determine the company's reporting scope: it must report on climate change (ESRS E1), water (ESRS E3), and its own workforce and value chain workers (ESRS S1 and S2).