In this article, we explain in detail how double materiality is defined, what requirements arise from the European Sustainability Reporting Standards (ESRS) and how companies can carry out a sound materiality analysis in order to both meet regulatory requirements and secure strategic advantages.
What does double materiality mean?
Definition and core concept
With the Corporate Sustainability Reporting Directive (CSRD), the EU is setting new standards for corporate sustainability reporting. A central element of this directive is the principle of double materiality, which obliges companies to systematically analyze and disclose both financial risks through ESG factors and their own impact on the environment and society.
Materiality analyses are not new – they have already been used in reporting standards such as the Global Reporting Initiative (GRI). However, the special feature of the CSRD is the mandatory double materiality, which combines two perspectives:
- Impact materiality (“inside-out”) – What impact does the company have on the environment and society?
Example: A chemical company influences the water quality, biodiversity and health of the surrounding communities through its production processes. These impacts must be assessed and disclosed. - Financial materiality (“outside-in”) – Which ESG factors have a financial impact on the company?
Example: A car manufacturer could be confronted with rising production costs or market restrictions as a result of stricter emissions legislation. These financial risks must be taken into account in the reporting.
This concept therefore goes beyond previous reporting obligations by forcing companies to look at sustainability not only from the perspective of financial risks, but also to take responsibility for their external impact. Companies can no longer only report selectively, but must instead transparently explain why they classify certain ESG aspects as relevant – or not.
Regulatory classification
- Double materiality is not optional, but a mandatory requirement of the CSRD. Companies must prove that they have examined both dimensions.
- European Sustainability Reporting Standards (ESRS): The ESRS provide detailed guidelines on which ESG factors must be included in the analysis and how they are to be reported.
- Differences to other frameworks: While the Task Force on Climate-related Financial Disclosures (TCFD), for example, focuses on financial materiality, the CSRD with the ESRS requires an integrated view of both perspectives.
Why is double materiality relevant for companies?
- No more selective reporting: Companies can no longer limit themselves to financial risks or omit ESG aspects at will.
- Increased transparency and comparability: Mandatory disclosure ensures consistent and robust ESG data for investors, customers and other stakeholders.
- Better corporate management: A well-founded materiality analysis helps to make strategic decisions based on data and minimize long-term risks.
In the following chapters, we look at how companies carry out a materiality analysis and what they need to pay attention to.
Double materiality in the CSRD and the ESRS
The requirements of the CSRD and ESRS increase the pressure on companies – but they also create the opportunity to establish sustainability as an integral part of the corporate strategy. Those who address double materiality at an early stage benefit from clear processes, better decisions and a strong ESG profile.
While the CSRD defines the concept of double materiality as a binding requirement, the European Sustainability Reporting Standards (ESRS) provide the methodological basis for its practical implementation. The ESRS specify which ESG topics must be analyzed and reported on and how companies should carry out their materiality assessment in a structured manner.
The role of ESRS in the materiality analysis
Companies that fall under the CSRD must be guided by ESRS 1 and ESRS 2 when identifying material sustainability issues:
- ESRS 1 contains the general requirements for sustainability reporting, including the principle of double materiality. Companies are obliged to systematically assess both perspectives of materiality – financial and impact materiality – and to disclose this in a comprehensible manner.
- ESRS 2 requires a detailed description of the materiality analysis in the sustainability report, including the methodology used and the basis for decision-making. Companies must document which stakeholders were involved, which data sources were used and why certain ESG issues were classified as material or not material.
The ESRS also differentiate between cross-sector, sector-specific and company-specific ESG factors. While some ESG risks are relevant for all companies (e.g. climate change or labor standards), others are highly sector-specific (e.g. water consumption in the textile industry or supply chain risks in the electronics industry).
Which ESG topics must be examined in the materiality analysis
The ESRS define specific reporting obligations in the areas of environmental, social and governance. Companies must systematically assess how their business activities are linked to these issues:
- Environment (ESRS E1 – E5): climate risks, resource consumption, circular economy, biodiversity, pollutant emissions, etc.
- Social (ESRS S1 – S4): including working conditions, supply chain, human rights, social impact.
- Governance (ESRS G1): including corruption prevention, business ethics and tax transparency.
From theory to practice: Materiality using the example of various industries
The requirements of the ESRS are not just theoretical guidelines, but have a direct impact on the reporting practices of companies. A materiality analysis requires a differentiated consideration of industry-specific ESG factors:
- A car manufacturer is faced with the challenge of evaluating stricter CO₂ emission requirements both from a financial perspective (higher costs, regulatory requirements) and from an environmental perspective (resource consumption, pollutant emissions).
- A food company must keep an eye on its supply chains and their social standards as well as climatic risks such as extreme weather events, which have a direct impact on crop yields and procurement costs.
- A technology company, on the other hand, is faced with the task of analyzing its own energy consumption and electronic waste (inside-out perspective) as well as its dependence on critical raw materials and geopolitical risks (outside-in perspective).
The systematic assessment of these ESG factors often presents companies with considerable challenges. A lack of data, complex value chains and differing expectations from investors, regulators and customers make the process demanding. Nevertheless, double materiality offers the opportunity not only to meet regulatory requirements, but also to identify ESG risks and opportunities at an early stage and integrate them into the corporate strategy in a targeted manner.
How companies carry out a materiality analysis
The materiality analysis follows a clearly structured process. This is divided into the following five steps:
Step 1: Analysis of the business environment
- Identification of internal and external influencing factors (industry, regulation, market trends).
- Identification of company-specific ESG risks and opportunities.
Step 2: Identification of potentially material ESG topics
- Derivation of potential ESG topics based on industry standards.
- Collection of internal sustainability data and consideration of existing corporate strategies.
- Assessment of risks, opportunities and impacts (IROs)
Step 3: Stakeholder participation and expectation management
- Involvement of relevant stakeholders (investors, NGOs, customers, regulatory authorities, employees).
- Survey of stakeholder expectations by means of interviews, surveys and workshops.
Step 4: Evaluation and prioritization of material ESG topics
- Evaluation of the topics based on double materiality:
- Financial materiality (outside-in): Impact of ESG factors on the company.
- Impact materiality (inside-out): Impact of the company on the environment and society.
- Visualization of the results in a materiality matrix for prioritization.
Step 5: Integration into reporting and continuous review
- Documentation of the methodology and results in the sustainability report.
- Regular updating of the materiality analysis to adapt to new regulatory developments or market changes.
Through this methodical approach, companies can ensure that their ESG reporting not only fulfills CSRD requirements, but also provides valuable strategic insights and supports long-term sustainability goals.
Challenges and best practices in materiality analysis
A lack of data, unclear distinctions between financial and impact materiality or diverging stakeholder expectations are just some of the most common stumbling blocks. In this chapter, we look at the key challenges and highlight best practices to ensure an efficient and robust materiality analysis.
Typical challenges in the materiality analysis
- Data availability and quality: Companies face the challenge of collecting reliable ESG data and providing it in a standardized format.
- Differentiation between financial and impact materiality: The distinction between these two dimensions is not always clear.
- Stakeholder expectations and regulatory requirements: Different interests make it difficult to prioritize topics.
Best practices for a successful materiality analysis
- Early involvement of the relevant departments: ESG teams, finance departments and management should be involved from the outset.
- Use of software solutions for ESG data management: Automation can improve data quality and reporting accuracy.
- Orientation towards established standards: The use of GRI, ESRS and SASB can improve the comparability and quality of reporting.
Conclusion: Why a well-founded materiality analysis is more than just a duty
Now that we have looked at the theoretical foundations, the methodological implementation and the key challenges of materiality analysis, the question arises: What strategic advantages does double materiality bring beyond the mere fulfillment of regulatory requirements?
Companies that see the materiality analysis not just as a bureaucratic obligation, but as a management tool, can:
- Identify and manage ESG risks at an early stage before they have a financial or operational impact.
- Strengthen their competitive position by integrating ESG into business decisions.
- Better meet investor and customer expectations as sustainable companies are increasingly preferred.
- Ensure more efficient ESG reporting, as a sound materiality analysis helps to systematically collect relevant data.
The materiality analysis should not be seen as a one-off exercise, but as a continuous process. Sustainability issues and regulatory requirements are constantly evolving – companies that act flexibly and in a structured manner will be more successful in the long term.
