What is CSRD Double Materiality and why does it matter?

Double Materiality is a principle and a method that companies need to follow to be able to create their sustainability report under the CSRD (Corporate Sustainability Reporting Directive) and ESRS (European Sustainable Reporting Standards).

With the CSRD and the ESRS applying to the first set of companies from 1.1.2024 and the next batch of companies needing to report under ESRS from FY2025, the topic of double materiality is on everyone’s mind.

The CSRD and ESRS sustainability reporting is based on the principle of double materiality, contrary to other common sustainability reporting initiatives that most companies have been using as templates up until now. But what is double materiality and how does it differ from ‘traditional’ materiality assessments? Keep reading to find out.

📌 Under the CSRD companies are required to base their material topics on the double materiality principle. Conducting a double materiality assessment means that companies assess both the impact of a company on society and the environment (impact materiality) and the impact society and environment have on the company (financial materiality).

CSRD Double Materiality Principle

The double materiality principle in sustainability reporting means that companies need to assess sustainability topics on both how the company impacts each topic (inside-out) and how the sustainability issues themselves impact the company (outside-in).

♻️ The impact materiality, which refers to a company’s impact on sustainability issues such as environment, worker conditions and human rights, is often referred to as an inside-out view of materiality. These are the same impacts that are considered in for example the Global Reporting Initiative (GRI) standards.

💰 The financial materiality, is referred to as an outside-in view where companies assess how their business operations depend on the different sustainability issues, for example, availability of resources etc. Financial materiality also assesses the risks and opportunities that arise with different sustainability topics, for example, if there is a risk to the business model caused by climate change or from operating in a high-risk area for child labour. The financial materiality perspective is the basis for reporting according to TCFD and the IFRS Sustainability Disclosure Standards.

CSRD Double Materiality Assessment

For conducting the double materiality assessment, companies need to consider whether to follow a groupwise approach or if certain geographical, site or entity-specific differences need to be considered in the analysis.

From here, companies can assess double materiality using either a top-down or bottom-up approach:

• A top-down approach identifies the list of material sustainability matters at a topic / sub-topic / sub-sub-topic level.
• A bottom-up approach identifies potential material matters based on impacts, risks and opportunities that are identified for example through existing internal risk management processes.

💡 Regardless of the method used, the key is to identify which topics are material and where in the value chain the topics are relevant, for example, is the topic relevant through own activities, some key suppliers or for certain customers. Given that a topic is material, the reason for it can usually be identified in the crossroad between sub-topic / sub-sub-topic and value chain. Being able to assess this information requires good communication with the relevant parties, which means that the double materiality assessment is further founded in a solid stakeholder engagement that cover for example customers, suppliers, investors, employees and authorities, to mention some.

Considering both sides of materiality might impact which topics are material to your company, especially if you have assessed materiality from only one viewpoint earlier. Defining your double materiality assessment and the material topics sets the foundation for your sustainability reporting, and your reporting process and is the first step to ensure that you report sustainability information according to the new European Sustainability Reporting Standards or any other reporting framework.

Embrace the challenges of CSRD Double Materiality with confidence!

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