CSRD and Double Materiality Assessment Insights
The EU's Corporate Sustainability Reporting Directive (CSRD) requires a large number of companies in Europe to report on environmental, social and governance (ESG) topics.
The details and requirements for what to include in the sustainability management report are outlined in the European Sustainability Reporting Standards (ESRSs). Businesses falling under the full reporting scope are required to comply with the CSRD standards for the first time by publishing reports in 2025 covering reporting year 2024.
One of the main details that makes CSRD unique compared to other sustainability standards is its adoption of a double materiality assessment approach.
Double Materiality: A comprehensive approach to sustainability Reporting
A double materiality assessment is a requirement of CSRD and it forms the basis for determining which sustainability topics to report on and which information to disclose in a CSRD-aligned sustainability management statement. The double materiality assessment includes impact materiality lens and a financial materiality lens.
"Impact materiality” refers to environmental and social impacts
“Financial materiality” refers to financial risks and opportunities linked to sustainability issues
The word "materiality" refers to topics which are significant for an entity's unique scale, regions of operation, business model and value chain.
The EU's CSRD is the first set of mandatory ESG reporting standards to require a double materiality lens. Traditionally, investors wanted to access insights on ESG issues that had direct financial implications, while other stakeholders interests have centered on ways companies’ activities affected them.
EFRAG, the authority which developed the content of the CSRD, chose not to prioritize one perspective over the other. Instead, it included both as significant for sustainability reporting purposes in its CSRD regulation, recognizing the different but related informational needs of various stakeholder groups who are interested in business sustainability information.
There are various ways to distinguish impact and financial materiality perspectives from one another:
Impact materiality has a multi-stakeholder audience, while financial materiality focuses on the needs of the users of financial reports (mostly investors).
Impact materiality has an outward direction in that it reflects the ways business activities affect people and the environment, while financial materiality focuses inward on ways sustainability issues can affect the financial position, prospects and profitability of a business.
Impact materiality focuses on environmental and social impacts on society, while financial materiality is expressed in terms of risks and opportunities to business (related to direct and indirect policy, reputation, consumer demand and technological financial effects).
In spite of these differences, it is important to keep in mind that impact and financial materiality are not mutually exclusive. Indeed, they have a very interconnected relationship. Emerging impacts can often become financially material over time.
Double Materiality Assessment Process
As a brief overview, in a CSRD-aligned double materiality assessment, companies are called on to report on their impact and financial material topics, considering them across the entire value chain. They may choose a custom approach or methodology that makes sense for their business model, but the general process should include the following considerations:
Understanding the undertaking's sustainability context.
Determining the impacts a business has or could have on people and the environment.
Determining the financial risks and opportunities that are potentially decision-useful for report users.
Determining a list of material topics, considering these impacts, risks and opportunities by establishing qualitative and quantitative thresholds.
Reporting on all topics that fall within the thresholds outlined in the ESRS topic standards
Reporting on the process to identify material impacts, risks and opportunities
More details on each of these steps are provided below.
Identifying the entity's sustainability context
Recommended resources for compiling information on the sustainability context include:
Analysis of business model, strategy, business relationships across the value chain and legal regulations that apply
Analysis of the concerns of affected stakeholders for impacts and primary report users for financial risks and opportunities using stakeholder engagement
Perspectives from due diligence and internal risk management perspectives, if they cover sustainability matters.
Evidence collected in existing materiality assessments or through the adherence to voluntary reporting standards, especially:
IFRS sustainability disclosures, including SASB sector standards for financial material topics
GRI materiality assessment for impact material topics
Consulting with the list of topics in ESRS 1 para AR16. For more granular analysis, the EFRAG IG 13 - List of Datapoints may be used to assess for completeness as well. Good news: a new mapping tool has recently been published by EFRAG to help utilize these resources.
Given the emphasis on using objective criteria for establishing materiality, EFRAG also recommends using scientific research and expert opinions from NGOs or external research organizations to supplement direct stakeholder engagement and where such engagement puts stakeholders at risk.
Determining sustainability impacts and their materiality
Impacts are the effects of business activities across the value chain on people and the environment, including human rights. For determining material impacts, companies should consider:
Positive and negative impacts
Actual and potential impacts
Impacts across the short-, medium- and long-term
Engagement with affected stakeholders can support information gathering about sustainability impacts.
No prescribed approach to stakeholder engagement is given by EFRAG, but an emphasis is placed on applying due diligence and using internationally recognized due diligence instruments:
Guidance from international instruments of due diligence including:
UN Guiding Principles of Human Rights
OECD Guidelines for Multinational Enterprises
OECD Due Diligence Guidance for Responsible Business Conduct
Criteria for materiality of negative impacts: severity, defined as the scale, scope and irremediable character and if potential, likelihood and time horizon. As in GRI reporting, ESRS 1 states that for potential human rights impacts, severity takes precedence over likelihood.
Criteria for materiality of positive impacts: scale, scope and if potential, likelihood
Determining financial risks and opportunities and their materiality
EFRAG's implementation guidance notes that financial risks and opportunities arise from impacts or dependencies on resources. Material financial risks and opportunities are those that, if omitted, misstated or obscured, could reasonably influence the decision of primary report users such as investors and lenders.
For determining material financial risks and opportunities, companies should consider:
Sustainability matters which affect or could affect a companies financial performance, position, cash flows, access to and cost of capital
across the short-, medium- and long-term
Criteria for materiality of financial risks and opportunities: magnitude and likelihood
Important notes: Identifying the financial effects of material risks and opportunities is a requirement of reporting for ESRS. This can include qualitative or quantitative information, as some of the effects will be estimates based on probable or potential future effects, across the medium- and long-term time horizons.
The time horizons required for considering sustainability-linked risks and opportunities is longer than the standard financial reporting or business planning time horizon. Financial effects for sustainability-linked impacts or resources dependencies may not yet appear as effects in financial statements. Therefore, companies should consider the cumulative financial effects and cumulative probability of these effects (for likelihood) over time in their assessment of materiality and their choice of thresholds.
Bridging gaps to effective financial materiality analysis
In my experience, sustainability teams are less equipped to reflect sustainability matters in terms of risks and opportunities, as they are more familiar with reporting on impacts. However, the integration of financial and sustainability information is key to establishing strong links between the sustainability and traditional business strategies.
There are several ways to improve the analysis of the financial effects of sustainability information for different topics;
Climate-related physical and transition risk assessments give strong insights into why it is important to include both a scientific basis and a socio-economic basis for risks and opportunities that can be applied to other topics.
Similarly, climate scenario analysis reveals how starkly contrasting climate-related risks can become across different time periods, according to different possible socio-economic trajectories across short-, medium- and long-term time horizons. This suggests a similar use of scenario analysis could benefit the time horizon analysis for other sustainability topics as well.
Cross-collaboration among sustainability, enterprise risk management and financial reporting teams is crucial for establishing strong analysis of financial effects.
IFRS provides helpful examples in its Fundamentals of Sustainability Accounting training materials, demonstrating how sustainability topics transmit into financial effects. sustainability issues can affect:
Revenue risks and opportunities by way of consumer demand and brand reputation
How to reflect financial effects: market share revenue forecast for discounted cash flow or price based growth using price-earnings or price-earnings-to-growth evaluations.
Costs by way of operational efficiency and regulatory compliance
How to reflect financial effects: cost drivers, operational performance, or return on investment
Assets and liability valuations by way of capital expenditures and reserve value (risk of stranded assets)
How to reflect financial effects: Demonstrate impacts on business valuation methods, ROI, RRR and solvency
Cost of capital by way of operational risks and cost of capital
How to reflect financial effects: Demonstrate impacts on business valuation methods, ROI, RRR and solvency
Resources, research and empirical evidence have developed significantly over the past decade related to sustainability-linked financial risks and opportunities and will continue to do so as financial systems adopt mandatory reporting standards.
Recent publications from the UNEP FI on sector-based climate risks as well as analysis from the IEA on net zero transition pathways are just a few examples of materials that can support strong analysis for this part of your double materiality analysis.
Establishing thresholds for materiality
Within sustainability reporting, there are a lot of potentials to explore. Defining objective criteria to determine materiality is key, but remains a significant challenge. Not much guidance is provided by EFRAG, which states companies should choose their own relevant quantitative and qualitative thresholds for materiality and apply objective criteria.
Still, there are certain ways that thresholds should not be applied:
Reporting thresholds should not exclude material topics because the company does not have policies, actions or targets in place. The absence of these activities is considered material information.
Reporting thresholds should not exclude issues that are only material for either their impacts or their financial risks and/or opportunities, because these issues are included in the ESRS scope of analysis. In other words, a Venn-diagram overlap approach does not apply. All material financial-only, impact-only and both financial and impact material topics are included.
Reporting thresholds should not exclude material topics that are upstream or downstream of the business operations, as the scope of reporting is the full value chain.
Here are some ways thresholds may be applied:
The criteria for materiality (severity and likelihood for impacts and magnitude and scale for financial effects) are the starting points.
Thresholds may be quantitative and/or qualitative in nature (i.e., a specific percentage of a total or "high/medium/low” classifications)
They may include perspectives of affected stakeholders for a given material topic.
They may consider the relative size, operating regions, industry and competitive landscape of the business.
They may consider the cumulative or other potential effects across short-, medium- and long-term time horizons.
Materiality assessment outcome: Material topic list and preparing for disclosure
Topics included in the material topic list may refer to ESRS topic standards or entity-specific standards.
ESRS topics: For all ESRS material topics, companies should apply materiality at the topic, sub-topic and sub-sub-topic scale to map their full list of information points to include in reporting.
Entity-specific (non-ESRS) standards: For all entity-specific standards, companies should include their policies, actions, metrics and targets (as defined by the ESRS cross-cutting standards), with the help of reference to external standards such as GRI or IFRS sustainability disclosures (including SASB) where relevant.
Required disclosures, regardless of materiality: ESRS 2: General Disclosures are required by all reporting entities, regardless of the outcome of the materiality assessment.
Omitting topics that are not material: For topics, sub-topics or sub-sub-topics that are not material, companies may simply omit any topical information that is not material. However, if the omission relates to data points from other EU legislation (see ESRS 2 Appendix B) the company needs to explicitly state the data is not material. Also, if the omission relates to the ESRS E1 Climate Change standard, an explanation for omission is required.
Reporting when policies, targets and actions don't exist: The cross cutting standards define specific requirements for reporting policies, target and actions for all material topics. However, some companies may not (yet) have policies, targets and/or actions related their first CSRD-aligned double materiality assessment.
In this case, companies must still report that they do not have these elements in place. It is then optional to define a timeline according to which the items are being developed.
Reporting on the double materiality assessment process
In addition to reporting on topical information, companies will also need to report on their process to conduct a double materiality assessment, including how they identified their impacts, risks and opportunities (ESRS 2 IRO-1). This includes details such as the steps taken, the nature and application of stakeholder engagement and due diligence, the quantitative and qualitative thresholds applied, and the methodologies and reference materials underpinning the approach.
They will also need to report on how their material IROs interact with their strategy and business model (ESRS 2 SBM-3) and follow the disclosure requirements for their sustainability statement (ESRS 2 IRO-2), such as including a content index for
Summing up
In many ways, a double materiality assessment is similar to reporting under both GRI and SASB, which many large companies have already been doing. Companies less familiar with these standards will have a higher learning curve and should rely on professional assistance for their first reporting period.
No matter a company's size, CSRD reporting is more extensive than any other existing standard, which companies should consider within their planning process for conducting a double materiality assessment. Some of the main points of enhancement from other standards include:
Examining the entire value chain for material sustainability topics.
Assessing materiality at the topic, sub-topic and sub-sub-topic scales.
Ensuring objective criteria are used and documenting this criteria through the affective consultation of experts, internal and external stakeholders’ views.
Documenting and establishing clear processes and methodologies for the double materiality assessment, including the use of quantitative and qualitative thresholds for determining materiality.
Selecting and defining additional appropriate entity-specific disclosures. One way to simplify this would be to include IFRS (still heavily reliant on SASB sector standards) and GRI sector standards.
If you wish to have copywriting support for your CSRD-aligned sustainability statement in English, please get in touch. I have experience working on numerous ESG reports across industries, and I hold a number of professional sustainability certificates qualifying me for narrating ESG issues from both impact and financial materiality perspective (i.e., GRI Sustainability Professional, Global Association of Risk Professionals Sustainability and Climate Risk, and Fundamentals of Sustainability Accounting Level II candidacy).
I hope this overview has been helpful. The below resources provide more details and serve as my main set of sources for compiling information in this article:
ESRS 1: General Requirements
ESRS 2: General Disclosures
EFRAG Implementation Guidance on Materiality Assessment