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May 29, 2024 • Reading time: 6 Min

Double materiality: all you need to know

What is double materiality in corporate reporting all about? In our article, we not only explain the concept of dual materiality, but also look at how it helps companies to optimize their reporting and paint a more complete picture of their environmental and social impact. Dual materiality is a key concept in sustainability reporting. It helps companies to integrate not only economic, but also social and environmental aspects into their reports. By considering this dual dimension, companies can convey a comprehensive picture of their social and environmental footprint. This holistic approach enables companies to report transparently on their activities while demonstrating their commitment to sustainability. Learn how considering both external and internal materiality helps companies paint a complete picture of their environmental and social impact, why dual materiality enhances transparency and trust, and how it contributes to long-term sustainability and business success.

Summary: What you should know

Double materiality, an increasingly important concept in sustainability reporting, integrates both financial and non-financial factors. Companies consider not only their financial interests but also the impacts of their business activities on the environment and society (Impact Materiality) and the resulting effects on the company (Financial Materiality). Originating from Corporate Social Responsibility (CSR), double materiality expands this principle to enable more comprehensive and detailed reporting.

Two perspectives are essential: external materiality (Financial Materiality) and internal materiality (Impact Materiality). The outside-in approach (Financial Materiality) analyzes external factors and their impacts on the company, while the inside-out approach (Impact Materiality) examines the company's influences on the environment and society.

With the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), double materiality analysis becomes mandatory for many companies. This includes large companies already subject to the Non-Financial Reporting Directive (NFRD), as well as all other large companies and publicly traded SMEs, phased in based on company size and market orientation from 2024 to 2026.

The process involves several steps: defining the scope, creating a long list, identifying impacts, risks, and opportunities, materiality assessment, and compiling material topics. Companies must engage stakeholders and conduct a systematic analysis to optimize their sustainability reporting and meet regulatory requirements.

Although double materiality analysis is complex and resource-intensive, it offers companies the opportunity to improve their sustainability strategy and remain competitive and resilient in the long term.

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Double materiality: definition and background

Dual materiality is a concept that has become increasingly important in recent years, particularly in the area of sustainability reporting. It involves taking a holistic perspective by considering both financial and non-financial factors. This means that companies not only consider their own financial interests, but also analyze and report on the effects of their business activities on the environment and society (impact materiality) as well as the resulting repercussions on the company itself (financial materiality).

The term "double materiality" originally comes from the field of corporate social responsibility(more on CSR) and has evolved over time to meet the increasing demands for transparency and accountability in corporate management. CSR focuses on ensuring that companies recognize their responsibility towards society and the environment and act accordingly. In the context of dual materiality, this principle is extended to ensure that companies report more comprehensively and in greater detail on their sustainability performance.

A central element of dual materiality is the consideration of two perspectives: external materiality/financial materiality and internal materiality/impact materiality.

Dual materiality is therefore a key tool for companies to ensure their long-term sustainability. It helps to understand the interactions between financial and non-financial factors and to incorporate them into strategic planning. Through a thorough dual materiality analysis, companies can not only meet regulatory requirements, but also strengthen the trust of their stakeholders and improve their position in an increasingly competitive and sustainability-conscious market.

The dual materiality analysis is an integral part of this approach, as it systematically identifies which topics are of greatest importance to the company and its stakeholders. The consistent application of dual materiality enables companies to optimize their reporting and consider both internal materiality and external materiality in their overall strategic orientation.

Overview: Impact materiality and financial materiality

With the introduction of the CSRD Directive, the outside-in and inside-out perspectives are gaining in importance. The CSRD sets out the framework conditions, while the European Sustainability Reporting Standards(ESRS) define the content, including the aspects of financial and impact materiality.

Outside-in approach

The outside-in approach, also known as financial materiality or external materiality, focuses on external factors and their impact on the company and its business results. This includes the expectations of other market participants, investors, stakeholders and shareholders as well as relevant framework conditions such as political regulations, availability of raw materials, environmental risks and social developments such as demographic changes, diversity, migration and equality. The outside-in perspective also takes into account the financial impact of these external factors in order to identify risks and opportunities for the company.

Inside-out approach

The inside-out approach, also known as impact materiality, looks at the company's impact on environmental and sustainability aspects and therefore focuses on the company's external influence. Topics such as the company's contribution to environmental pollution, biodiversity and measures to combat corruption are considered. In addition, the financial implications of these internal impacts are analyzed in order to understand and manage the long-term risks and opportunities for the company.

By combining both approaches, companies can carry out a comprehensive materiality assessment that takes into account both the financial and impact materiality aspects. This enables sound and holistic reporting in accordance with the requirements of the CSRD and the ESRS.

Performance of the materiality analysis

When the Corporate Sustainability Reporting Directive(CSRD) and the associated ESRS come into force, the double materiality analysis will become mandatory for affected companies. The timing of the introduction of the reporting obligations is staggered and depends on the size of the company and its capital market orientation:

  • For financial years beginning on or after January 1, 2024, this affects large companies that are already subject to the Non-Financial Reporting Directive (NFRD) or the CSR Directive Implementation Act (CSR-RUG).
  • For financial years beginning on or after January 1, 2025, this applies to all other large companies that are not subject to the NFRD or the CSR-RUG.
  • For financial years beginning on or after January 1, 2026, this applies to capital market-oriented SMEs, whereby a voluntary deferral until the 2028 financial year is possible.

An estimated 15,000 companies in Germany are gradually being included in the scope of the CSRD. In order to meet the extensive requirements resulting from the many qualitative and quantitative data points of the ESRS, companies must establish efficient and robust reporting processes in good time. To this end, it is important to first identify the company's material topics. Only then can gaps in the existing reporting processes be specifically identified, responsibilities defined, IT systems configured and synergies exploited. It is therefore advisable to start identifying the key issues at an early stage in order to have enough time to define, implement, fine-tune and document the processes.

Materiality analysis made easy

Simple implementation of CSRD and collection of relevant data in one tool


ESRS and the double materiality

ESRS 1 general requirements provide detailed guidance on how to perform a dual materiality assessment, including a step-by-step guide

In order to carry out a comprehensive materiality assessment, it is important to include all relevant interest groups. Affected stakeholders should be consulted as part of this assessment. According to ESRS, nature can be considered a 'silent shareholder'. The areas of impact must be identified. Actual and potential impacts should be identified by considering the list of sustainability topics provided by ESRS and by consulting affected stakeholders and experts. The severity of the impact is assessed by considering the scale, scope and persistence of the issue. A threshold value is defined for reporting on the impacts. Impacts that exceed the defined severity level must be reported in accordance with the specific guidelines for the topic in question. The financial materiality of all the above-mentioned impact areas is assessed and divided into risks and opportunities. Finally, a threshold is set for reporting on financial materiality. This depends on the likelihood and severity of the financial impact. Those that exceed the defined severity level must be reported in accordance with the specific guidelines for the topic in question.

EFRAG has determined that certain topics as described in ESRS 2 General Disclosures, ESRS E1 Climate Change and specific disclosures within ESRS S1 Own Workforce are mandatory for all entities. Apart from this, companies are expected to report on all topics that they consider material in accordance with their dual materiality assessment. A brief explanation must be provided for all topics that are not considered material.

How companies can implement dual materiality

In order to effectively implement the principle of dual materiality, companies should pursue a systematic approach. This ensures that both external materiality and internal materiality are fully considered. The process can be divided into several steps based on a thorough dual materiality analysis.

Step 1: Defining the scope

Before starting the actual materiality analysis, a systematic examination of the company context is required. This includes recording the activities, products and services as well as the company's locations and the entire value chain. Relevant legal and regulatory frameworks, such as sector-specific regulations, media reports and benchmarking, should also be taken into account. The scope and type of involvement of technical experts and stakeholders is also determined in this step. Representatives of the stakeholder groups are identified and assigned to the relevant subject areas.

Step 2: Creating the longlist

The ESRS provide a table as a basis for creating a longlist of potentially material topics. This table breaks down the ten topics covered by the ESRS into sub-topics and sub-sub-topics. Due to the postponement of the publication of sector-specific standards by two years, companies must expand this longlist with individually identified sector- and company-specific topics. The results from the company analysis in the first step can be helpful here.

Step 3: Identification of impacts, risks and opportunities

On the basis of the longlist, the previously defined and trained experts identify company-specific short, medium and long-term impacts, risks and opportunities for the individual topic areas. Sources for this can be previous materiality analyses, internal risk management or feedback from stakeholder dialogs. It is important to note that impacts, risks and opportunities (IROs) can occur not only in the company's own operations, but along the entire value chain. The ESRS distinguishes between negative and positive as well as actual and potential impacts, and between risks and opportunities. This classification should be made directly by the experts during identification in order to avoid misunderstandings later on. Topics without assigned IROs are removed from the list. The resulting shortlist is ideally validated by an extended stakeholder group.

Step 4: Materiality assessment

The assessment of materiality is based on the criteria defined by the ESRS for the specific IROs. For example, actual negative impacts are assessed in terms of scale, scope and persistence, while potential negative impacts are assessed in terms of likelihood of occurrence. In order to ensure objectivity and create a common understanding among the assessors, the assessment criteria should be precisely defined in advance. Based on these benchmarks, threshold values are set for the individual criteria, which are used to identify significant IROs. It is advisable to have elements that are close to the materiality threshold reviewed and validated by technical experts.

Step 5: Compilation of key topics

In the final step, the IROs identified as material are assigned to the associated (sub-/sub-sub-)topics and their assessments are aggregated. The presentation of the material topics and IROs as well as the granularity level to be selected is left to the company, as this is not prescribed by the ESRS. Due to the complexity of the assessment system, there is much to be said against the traditional presentation in the form of a matrix, which often leads to a loss of information, and more in favor of a tabular listing and classification. The prepared material topics should then be validated together with the management.

By consistently applying these steps, companies can effectively implement double materiality. This not only helps them to achieve their sustainability goals, but also to remain competitive and resilient in the long term. Dual materiality provides valuable guidance for systematically and transparently integrating both external materiality and internal materiality into corporate management.

Dual materiality as the key to effective sustainability reporting

A conclusion

The considerable effort involved in carrying out an ESRS/CSRD-compliant materiality analysis should not be underestimated. This task poses major challenges for many companies. Companies are often unaware of the complexity and urgency of this analysis and the resources required and therefore start the necessary preparations too late. Although the reporting obligation for large companies that have not yet been required to prepare a non-financial report will not apply until the 2025 financial year, it is advisable to start looking closely at ESG issues, the upcoming reporting obligations and the materiality analysis in accordance with ESRS now.

It is crucial to create a common understanding of the importance of the materiality analysis among all stakeholders and company management, as it influences the entire reporting process. It is advisable to define who is responsible at an early stage and to clarify key issues such as the use of internal and external sources, the planned time required and the available human and financial resources.

By addressing these steps in good time, there is sufficient time to react appropriately to unforeseen challenges such as a lack of willingness to cooperate on the part of stakeholders, unclear scale definitions or varying degrees of detail in the identified risks and opportunities and to continuously manage the process. The results of the materiality analysis can be used to carry out a detailed gap analysis and develop strategies, measures and objectives for the respective topics based on this - as provided for by the ESRS.

Despite the high level of effort and the additional resources required, the materiality analysis should be seen as an opportunity. It enables companies to improve their sustainability strategy and ensure long-term success. Dual materiality, which takes into account both financial and impact materiality, is the key to effective and comprehensive sustainability reporting.

These factors have a significant influence on companies when planning and implementing their overall sustainability strategy and help ensure that companies not only meet legal requirements, but can also respond proactively to social and environmental challenges.

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