What Is a Double Materiality Assessment?

Two perspectives instead of one

Traditionally, companies have carried out materiality assessments from a single perspective: what do our stakeholders care about? The double model is a central requirement of the Corporate Sustainability Reporting Directive (CSRD) and the ESRS reporting standards. Under it, companies have to consider two dimensions at the same time: impacts, risks and opportunities, seen both from the inside out and from the outside in.¹

Impact materiality, inside out. How does the company's business affect the world around it? This covers effects on the environment, the climate and people, both directly and through the supply chain.¹ Examples include carbon emissions, water use and working conditions at suppliers.

Financial materiality, outside in. What future effects could sustainability issues have on the company's business? This covers risks and opportunities with financial consequences.³ For example, rising commodity prices linked to climate change could squeeze margins, or demand for sustainable products could open up new markets.

A sustainability matter is considered material if it meets the criteria for either dimension, or both.¹ It's an "or", not an "and".

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Why is it called double?

The name refers to the fact that the assessment looks in two directions at once. A company doesn't only affect the world around it. It's also affected by that world. Assessing only one of the dimensions gives an incomplete picture.

Together, the two perspectives give a more honest and strategically useful picture of where sustainability issues have the greatest impact.

What is a double materiality assessment used for?

The outcome of the materiality assessment directly determines what the company has to report. The sustainability matters assessed as material, whichever perspective they fall under, are the ones the sustainability report must cover under ESRS.¹ So a double materiality assessment isn't just an administrative step. It sets the scope and content of the entire report.⁴

The assessment also gives the company a strategic tool. It reveals blind spots and helps management make sure resources go to the areas that matter most for the business, both now and in the future.

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How the process works

A double materiality assessment usually follows these steps:²⁴

1. Map the value chain. Understand where the company's operations can affect, and be affected by, the world around them, from raw materials to end customer.
2. Identify stakeholders. Who is affected by the business, and who uses the sustainability information?
3. Draw up a long list of sustainability matters. The starting point is the topics covered by ESRS: climate, biodiversity, water, social issues, governance and more.
4. Assess impact materiality. For negative impacts, severity is assessed on three factors: scale (how serious the impact is), scope (how widespread it is) and irremediable character (how hard it is to reverse).¹ For potential negative impacts, likelihood is also taken into account. For positive impacts, only scale and scope are assessed, plus likelihood for potential positive impacts.¹
5. Assess financial materiality. What actual and potential financial effects could the relevant risks and opportunities have on the company's financial position, financial performance, cash flows, access to finance and cost of capital, over the short, medium and long term?³
6. Determine what is material. Set thresholds and rank the matters based on the results from both dimensions.⁴ The outcome is documented and can be presented in different ways, for example in a materiality matrix.

What applies to SMEs?

CSRD and the requirement for a double materiality assessment mainly apply to larger companies. Smaller companies aren't directly covered, but they're still affected, because large companies have to make sure their suppliers and partners also provide sustainability data.

There is also the voluntary EU standard VS (formerly VSME), designed specifically for small and medium-sized companies that want to stay ahead or meet customer demands for transparency.

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