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The Corporate Sustainability Reporting Directive (CSRD) represents a significant evolution in the way companies report on their sustainability activities. Large companies, as well as CSRD and ESG consultants, are grappling with the implications of these regulatory shifts. Central to this dialogue is the notion of double materiality. Understanding double materiality – what’s essential from an environmental, social, and governance (ESG) perspective for a company – is fundamental for both businesses and consultants. 

Some background: what is double materiality? 

The CSRD mandates companies to conduct a double materiality assessment. The term “double” is key here, implying that companies must evaluate sustainability matters from two separate standpoints. 

Firstly, companies need to gauge how their operations affect the environment and people – this is the inside-out perspective – also referred to as impact materiality –, like environmental harm or human rights breaches. Secondly, they must consider how external sustainability trends or incidents present risks and opportunities for them – the outside-in perspective – also known as financial materiality. This can be seen in areas like potential reputational risks from corruption scandals, the implementation of new carbon taxes, or the chance to create sustainable, circular products. We’ll dive deeper into these concepts below.

In the realm of double materiality, a sustainability issue might be significant either due to its impact, or through its associated risks and opportunities. While the CSRD offers some guidance, the responsibility ultimately lies with the organization to discern if an issue is indeed material - for a definition of “materiality”, see below - and to back up its decisions. 

Evaluating the most pertinent topics for an organization is a foundational step towards aligning with CSRD mandates. The results of this evaluation shape, in terms specific to the CSRD, which reporting standards, disclosures, and data aspects an organization should incorporate in its sustainability reporting and which can be reasonably omitted. 

How does double materiality differ from materiality? 

Materiality acts as the threshold for determining which information is significant enough to be included in corporate reports. In essence, it’s about: 

  • Assessing the relevance of information in relation to the events or trends it describes 
  • Meeting the expectations and needs of stakeholders, facilitating informed decision-making 
  • Upholding the broader demands for transparency in alignment with public interest 

Double materiality goes a step further, primarily in the context of sustainability reporting. It establishes criteria to decide if a sustainability topic or data should feature in a report. Here’s the breakdown: 

  • Impact Materiality: The environmental or social ramifications of a company’s actions or omissions.
  • Financial Materiality: The potential financial consequences, whether they be risks or opportunities, arising from environmental or social issues.

For a topic to meet the double materiality criteria, it should be significant from either the impact viewpoint, the financial perspective, or ideally, both. This ensures a holistic view of sustainability that captures both the tangible and intangible effects on a company and its stakeholders. 

In this regard, CSRD stands out as one of the few regulations mandating companies within its scope to conduct a double materiality assessment. For instance, ESG disclosure proposals from national authorities, such as the SEC in the US focus on a company's impact  through an investor’s viewpoint– as in, financial materiality or outside-in perspective. This perspective emphasizes the potential effects on financial performance. With the CSRD however, companies also need to consider how their business activities affect the environment, employees, and other stakeholders. As such, the CSRD’s approach offers a more comprehensive view, albeit is more burdensome on the companies. 

Due diligence in materiality assessment 

Materiality assessment, as indicated above, is an integral component of a company’s strategic evaluation and  leans heavily on its due diligence process. This process, informed by international standards such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, serves as the foundation for understanding a company’s impacts, risks, and opportunities. 

The due diligence procedure involves several crucial steps to identify and assess negative impacts caused by the company’s actions. It’s not just about direct consequences but also those directly related to its operations, products, or services via its business relationships. This deep dive is especially instrumental when exploring the company’s value chain and pinpointing the origins of its impact. Additionally, the due diligence procedure provides criteria to prioritize actions based on the severity and the likelihood of the impacts previously identified. 

Conducting a robust ESG due diligence provides two primary benefits: (a) it allows a company to recognize and evaluate its potential and current negative impacts and (b) it facilitates the evaluation of the materiality of these impacts for reporting based on the severity and likelihood criteria (by the way, if you need a refresher about the main steps involved in the ESG due diligence process, you can read this article).

Moreover, recognizing material impacts directly helps identify  sustainability risks and opportunities. It’s essential to understand that these risks and opportunities often arise as a result of the identified impacts. 

Last but not least, through this rigorous procedure, companies can pinpoint the stakeholders affected by these impacts. Engaging these stakeholders becomes imperative when evaluating the materiality of the impacts, risks, and opportunities, ensuring a holistic and inclusive approach to materiality assessment. 

Optimizing efficiency in materiality assessments

The materiality assessment mandates set forth by the CSRD pose a significant challenge, particularly for enterprises with expansive value chains. To achieve compliance, these businesses should undertake exhaustive due diligence assessments across their supply chains to accurately assess their material risks and opportunities, a task that is both demanding and time-sensitive. 

Consultancies and advisory firms play a pivotal role in assisting companies with materiality assessments, and can also be involved in the extensive due diligence processes, leading to long project timelines. 

Materiality assessments can be challenging and time-consuming, especially when performed as part of a due diligence process. Fortunately, there are already several solutions on the market that are designed to ease the burden on ESG analysts and streamline materiality assessments and data extraction significantly. 

For example, Briink’s ESG Policy Screener can perform a social and good governance materiality assessment through a simple document drag and drop. The tool currently covers policies around social topics such as, human rights, fair competition, taxation, and anti-bribery. These social issues align with the EU Taxonomy’s Minimum Safeguards requirements. As part of the CSRD, companies are mandated to report on their EU Taxonomy eligibility and alignment – hence, conduct Minimum Safeguards assessment. 

The Screener checks if a company has put in place certain rules and steps to make sure it follows the best global practices for handling social issues, both inside and outside the company, taking into account requirements laid out by organizations such as the OECD, the UN, the International Labour Organisation, and the International Bill of Human Rights.

Even if your company doesn't fall under the scope of the CSRD, and thus is not required to report on their EU Taxonomy  eligibility and alignment, the tool can give you a complete picture of how well your company manages governance and social issues and risks.


If you want to dive deeper into this topic, we recommend the following materials:

EFRAG's implementation guidelines for materiality assessments

UN Guiding Principles on Business and Human Rights

OECD Guidelines for Multinational Enterprises