Double Materiality Assessment: A Plain Guide

What is a Double Materiality Assessment?

A double materiality assessment is the process by which an organisation determines which sustainability topics are significant enough to require disclosure, evaluated from two distinct angles simultaneously:

Impact materiality — How does the organisation's activity affect people and the planet (outward)?
Financial materiality — How do sustainability issues affect the organisation's financial performance and position (inward)?

A topic is "material" under double materiality if it is significant on either dimension. It doesn't have to be financially material to require disclosure — it may be materially important simply because the company's operations create significant environmental or social impacts.

This dual lens is the defining feature of European sustainability reporting and distinguishes it from traditional financial materiality under frameworks like US GAAP or even the older TCFD recommendations.

Why Double Materiality Exists

The concept originated in EU sustainability policy and is now codified in the Corporate Sustainability Reporting Directive (CSRD) and implemented through the European Sustainability Reporting Standards (ESRS). It reflects a philosophical position: companies have reporting obligations not just to investors (financial materiality) but to the broader stakeholders affected by their operations.

Under single materiality — the traditional financial reporting approach — a company only discloses sustainability issues that could affect its financial value. Under double materiality, a company must also disclose the impacts it creates on people and the environment, even if those impacts don't currently affect its balance sheet.

For large European companies subject to CSRD compliance, the double materiality assessment is a legal requirement — not an optional exercise. It must be conducted before determining which ESRS disclosures apply.

The Two Dimensions in Detail

Impact Materiality (Inside-Out)

Impact materiality asks: What are the company's actual and potential impacts on sustainability matters?

Impacts can be:

Actual — impacts already occurring (current carbon emissions, ongoing labour practices)
Potential — impacts that may occur in future (risk of chemical spills, exposure of supply chain workers to unsafe conditions)
Positive — beneficial effects (renewable energy generation, job creation in underserved communities)
Negative — harmful effects (deforestation, water pollution, wage theft in supply chains)

The significance of an impact is assessed based on:

Severity — How serious is the harm or benefit? Is it reversible?
Scale — How many people or how much of the environment is affected?
Scope — Is the impact widespread or localised?
Likelihood — For potential impacts, how probable are they?

Financial Materiality (Outside-In)

Financial materiality asks: What sustainability risks and opportunities affect (or could affect) the company's financial performance, position, cash flows, or access to capital?

This dimension aligns more closely with traditional investor-focused materiality. Risks include:

Physical risks — Flooding, drought, or extreme weather disrupting operations or supply chains
Transition risks — Regulatory costs, stranded assets, or consumer preference shifts from climate transition
Liability risks — Legal exposure from sustainability failures
Reputational risks — Brand damage affecting revenue or talent acquisition

Opportunities include: cost savings from energy efficiency, new markets from sustainable products, preferential financing from green bond programmes.

The significance of financial impacts is assessed by magnitude (quantitative) and likelihood — the standard dimensions of financial risk assessment.

How to Conduct a Double Materiality Assessment

ESRS 1 (General Requirements) provides the methodological framework. In practice, a double materiality assessment typically follows these steps:

Step 1: Map the Value Chain

Document your business activities, upstream supply chain, and downstream product/service use and disposal. Impacts and risks must be assessed across the full value chain, not just owned operations.

Step 2: Identify a Long List of Sustainability Matters

ESRS provides a reference list covering:

Environmental: Climate change (ESRS E1), Pollution (E2), Water (E3), Biodiversity (E4), Resource use (E5)
Social: Own workforce (S1), Workers in value chain (S2), Affected communities (S3), Consumers (S4)
Governance: Business conduct (G1)

Start by considering all of these before narrowing based on your business model.

Step 3: Assess Impact Materiality

For each sustainability matter, evaluate the severity, scale, scope, and likelihood of impacts. This typically involves:

Internal expert workshops across functions (procurement, operations, HR, legal)
Stakeholder engagement — collecting input from affected groups (employees, communities, NGOs)
Benchmarking against sector peers

Step 4: Assess Financial Materiality

For each sustainability matter, evaluate whether there are risks or opportunities that meet a financial significance threshold. This typically involves:

Risk management and finance teams applying quantitative thresholds
Scenario analysis for physical and transition risks
Input from investor relations on investor-relevant concerns

Step 5: Apply Double Materiality

A topic is in scope for full ESRS disclosure if it is material on either dimension. Topics that are significant on both dimensions receive the most detailed disclosure.

Step 6: Document and Get Sign-Off

The assessment must be documented with the rationale for each conclusion. Under CSRD, the assessment and its outputs are subject to third-party assurance (limited initially, moving to reasonable assurance over time).

Common Mistakes

Treating it as a compliance checkbox. The double materiality assessment shapes which disclosures you need to make. A poorly conducted assessment creates downstream risk when auditors or regulators scrutinise the outputs.

Limiting it to owned operations. The value chain scope is explicit in ESRS. Ignoring upstream supply chain impacts (especially for manufacturers or retailers with complex global sourcing) is a common gap.

Skipping stakeholder engagement. Regulators and assurance providers expect evidence that affected stakeholders were consulted. An internally-generated assessment without external input will face scrutiny.

Over-materiality. Rating everything as material doesn't protect you — it overwhelms your reporting and dilutes focus. The ESRS expect a proportionate, reasoned assessment.

Tools and Automation

For large organisations, conducting a double materiality assessment manually across hundreds of value chain nodes is resource-intensive. Increasingly, companies are using:

Dedicated materiality assessment platforms (Workiva, Watershed, Persefoni)
ESG data collection software to gather supply chain data at scale
AI-assisted analysis to process stakeholder input and identify patterns

Our ESG checklist covers the data requirements for a CSRD-ready double materiality assessment, including what to collect from suppliers.

For a practical step-by-step on the full CSRD process, see our CSRD compliance checklist for 2026.

Double Materiality vs Single Materiality

| Dimension | Single Materiality | Double Materiality | |---|---|---| | Focus | Financial impact on company | Both: impact on world AND financial impact | | Primary audience | Investors | Investors + broad stakeholders | | Common frameworks | TCFD, SASB, traditional financial reporting | CSRD/ESRS, GRI | | Regulatory requirement | US SEC (proposed), IFRS S1/S2 | EU CSRD (mandatory for in-scope companies) |

Who Needs a Double Materiality Assessment?

Currently, companies subject to CSRD are required to conduct one. This includes:

Large EU companies (>500 employees, currently reporting under NFRD — from FY2024)
Large EU companies (>250 employees OR >€40M turnover OR >€20M total assets — from FY2025)
Listed SMEs on EU regulated markets (from FY2026, with opt-out option)
Non-EU companies with significant EU revenue (>€150M, from FY2028)

Even for companies outside the current mandatory scope, conducting a double materiality assessment is increasingly expected by:

Enterprise customers requiring supply chain sustainability due diligence
Investors applying ESG screens
Lenders offering sustainability-linked financing

Need help structuring or automating your double materiality assessment? Talk to the 100x Engineering team — we've built ESG data collection and reporting systems that make CSRD compliance significantly less painful.

Need to run a double materiality assessment? Book a scope call with the 100x Engineering team to explore how we automate the process.