Understanding double materiality under CSRD
The Corporate Sustainability Reporting Directive (CSRD) is reshaping how businesses disclose their environmental, social, and governance (ESG) impacts. As sustainability reporting shifts from voluntary commitments to regulatory requirements, companies must assess their sustainability efforts from all angles.
At the core of CSRD lies double materiality—a principle that requires companies to evaluate both financial materiality (how sustainability issues affect the company’s financial performance) and impact materiality (how the company’s activities affect society and the environment). While this concept is integral to compliance, many businesses struggle to apply it effectively. This is where compliance consultants can play a critical role, guiding companies through the process of double materiality assessment and ensuring alignment with regulatory standards.
What is double materiality?
Double materiality is a key principle within CSRD that expands the traditional definition of materiality. Unlike other sustainability disclosure frameworks that focus on just one aspect of materiality, CSRD is groundbreaking because it requires companies to consider both financial and impact materiality.
This makes it more comprehensive than frameworks like the Taskforce on Climate-Related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB), which prioritize financial materiality, or the Global Reporting Initiative (GRI), which emphasizes impact materiality.
By integrating both perspectives, CSRD is designed to serve a wider range of stakeholders—including investors, regulators, employees, communities, and consumers—ensuring that corporate sustainability efforts are both financially relevant and socially responsible.
- Financial materiality: How sustainability factors—such as climate risks, resource scarcity, and regulatory changes—affect a company’s financial health, strategy, and long-term viability.
- Impact materiality: How a company’s operations, supply chain, and products influence society, the environment, and stakeholders, including customers, employees, and communities.
Are financial and impact materiality mutually exclusive?
No — financial and impact materiality aren’t mutually exclusive. Although they represent different ways of looking at climate risk, often what represents a risk from an impact standpoint will also register as a risk from a financial perspective.
For example, if a company’s carbon footprint is high, this would feature as material from an impact perspective, as greenhouse gases are a key contributor to climate change. At the same time, with carbon pricing mechanisms and reporting requirements rolling out in various jurisdictions around the world, a high carbon footprint also now represents a financial liability for companies.
Impact and financial materiality don’t always crossover, but they frequently do. For companies preparing for CSRD compliance, assessing both dimensions is essential for meaningful ESG reporting.
Impact materiality vs. financial materiality
Impact materiality
Impact materiality considers a company’s direct and indirect effects on people and the planet. This includes factors such as carbon emissions, labor practices, biodiversity loss, and human rights. Companies must evaluate their footprint across their value chain, considering both positive and negative contributions to sustainability goals.
Financial materiality
Financial materiality, on the other hand, focuses on how ESG-related risks and opportunities influence corporate performance. For instance, exposure to climate risks could lead to supply chain disruptions or regulatory penalties, while strong ESG practices may open up new business opportunities or enhance investor confidence.
CSRD requires companies to assess both perspectives to provide a holistic view of their sustainability position.
The role of double materiality in CSRD
Expanding the scope of ESG reporting
By incorporating both financial and impact materiality, CSRD broadens ESG reporting beyond traditional financial disclosures. This dual approach ensures that sustainability reporting is relevant not just to investors but to a much wider range of stakeholders.
Unlike other reporting frameworks that focus primarily on investor needs, CSRD’s approach acknowledges that companies do not operate in isolation from society and the environment. For example:
- Investors are looking for detailed and relevant information on a company’s sustainability risk profile, and how its exposure to and management of these risks may affect its future costs, valuation, and revenue generation.
- Regulators and policymakers require impact-related disclosures to assess how businesses contribute to or hinder sustainability goals, such as climate action and social equity.
- Employees and labor unions may be interested in how a company’s social practices, such as fair wages and diversity policies, affect workplace conditions.
- Customers and consumers benefit from transparency on issues such as ethical sourcing and carbon footprints, enabling them to make informed purchasing decisions.
- Local communities and advocacy groups use sustainability disclosures to assess corporate environmental impact, such as pollution or water use, that may affect their quality of life.
By addressing the needs of these diverse stakeholder groups, CSRD moves beyond a narrow investor-centric model and ensures that sustainability reporting aligns with broader economic, environmental, and social objectives. This shift encourages businesses to engage with external stakeholders more effectively, enhancing their social license to operate and fostering trust in their sustainability commitments.
Mandatory compliance for a wider range of companies
CSRD’s double materiality assessment applies to a broad spectrum of businesses, including:
- Large EU companies meeting two of the following three criteria: net turnover of €40 million+, total assets of €20 million+, or 250+ employees.
- Listed small and medium enterprises (SMEs), though they have an extended compliance timeline.
- Non-EU companies generating more than €150 million in EU revenue, with at least one subsidiary or branch in the EU, starting in 2027.
Aligning with the European Sustainability Reporting Standards (ESRS)
The European Sustainability Reporting Standards (ESRS) provide a structured approach to conducting double materiality assessments. These standards guide businesses in identifying, measuring, and disclosing ESG risks and impacts consistently across industries.
Improving corporate risk management and decision-making
A thorough double materiality assessment helps companies proactively address ESG-related risks, improving resilience and regulatory adaptability. By identifying material ESG factors, businesses can integrate sustainability into their core strategy and enhance long-term decision-making.
Strengthening transparency and stakeholder trust
Double materiality drives transparency in corporate disclosures, reducing greenwashing risks and aligning businesses with EU sustainability objectives. By clearly reporting ESG impacts and financial risks, companies build credibility among investors, regulators, and the public.
Common challenges in double materiality assessments
Lack of clear methodology
Since CSRD does not prescribe a one-size-fits-all methodology or universally accepted framework for double materiality assessments, companies often struggle with consistency in their assessments. Ultimately, a lack of universal methodology is a good thing for companies, because it gives them the flexibility to truly explore and dig into what is material for their business and their stakeholders — but in the early days, it can feel like you’re navigating uncharted territory.
Consultants can become their clients’ best friends here, offering them structure and guidance as they navigate the process for the first time. Focus on simplifying the process for your clients, but also setting them up for future success by creating structured, repeatable methodologies that allow them to conduct regular double materiality assessments as the company evolves.
To this end, analyzing competitor materiality assessments and reading up on industry best practices, as well as checking out guidance for materiality assessments put out by other sustainability frameworks, standards, and organizations, can offer a great starting point. As a bonus, any template or structured process you develop can often be used with new clients as they come onboard, with a few tweaks to make sure it’s relevant for each client.
Data collection challenges
Assessing double materiality requires vast amounts of ESG data, which can be difficult to gather and verify. Companies must navigate fragmented data sources, different reporting frameworks, and a lack of standardized metrics across multidisciplinary topics and departments. Consultants should focus on getting their clients set up with appropriate ESG reporting tools and AI-driven platforms to cut down time spent on data collection and also reduce the potential for introducing data errors into the mix.
Better data doesn’t just help ensure your clients achieve full compliance; it also gives consultants more opportunity to mine the data for insights and opportunities that help can form the basis of a meaningful sustainability strategy (and a long-term working relationship) for your clients.
Stakeholder engagement complexity
Stakeholder perspectives play a crucial role in double materiality assessments, but engaging multiple different types of stakeholders—such as investors, employees, customers, NGOs, community organizations, and regulators—can be complex. Consultants can do a lot to help their clients here, whether it’s guiding them through effective stakeholder mapping at the very beginning or developing and even conducting structured and structured engagement processes on behalf of their clients to make sure relevant insights make their way into the final materiality assessment.
How to conduct a double materiality assessment: Steps for consultants
Consultants are in an ideal position to help clients conduct double materiality assessments. They often have expertise that companies lack internally, and can be sources of guidance and external structure that can keep the process moving ahead at the right pace.
We recommend consultants broadly follow these five steps as they guide clients through double materiality assessments.
Step 1: Define the scope of the assessment
Consultants should guide companies in setting clear boundaries for their assessment, including:
- Identifying relevant business units and operations
- Determining the company boundaries (particularly important with complex, multi-national clients) and geographic scope
- Selecting ESG topics aligned with industry benchmarks and regulatory requirements
Step 2: Identify potential material topics
Consultants should help businesses identify material ESG factors by:
- Analyzing industry trends, competitor disclosures, and regulatory expectations
- Conducting preliminary stakeholder engagement to understand key concerns
- Reviewing sustainability standards such as ESRS and the Global Reporting Initiative (GRI)
Step 3: Conduct a double materiality analysis
Once potential material topics are identified, companies must assess both financial and impact materiality:
- Financial materiality: Evaluating how ESG factors influence revenue, costs, supply chains, and market positioning
- Impact materiality: Assessing environmental and social consequences through lifecycle analyses, impact assessments, and stakeholder feedback
Step 4: Prioritize and validate material topics
After the analysis, consultants should support companies in prioritizing material ESG issues by:
- Ranking material topics based on significance and stakeholder relevance
- Validating findings through internal reviews, stakeholder discussions, and external audits
Step 5: Integrate findings into CSRD reporting
To help their clients achieve CSRD compliance, consultants should help clients:
- Incorporate double materiality insights into internal and external sustainability reporting
- Align disclosures with ESRS standards and other regulatory frameworks (many international clients will be subject to more than just CSRD reporting requirements)
- Use data-driven insights around topic significance to refine or create sustainability strategies, using disclosure and reporting as a foundational step toward climate action
Help your clients navigate CSRD compliance with Manifest Climate
For ESG consultants, staying ahead of regulatory changes is critical to delivering value to clients. Manifest Climate provides AI-powered ESG compliance tools that help consultants:
- Identify disclosure gaps efficiently
- Streamline reporting with AI-driven analysis
- Ensure compliance with CSRD, ESRS, and other global standards.
While Manifest Climate does not conduct double materiality assessments, it equips consultants and businesses with the insights needed to align ESG reporting with regulatory expectations. Book a demo today to see how Manifest Climate can enhance your ESG compliance strategy.
