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CSRD: Understanding the principle of Double Materiality Assessment

Updated: Nov 29, 2023

The CSRD directive introduces new European standards for ESG (Environmental, Social, and Governance) reporting. These upcoming sustainability-focused standards, the ESRS (European Sustainability Reporting Standards), will require many European Union companies to adopt "double materiality assessment" practices. This is a central concept in the CSRD, leading to new prerequisites for CSR (Corporate Social Responsibility) strategies.

What is the CSRD Directive?

The CSRD (Corporate Sustainability Reporting Directive), which the European Commission, the European Parliament, and the European Council agreed upon in 2022, introduces new requirements for non-financial reporting. The directive aims to combat greenwashing by promoting increased transparency regarding corporate CSR efforts and commitments to sustainability.

Building on the foundation of the NFRD (Non-Financial Reporting Directive), which has required companies to include non-financial reports in their annual management reports since 2014, the CSRD complements and addresses the shortcomings of the NFRD. This enhancement is designed to make environmental performance and social responsibility declarations more reliable, measurable, and more easily comparable.

The CSRD has expanded the obligation of non-financial reporting to a broader range of companies. Here is a summary of the businesses affected by this requirement:

Net turnover total exceeding

Balance sheet total exceeding

Average number of employees exceeding

Large companies (listed or not)

€50 million

€25 million


​Listed SMEs (excluding micro-enterprises)




The CSRD will also apply to non-European companies if they have a subsidiary or branch operating within the European Union and exceeding €150 million in annual net turnover.

A progressive timeline for implementation has been established, with the initial reporting due in 2025 for large companies already subject to the NFRD, followed by a phased extension of the obligation until it applies to non-European companies in 2029.


What are the ESRS (European Sustainability Reporting Standards)?

ESRS, or European Sustainability Reporting Standards, make up a set of 12 standards outlined by the CSRD directive, which companies will utilize for sustainability data reporting. These standards are developed by EFRAG (European Financial Reporting Advisory Group) and aim to standardize non-financial disclosures by companies, enabling the measurement of the environmental and social impact of an organization's activities, as well as the financial impact of sustainability matters on the business. The 12 ESRS can be categorized into four main types of indicators:

  • 2 cross-cutting standards dedicated to general requirements and disclosures

  • 5 environmental standards: climate change, pollution, water and marine resources, biodiversity and ecosystems, resources and circular economy.

  • 4 social standards cover the company's workforce, workers in the value chain, affected communities, customers and end-users.

  • 1 indicator for corporate governance (business conduct).


With the end of the co-legislators' scrutiny period on October 21st 2023, the ESRS are now integrated into the European legal framework.

What is the principle of double materiality assessment?

Derived from financial audit terminology, materiality is an accounting principle that dictates that everything capable of impacting a company's performance and, thus, influencing investor decision-making must be included in financial reports. Material information is primarily relevant information that represents a genuine concern for the company, its financial well-being, and its attractiveness."

Understanding the principle of materiality in CSR

While the initial focus was on the requirement for accuracy in non-financial reporting, the introduction of the materiality criterion strengthens the fight against greenwashing by promoting a culture of relevance. To achieve the Sustainable Development Goals (SDGs) of the 2030 agenda, it is essential to be able to measure and monitor the impact of environmental and societal risks on a company's activities, and vice versa. Materiality enhances non-financial reporting by expanding the scope of analysis, comprehending a company's performance in all its dimensions, identifying issues comprehensively, and prioritizing them based on their relevance. Introduced within a CSR approach, materiality reveals the correlation between non-financial and financial performance. Through materiality analysis, reporting on sustainability issues becomes a driver for value creation.

Principle of Double Materiality

Double materiality is grounded in the same principles as single materiality: the identification of significant issues that can influence investor decisions. However, it consists of two distinct types of materiality, corresponding to internal and external perspectives on the sustainability of a company's activities:

  • Financial Materiality (Outside-In), which is akin to single materiality, examines the impact of environmental and societal issues on a company's economic performance. In other words, it identifies how changes in social and environmental conditions can affect the company's activities, as well as the economic opportunities that these conditions may offer for the company's sector.

  • Impact Materiality (Inside-Out), assesses the impact of a company's activities on the environment and society. It involves identifying all the issues that are relevant to include in the sustainability report, such as greenhouse gas emissions, human rights, resource management, diversity and inclusion, business ethics, and more.

Double materiality assessment, a prerequisite for CSRD

A central concept in the European Sustainability Reporting Standards (ESRS) developed for the implementation of the CSRD directive, double materiality places sustainability information and financial information on an equal footing.

By promoting double materiality, the European approach distinguishes itself from the American approach, which is solely based on the analysis of financial materiality. The standards proposal published in 2023 by the European Commission confirms this approach, as all ESRS are subject to double materiality assessment. EFRAG offers a methodology that allows companies to assess the materiality of an issue. Financial materiality analysis is based on three criteria: the significance of the issue (whether it represents a harmful impact or an opportunity), its importance, and its likelihood of occurrence.

Impact materiality analysis, on the other hand, evaluates the quality of the impact, whether it is potential or realized, its severity (importance, scope, remediation), and the probability of its occurrence.

A concrete example of double materiality assessment

Let's consider the case of an automobile manufacturer concerning climate change to illustrate double materiality.

Impact materiality & financial materiality for an automobile manufacturer

Impact materiality

​The automobile industry has a substantial environmental impact, particularly through the production of vehicles with internal combustion engines. These vehicles emit greenhouse gases, contributing to climate change. However, automobile manufacturers are also involved in the development and production of electric vehicles, which produce zero tailpipe emissions.

Financial materiality

Climate change also holds financial significance for automobile manufacturers. The success of these companies hinges on their ability to produce and sell vehicles compliant with increasingly stringent emissions regulations. If the cost of renewable energy decreases or if climate change regulations become more rigorous, automobile manufacturers investing in electric vehicles could reap financial benefits. Conversely, if climate change worsens, leading to more extreme weather events such as floods, hurricanes, or wildfires, automobile manufacturers may face substantial financial costs, including damage to production facilities or disruptions in their supply chain.

Specific disclosure examples

Impact materiality disclosure:

  • Greenhouse gas emissions and emission reduction strategies.

  • Water consumption and conservation initiatives.

  • Waste generation and waste reduction efforts.

Financial materiality disclosure:

  • Risks and opportunities related to climate change.

  • Investments in renewable energy and climate change mitigation technologies.

  • Climate change-related litigation risks.

By disclosing this information, automobile manufacturers can help their stakeholders understand how climate change impacts their businesses and how they are managing those impacts. This information can also help investors to make informed investment decisions.

In conclusion

Double materiality assessment is now an integral part of European environmental regulations and must be carried out by companies affected by the CSRD. While its inclusion in the sustainability report is not mandatory, it represents a significant opportunity for companies to accelerate their environmental and sustainable transition.


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