The concept of “Double Materiality” in sustainability reporting

“Double Materiality” – What does “double materiality” mean for sustainability reporting?

The concept of “double materiality” is a central element of future corporate sustainability reporting in the European Union. The Corporate Sustainability Reporting Directive (CSRD) will replace the current Non-Financial Reporting Directive (NFRD) in Europe. As per the mandate of the CSRD, sustainability reporting is to be carried out uniformly under the European Sustainability Reporting Standard (ESRS), the core element of which is the concept of “double materiality”. 

Unlike single materiality which looks at only the “Outside-In” impact on the financial performance of a firm, double materiality also considers the “Inside-Out” perspective, which is the impact of the firm on all stakeholders. Before delving deeper into this concept, a brief background on CSRD and ESRS.

Classification of CSRD and ESRS

The CSRD regulations will apply to the following companies: 

  • All large companies that meet at least two of the following three criteria:
    • Balance sheet total min. 20 million euros
    • Net sales min. 40 million euros
    • An average number of employees min. 250
  • All companies listed on the stock exchange, except micro-enterprises, which meet the following criteria: 
    • Balance sheet total max. 350,000 euros
    • Net sales max. 700,000 euros
    • An average number of employees max. 10

This will extend sustainability reporting to significantly more companies (NFRD: 11,000 companies, CSRD: 50,000 European companies), and reporting will be uniform following the European Sustainability Reporting Standard / ESRS [2], which is currently available as a draft.

Update 1 : 21 June 2022

The European Council announced in a press release on 21 June 2022 that it has reached a provisional agreement with the European Parliament regarding the EU’s Corporate Sustainability Reporting Directive(CSRD). 

The European Council emphasized that the Sustainability reports have to be certified by an accredited independent auditor or certifier. The key modification to the draft CSRD relates to the implementation timeline, which will now be done in a phased manner as follows. 

          • 1 January 2024 for companies already subject to the non-financial reporting directive;
          • 1 January 2025 for companies that are not presently subject to the non-financial reporting directive;
          • 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings.

More details are available in the press release here

(Single) Materiality

The term “materiality” itself is nothing new. It is the foundation of financial reporting. According to one definition, which is in line with the US GAAP(Generally Accepted Accounting Principles), “Materiality is an accounting principle which states that all items that are reasonably likely to impact investors’ decision-making must be recorded or reported in detail in a business’s financial statements” (Source). In simpler terms, any information can be considered material if it helps shareholders understand the impact of any factor that can influence a firm’s financial performance(“Outside-In” ). Typically, the concept of materiality is investor or shareholder focused. 

Double materiality, on the other hand, is stakeholder focused and focuses not only on the impact of a firm’s activities on its shareholders but also on its stakeholders. This includes both “Outside-In” and “Inside-Out” perspectives. 

“Double materiality” as a central component of EU sustainability reporting

The current draft of the ESRS makes it clear how important the concept of double materiality will be in sustainability reporting. “The undertaking shall report sustainability matters based on the double materiality principle”. 

According to the ESRS, the concept of double materiality is not only used to determine whether a sustainability issue is included in sustainability reporting.

“Double materiality is a concept which provides criteria for the determination of whether a sustainability matter has to be included in the undertaking’s sustainability report. Double materiality is the union (in mathematical terms, i.e., union of two sets, not intersection) of impact materiality and financial materiality. A sustainability matter, therefore, meets the criteria of double materiality if it is material from either the impact perspective or the financial perspective or both perspectives.”

Although the term “double materiality” may initially suggest that corporations must conduct two independent assessments, there is no need to do so.  

For preparers of sustainability reports, it might be worthwhile to note that the double-materiality concept is the ‘guiding principle’ in the GRI reporting standards.  

Terms like Dynamic Materiality, Core Materiality and Nested Materiality are recently being used by practitioners. Click here to learn more about these terms.

Notes from the ESRS

From the current draft of the ESRS, further concretizations and references around the topic of double materiality can be derived. Sources are, for example, the document ESRS 1 General Principles section 2.2 [4].

Stakeholders in the context of double materiality

Stakeholders are individuals, groups, institutions, etc., on whom the company’s activities have an impact or which themselves have an impact or can influence the company’s activities. 

According to the ESRS, reporting companies should identify two main groups of stakeholders: 

  • Those on whom the company’s activities have an impact (individuals or groups whose interests are or could be affected by the company’s activities – both positively and negatively. Both the direct company activity and its value chain are considered). 
  • Users of sustainability reports, i.e., stakeholders who have an interest in the reporting company (existing and potential investors, financiers, business partners, trade unions, social partners, civil society, NGOs, …). 

It is possible that some stakeholders also belong to both groups. The Double Materiality process aims to ensure that the impact on all affected stakeholders is considered. 

Communicating the results is not enough

Communicating the results of the materiality assessment alone is not enough. To create the necessary transparency and thus traceability, the materiality assessment process as a whole must be documented. The method includes the selection of stakeholders and their involvement and classifying of the results, among others. 

How to get from 0 to Double Materiality?

Our blogpost “From 0 to Double – How to conduct a Double Materiality Assessment” explains how to conduct a double materiality assessment. 


The CSRD, the ESRS, and the EU taxonomy [3] provide guidelines and mandates that companies covered by the CSRD regulations should address as early as possible to set the course for future sustainability reporting. Firms that are likely to report their sustainability performance for the first time will be well-served if they do not underestimate the detailing and complexity of these regulatory mandates. This includes identifying material issues, data collection, analysis and reporting of sustainability performance. And it all starts with materiality assessment. On the positive side, a clear understanding of these material issues (both from financial and impact perspectives) could help the firm understand sustainability-related risks better and plan its risk mitigation strategies accordingly. The firm might also end up identifying new opportunities due to this exercise. 


NordESG is an independent consulting firm that advises on sustainability and ESG. We support companies in navigating their sustainability landscape and develop strategies and concepts individually tailored to their requirements. This also includes managing the transition to CSRD. We look forward to hearing from you via email. You can also make an appointment with us directly for a free introductory meeting.

Notes, further information and sources

The ESRS is currently available in the draft form [5] for public consultation. Changes to the final version should be expected. 

[1] Our blog post and whitepaper on the CSRD – are here.

[2] Our blog post and whitepaper on the ESRS – are here.

[3] Our blog post on the EU taxonomy – here

[4] ESRS 1 – General Principles – description of the concept of “double materiality“.

[5] Draft ESRS (all content and further information) on EFRAG’s website – here.