Sustainability & ESG

A company can have a small environmental footprint today and still face major financial risks from climate change, supply chain pressure, or new reporting rules. At the same time, its own activities may affect workers, communities, customers, and the environment. Traditional materiality often focuses on what can affect the business. Double materiality asks companies to look in both directions. Introduction ESG reporting is moving beyond a simple list of environmental, social, and governance metrics. Under the European Sustainability Reporting Standards (ESRS), companies in scope of the Corporate Sustainability Reporting Directive (CSRD) use a double materiality perspective to identify the sustainability matters that need to be reported. EFRAG explains that this means assessing both impact materiality and financial materiality. A topic can be material from one perspective or both. This guide explains how double materiality works and how companies can apply it in practice today across markets. Key Takeaways Here is a quick look at the main things you will learn in this guide: Double materiality combines impact and financial materiality. A matter can be material from one perspective or both. Companies should consider relevant value chain relationships. Stakeholder input and evidence support the assessment. Results should connect to ESG disclosures and metrics. Table of Contents What Is Double Materiality? Impact Materiality vs. Financial Materiality Why Double Materiality Matters in ESG Reporting How Companies Conduct a Double Materiality Assessment What Data and Stakeholder Input Should Companies Use? How Double Materiality Supports ESRS Reporting Common Challenges Companies Face How US and UK Companies Should View Double Materiality Practical Example of a Double Materiality Assessment Conclusion: Turning Assessment Results Into Better Reporting FAQs What Is Double Materiality? Double materiality assesses sustainability matters from two connected perspectives. Impact materiality asks how a company affects people and the environment. Financial materiality asks how sustainability-related risks and opportunities can affect the company. EFRAG states that ESRS reporting uses both perspectives. A matter does not have to be material from both sides. Workplace safety, for example, could be material because of its effect on employees even when its current financial effect is limited. A sustainability issue could also create a material financial risk without a comparable direct impact. The approach therefore asks two questions: “How could this issue affect our business?” and “How do our activities affect people and the environment?” It also considers relevant upstream and downstream value chain relationships. Impact Materiality vs. Financial Materiality Impact materiality focuses on the effects a company has on people and the environment. These effects may be actual or potential, positive or negative, and may occur over the short, medium, or long term. A company may assess topics such as emissions, employee health and safety, human rights, product safety, water use, biodiversity, or community impacts. Financial materiality focuses on sustainability-related risks and opportunities that could affect the company’s development, financial position, financial performance, cash flows, access to finance, or cost of capital. The assessment looks across the short, medium, and long term. The two perspectives can overlap. An environmental impact may lead to regulation, higher costs, asset damage, or financing concerns. A workforce issue may affect retention, legal exposure, or operating costs. Companies do not need two isolated exercises. ESRS guidance says the assessment should reflect both perspectives and their connections. Why Double Materiality Matters in ESG Reporting Double materiality matters because ESG reporting is increasingly connected to how companies explain their strategy, governance, risks, and performance. Under the ESRS framework, the sustainability statement is based on material sustainability impacts, risks, and opportunities identified through the materiality assessment. The process can improve internal understanding of sustainability issues. Finance, risk, legal, operations, procurement, HR, and sustainability teams can see how these matters connect with business activities. For companies with European reporting obligations, the assessment supports the selection of information included in the sustainability statement. EFRAG’s 2026 State of Play report reviewed 905 assured FY2025 sustainability statements and included analysis of double materiality methods, showing how practice is developing. How Companies Conduct a Double Materiality Assessment A practical assessment can be organized into several stages. 1. Understand the company and its context Start with the business model, strategy, activities, markets, products, services, locations, workforce, assets, and business relationships. Consider the company’s legal structure and the nature of its operations. Companies should review the regulatory and market context because different business models face different sustainability matters. 2. Identify sustainability matters Build a broad list of relevant ESG matters before deciding which ones are material. ESRS 1 provides a sustainability matters framework covering environmental, social, and governance topics. Companies can also identify entity-specific matters that are relevant to their own circumstances. Sources may include ESG reports, risk registers, environmental data, incident reports, supplier information, research, and regulatory developments. 3. Identify impacts, risks, and opportunities For each matter, identify actual and potential impacts and consider the related risks and opportunities. Map where these arise in the company’s own operations and across relevant value chain relationships. For impact materiality, companies can consider the scale, scope, and characteristics of impacts. Potential negative impacts may also require consideration of likelihood. For financial materiality, companies assess the size and likelihood of financial effects and the time horizon over which those effects may occur. 4. Gather stakeholder input Stakeholder engagement can provide useful evidence. Relevant groups may include employees, workers, suppliers, customers, consumers, local communities, public authorities, investors, lenders, and other affected parties. Stakeholder input is one source of evidence that can help the company understand impacts, risks, and expectations. 5. Score and evaluate matters Companies can use a documented scoring method to assess impacts and financial effects. ESRS does not prescribe one universal scoring model. The company should document its criteria, evidence, assumptions, thresholds, and judgments. EFRAG guidance says the assessment should reflect the company’s specific facts and circumstances. 6. Validate the results Senior management and relevant governance bodies should review the assessment process and results. The company should check for missing matters and confirm that conclusions are supported by evidence. The assessment should link sustainability matters to […]