Double Materiality Assessment according to CSRD and ESRS

Background to CSRD and ESRS

For companies subject to sustainability reporting, the entry into force of the CSRD (Corporate Sustainability Reporting Directive) and the related European Sustainability Reporting Standards (ESRS) makes conducting a double materiality assessment mandatory. These complex requirements confront many companies with new challenges, often raising fundamental questions: Which requirements must be met? When and how should they be implemented? And, most importantly, where should you start? This article gives you an overview of the topic and answers to your questions.

What is a double materiality assessment?

Double materiality is a core component of sustainability reporting under the CSRD. It requires companies to identify and assess both their positive and negative effects on the environment and society, covering potential as well as actual impacts. At the same time, companies must factor in how external sustainability factors affect their own financial performance as part of the double materiality assessment (DMA). This approach enables a comprehensive and transparent assessment of a company's sustainability performance. The requirements for the double materiality assessment are set out in ESRS 1 of the ESRS Delegated Regulation (EU) 2023/2772 and must be reported under ESRS 2. On 3 July 2026, the European Commission adopted revised ESRS, which reduce the number of mandatory datapoints by 61%, among other changes; these become mandatory from financial year 2027.

To determine which topics are material for a company, two perspectives are always considered.

1. Financial Materiality (Outside-In)

‍The company assesses the opportunities and risks that external sustainability issues such as climate change, biodiversity changes, or water resources may have on its own financial performance.

2. Impact Materiality (Inside-Out)

‍It examines the negative and positive impacts of the company's business activities on the environment and society, such as greenhouse gas emissions.

When does a topic qualify as material?

A topic qualifies as material, and therefore reportable, if it is relevant either through the company's specific activities, risks, and opportunities (outside-in perspective) or through its impact on people and the environment (inside-out perspective). What matters is limiting the sustainability report to information that is substantively significant for the company in question and therefore holds material value for report users. Conducting the assessment requires considering various topic areas, which are organized into overarching topics and sub-topics. With the ESRS revision of 3 July 2026, the previous three-tier structure (topics, sub-topics, sub-sub-topics) was simplified into a two-tier structure that is no longer mandatory.

Who must carry out a double materiality assessment?

Under current law, reporting is mandatory for companies that exceed both thresholds simultaneously: more than 1,000 employees and revenue of more than €450 million. The rollout is staggered, and individual deadlines have been pushed back by a further two years under the Stop-the-Clock Directive.

6 steps to a double materiality assessment

Carrying out a double materiality assessment requires a structured, efficient approach that creates a solid foundation for the subsequent gap analysis and the collection of reporting content. A double materiality assessment involves several steps:

Step 1: Preparing for the DMA

Preparation for the double materiality assessment should clarify key questions such as the project team, timeline, and stakeholder involvement. Workshops and interviews need to be planned to identify relevant topics, with a balanced involvement of internal and external stakeholders being essential.

Step 2: Customizing the longlist

The longlist resulting from the value chain analysis covers potentially relevant ESG topics. The goal is to identify, group, and prioritize the topics most important to the company and its stakeholders across environmental, social, and governance (ESG) areas. These prioritized topics are then integrated into the company's sustainability reporting. The topic list set out in ESRS 1 Appendix A can serve as a starting point; since the ESRS revision of 3 July 2026, its use is no longer mandatory, and the earlier breakdown into sub-sub-topics has been removed.

Step 3: Identifying impacts, risks, and opportunities (IROs)

Companies must identify their material impacts, risks, and opportunities (IROs). These form the basis for analyzing financial materiality and impact materiality, ensuring that stakeholder interests and concerns are adequately considered. Following the ESRS revision of 3 July 2026, companies can use a simplified "top-down" approach that reduces the assessment effort for individual IROs.

Step 4: Assessing impacts, risks, and opportunities (IROs)

An assessment framework is developed with thresholds for the scale, scope, irremediability, and likelihood of occurrence of the IROs. The project team, along with other internal and, where relevant, external stakeholders, assesses the IROs to determine the material sustainability topics and their financial materiality and impact materiality.

Step 5: Analyzing double materiality

After the IROs have been assessed, the material sustainability topics are prioritized. These are reviewed for their financial materiality and impact materiality to ensure that all relevant information is covered for reporting purposes.

Step 6: Translating material sustainability topics into reporting obligations

The material sustainability topics are translated into concrete reporting obligations. This process ensures that all material aspects are covered in the sustainability report in line with regulatory requirements.

How often must a double materiality assessment be carried out?

The materiality assessment should be treated as a living document and reviewed annually as part of the corporate reporting cycle to decide on the disclosure of information. Although the initial effort to create it is high, a full overhaul with intensive stakeholder involvement is not necessary every year. Instead, adjustments are needed, for example in the case of major corporate changes such as mergers and acquisitions, entry into new markets, or significant shifts in the business environment.

Tips for an effective materiality assessment

Companies that already prepared sustainability reports under the NFRD (Non-Financial Reporting Directive) have a head start, while many mid-sized companies are still establishing the necessary processes. Adapting to new standards remains a challenge even for experienced companies, particularly when it comes to precisely identifying and presenting sustainability topics relevant to both the company and its stakeholders. Whether a materiality assessment is carried out internally or externally is up to the company. Many opt to handle it in-house, which can be advantageous, since an internal assessment significantly reduces future reporting effort. This is because early stakeholder involvement increases willingness to collaborate on data collection later on.

These tips help ensure an effective process:

• Allow enough time and resources to develop and adapt your individual methodology. Starting the assessment early is essential for effective ESRS reporting.
• Assign project ownership and involve subject-matter experts and top management to effectively define and assess impacts, risks, and opportunities (IROs).
• Get familiar with sustainability standards such as ESRS, GRI, GHGP, and IFRS.
• Take enough time to prioritize ESG topics. Overly extensive reporting on ESG topics can undermine the informational value and readability of the report.
• Share the findings of the double materiality assessment across the company and embed them into strategic planning.

What happens after the materiality assessment?

After completing the double materiality assessment, it is important to establish clear procedures that enable regular data collection, consolidation, analysis, and quality assurance. It is also essential to define specific, measurable targets for reducing environmental impacts or improving social outcomes.

Under the CSRD, the completed double materiality assessment must subsequently be reviewed by an independent auditor under "limited assurance." This review focuses in particular on the data collection and evaluation process, with the accuracy of results checked through sampling. The tightening to "reasonable assurance" originally planned for 2028 was dropped as part of the EU Omnibus package: CSRD reporting therefore remains at "limited assurance" for the foreseeable future, with the European Commission's corresponding assurance standards expected by 1 July 2027 at the latest.

Manual processes or jointly edited spreadsheets for data collection and calculation often fail to meet requirements for traceability of results, since a full, audit-proof trail cannot be guaranteed. Software-based processes can help avoid methodological errors through changelogs, a four-eyes approval principle, and continuously updated references (for example, to external emission factor databases), ensuring full traceability and simplifying audit processes.