The materiality assessment is the cornerstone of CSRD reporting. It determines which sustainability topics your company must disclose, shaping the entire scope of your ESRS report. Getting it right means focused, credible reporting. Getting it wrong means either disclosing irrelevant topics or , worse , missing material ones that auditors and regulators will flag.
Under the CSRD, companies must perform a double materiality assessment that considers both the company’s impact on people and the environment, and how sustainability issues affect the company’s financial performance.
What is double materiality?
Double materiality combines two perspectives into a single assessment:
Impact materiality
A sustainability topic is material from an impact perspective when the company causes or contributes to significant positive or negative impacts on people or the environment. This is the “inside-out” view.
Examples:
- A manufacturing company’s greenhouse gas emissions affect climate change
- A retailer’s sourcing practices affect workers in developing countries
- A tech company’s data practices affect user privacy and digital rights
Financial materiality
A sustainability topic is material from a financial perspective when it creates risks or opportunities that influence the company’s financial position, performance, or cash flows. This is the “outside-in” view.
Examples:
- Carbon pricing regulations creating additional operating costs
- Water scarcity threatening production continuity
- Shifting consumer preferences toward sustainable products creating revenue opportunities
When is a topic material?
A topic is material under CSRD if it is material from either perspective , impact OR financial. You do not need to satisfy both criteria. This significantly broadens the scope compared to financial-only materiality used in IFRS S1/S2.
Step-by-step process
Step 1: Define your value chain
Before assessing materiality, map your complete value chain , upstream, own operations, and downstream. The CSRD requires you to consider impacts and risks across the entire chain, not just your direct operations.
Upstream: Raw material suppliers, component manufacturers, logistics providers, service contractors
Own operations: Production facilities, offices, warehouses, retail locations, employees
Downstream: Distribution, customers, product use phase, end-of-life disposal
Document the key activities, geographies, and stakeholder groups at each stage. This map becomes the foundation for identifying where impacts and risks occur.
Step 2: Identify the universe of topics
Start with the full list of ESRS sustainability topics:
Environmental (ESRS E1–E5)
- E1: Climate change
- E2: Pollution
- E3: Water and marine resources
- E4: Biodiversity and ecosystems
- E5: Resource use and circular economy
Social (ESRS S1–S4)
- S1: Own workforce
- S2: Workers in the value chain
- S3: Affected communities
- S4: Consumers and end-users
Governance (ESRS G1)
- G1: Business conduct
For each topic, the ESRS provides sub-topics and sub-sub-topics. For example, E1 (Climate change) includes: climate change adaptation, climate change mitigation, and energy.
Step 3: Assess impact materiality
For each topic, evaluate:
- Severity of actual negative impacts (scale, scope, irremediable character)
- Likelihood × severity for potential negative impacts
- Scale and scope of actual positive impacts
- Likelihood × scale/scope for potential positive impacts
Use a scoring matrix , typically a 1–5 scale for each dimension , and document the rationale for each score.
| Factor | Description | Score range |
|---|---|---|
| Scale | How serious is the impact? | 1 (negligible) to 5 (very severe) |
| Scope | How widespread? How many people or what extent of environment? | 1 (isolated) to 5 (widespread) |
| Irremediability | Can the impact be reversed? | 1 (easily reversible) to 5 (irreversible) |
| Likelihood | How probable is the potential impact? | 1 (remote) to 5 (very likely) |
A topic is material from an impact perspective when its combined score exceeds your defined threshold.
Step 4: Assess financial materiality
For each topic, evaluate:
- Financial risks: Could this topic lead to material costs, asset impairment, revenue loss, or increased cost of capital?
- Financial opportunities: Could addressing this topic create competitive advantage, new revenue, or cost savings?
- Time horizon: Short-term (<1 year), medium-term (1–5 years), or long-term (>5 years)?
- Likelihood and magnitude: How probable and how significant?
Use the same scoring approach as impact materiality, but focused on financial effects.
Common financial triggers:
- Regulatory changes (carbon pricing, EU Taxonomy eligibility)
- Physical climate risks (flooding, heat stress, supply disruption)
- Market shifts (customer demand for sustainable products)
- Reputational risks (greenwashing allegations, ESG rating downgrades)
- Transition risks (stranded assets, technology shifts)
Step 5: Engage stakeholders
The CSRD explicitly requires stakeholder engagement in the materiality assessment. This validates your internal scoring and ensures you have not overlooked impacts that affected parties consider significant.
Key stakeholder groups:
- Employees and worker representatives
- Customers and consumers
- Suppliers and business partners
- Investors and lenders
- Local communities
- NGOs and civil society
- Industry associations
- Regulators
Engagement methods:
- Surveys and questionnaires (scalable, quantifiable)
- Interviews and focus groups (deep qualitative insights)
- Workshops (collaborative prioritisation)
- Review of public positions and published expectations
- Analysis of grievance mechanisms and feedback channels
Document your stakeholder engagement process, who was consulted, and how their input influenced the final assessment. Auditors will review this.
Step 6: Set materiality thresholds
Define clear thresholds that determine when a topic is material. There is no single correct threshold , the ESRS requires you to use judgement and document your reasoning.
A common approach:
- Clearly material: Impact score ≥ 4.0 OR financial score ≥ 4.0
- Potentially material: Impact score 3.0–3.9 AND financial score 3.0–3.9
- Not material: Both scores below 3.0
“Potentially material” topics require additional analysis and stakeholder validation before a final decision.
Step 7: Map to ESRS disclosure requirements
Once you have identified material topics, map them to the specific ESRS disclosure requirements:
- Each material ESRS topic triggers a set of mandatory disclosures
- Some disclosures within a topic may still be assessed as not material at the sub-topic level
- Cross-cutting standards (ESRS 2) apply regardless of materiality
- XBRL tags correspond to each required datapoint
This mapping determines the exact scope of your sustainability report and the data you need to collect.
Step 8: Document and disclose
The CSRD requires you to disclose:
- The process used to identify material topics
- How stakeholders were engaged
- Which topics are material (and which are not, with justification)
- The thresholds and criteria applied
- How impacts, risks, and opportunities were assessed
This documentation forms ESRS 2 IRO-1 and IRO-2 , among the first disclosures auditors will review.
Common mistakes
Treating it as a tick-box exercise
Some companies rush through materiality with a small internal workshop and no real stakeholder engagement. Auditors will scrutinise the rigour of your process, and a superficial assessment undermines the credibility of every subsequent disclosure.
Confusing materiality with importance
Not everything that matters to your sustainability team is material under CSRD. Materiality requires demonstrated impact severity or financial significance , not just relevance to your corporate values.
Ignoring the value chain
Assessing only your own operations misses Scope 3 climate impacts, supply chain labour issues, and downstream product impacts. The CSRD explicitly requires value chain consideration.
Setting thresholds too high or too low
Thresholds that are too high risk missing genuinely material topics. Thresholds that are too low lead to an unmanageable reporting scope. Benchmark against peer companies and industry guidance.
Not updating annually
Materiality is not static. Regulatory changes, business model shifts, new operations, and emerging sustainability issues can change what is material. Review and update your assessment annually.
Materiality assessment and CSRD timeline
| CSRD phase | Companies | Materiality assessment deadline |
|---|---|---|
| Phase 1 | Large public-interest entities | Completed for FY2024 reporting |
| Phase 2 | All large companies | Must complete in 2025 for FY2025 reporting |
| Phase 3 | Listed SMEs | Must complete in 2026 for FY2026 reporting |
Companies in Phase 2 should start their materiality assessment now to allow sufficient time for stakeholder engagement, data gap identification, and reporting preparation.
How Dcycle supports materiality assessments
Dcycle’s CSRD platform guides companies through the entire double materiality process:
- Structured assessment workflow covering all ESRS topics and sub-topics
- Impact and financial scoring matrices with built-in guidance
- Stakeholder engagement tools for surveys and input collection
- Automatic ESRS mapping from material topics to required disclosures
- Gap analysis identifying data collection needs before reporting begins
- Expert advisory to validate thresholds, methodology, and documentation
- Audit-ready output with full process documentation for ESRS 2 IRO-1/IRO-2
Request a demo to see how Dcycle simplifies your double materiality assessment.
