Double Materiality Under CSRD: How to Perform and Document It Defensibly

If CSRD compliance fails, it usually fails here.

Not because companies ignore sustainability risks — but because they cannot prove how they decided what was material.

Under the Corporate Sustainability Reporting Directive (CSRD), double materiality is not a concept. It is a mandatory, auditable decision framework that determines what a company must disclose under the European Sustainability Reporting Standards (ESRS).

This page explains, in full operational and regulatory context:

• what double materiality legally requires,
• how it must be performed,
• how it must be documented,
• and how auditors will test it.

What Double Materiality Means Under CSRD (Precisely)

Double materiality requires companies to assess and disclose sustainability topics from two independent perspectives:

1. Impact materiality How the company’s activities impact:

   • people,
   • society,
   • the environment.

2. Financial materiality How sustainability issues create:

   • financial risks,
   • financial opportunities,
   • effects on enterprise value.

A topic is considered material if it is material under either lens.

This is non-negotiable under ESRS.

Why Double Materiality Is Mandatory (Not Optional)

Under CSRD:

• double materiality determines which ESRS topics apply,
• which datapoints must be disclosed,
• and what is out of scope — with justification.

You cannot:

• skip the assessment,
• rely on past ESG materiality exercises,
• or apply investor-only financial materiality logic.

Double materiality is a legal gatekeeper, not a sustainability exercise.

Impact Materiality Explained (Inside-Out Perspective)

Impact materiality assesses:

• the severity of actual or potential impacts, and
• the likelihood that those impacts occur.

Severity is evaluated based on:

• scale (how serious the harm is),
• scope (how many people or ecosystems are affected),
• irremediability (how difficult it is to reverse).

Key point: Impact materiality does not depend on financial consequences.

A topic can be immaterial financially and still mandatory to disclose if the impact is severe.

Financial Materiality Explained (Outside-In Perspective)

Financial materiality assesses whether a sustainability topic could reasonably be expected to:

• affect cash flows,
• affect financial position,
• affect future performance.

This includes:

• physical risks,
• transition risks,
• legal and regulatory exposure,
• market and reputational impacts.

Financial materiality uses a risk-based threshold, aligned with enterprise risk management — not ESG scoring.

ESRS Topics Are the Starting Point — Not the Outcome

Under ESRS, companies must assess materiality against the full ESRS topic list, including:

• environmental topics (E1–E5),
• social topics (S1–S4),
• governance and business conduct.

You cannot pre-filter topics based on convenience or existing data.

The correct sequence is:

1. Start with all ESRS topics
2. Perform double materiality assessment
3. Justify inclusions and exclusions
4. Disclose results transparently

The Required Double Materiality Process (Step by Step)

A defensible CSRD double materiality process includes six mandatory stages.

1. Scope Definition

Define:

• organisational boundaries (group vs entity),
• value chain coverage,
• reporting period.

This must align with CSRD scoping decisions.

2. Topic Identification

Identify:

• all ESRS topics,
• sub-topics and sub-sub-topics,
• relevant impacts, risks, and opportunities (IROs).

This stage must be exhaustive.

3. Impact & Financial Risk Assessment

Assess:

• severity and likelihood (impact materiality),
• probability and magnitude (financial materiality).

Scoring logic must be:

• consistent,
• documented,
• repeatable.

4. Stakeholder Engagement (Where Relevant)

Engage:

• internal stakeholders (legal, procurement, operations),
• external stakeholders where impacts are significant.

Stakeholder input informs, but does not replace, management judgement.

5. Threshold Setting & Validation

Define:

• materiality thresholds,
• escalation logic,
• governance approvals.

This is where auditors focus.

6. Documentation & Disclosure

Document:

• methodology,
• assumptions,
• thresholds,
• outcomes,
• changes vs prior year.

This documentation must stand alone under audit.

Documentation Is the Real Compliance Test

Most CSRD findings arise because companies:

• performed the assessment,
• but failed to document the reasoning.

Auditors will ask:

• why a topic was excluded,
• who approved thresholds,
• what data was used,
• how value-chain impacts were considered.

If the answer is “we discussed it,” it is not compliant.

Value Chain Impacts Cannot Be Ignored

Under CSRD, impact materiality explicitly includes:

• upstream suppliers,
• downstream use and end-of-life,
• indirect impacts.

This is where traditional ESG processes break.

If suppliers are not part of the assessment:

• impact materiality is incomplete,
• exclusions are indefensible,
• disclosures are vulnerable.

How Often Must Double Materiality Be Reassessed?

Double materiality is not a one-time exercise.

Companies must:

• reassess regularly,
• update when business models change,
• reflect regulatory, geographic, or supply-chain shifts.

Year-over-year consistency matters — but so does responsiveness.

Common Double Materiality Failures (Observed in Practice)

The most frequent issues flagged by auditors:

• undocumented thresholds,
• informal scoring workshops,
• ignoring downstream impacts,
• financial-only materiality logic,
• inconsistent value-chain coverage,
• lack of governance sign-off.

Every one of these creates disclosure risk.

What Auditors Will Test (Directly)

Auditors will test:

• existence of a formal methodology,
• consistency of scoring,
• traceability from assessment to disclosure,
• governance approval evidence,
• alignment with ESRS topic structure.

They will not accept narrative explanations without evidence.

Double Materiality Is a Governance Mechanism

Done correctly, double materiality:

• aligns sustainability with enterprise risk,
• exposes hidden value-chain risk,
• improves disclosure credibility,
• reduces audit friction.

Done poorly, it invalidates the entire CSRD report.

Double Materiality Is Not About “Less Reporting”

Some companies try to use double materiality to:

• minimise disclosures,
• avoid difficult topics,
• reduce data collection.

This approach backfires.

Double materiality is designed to ensure relevant reporting, not minimal reporting — and regulators are acutely aware of misuse.

Final Reality Check

If you cannot clearly answer:

• why a topic is material,
• why another is not,
• how thresholds were set,
• and who approved the outcome,

then double materiality has not been done correctly.

Under CSRD, that is not a theoretical weakness. It is a compliance failure.