Double materiality assessment: a step-by-step guide
A double materiality assessment identifies which sustainability matters a company must report by looking from two directions: impact materiality (how the company affects people and the environment) and financial materiality (how sustainability matters affect the company's cash flows, performance and value). A matter is material if it passes either test. The assessment is required under the EU's ESRS and is good practice for anyone reporting under GRI or ISSB.
What double materiality means
Most frameworks pick one lens. GRI focuses on impacts. The ISSB standards, IFRS S1 and S2, focus on financial materiality for investors. The ESRS combine both, which is why the term "double" is used.
| Impact materiality | Financial materiality | |
|---|---|---|
| Question | Does the company cause, contribute to or link to significant impacts on people or the environment? | Could the matter reasonably be expected to affect cash flows, financial position, performance, access to finance or cost of capital? |
| Direction | Inside-out | Outside-in |
| Assessed by | Severity (scale, scope, irremediable character) and likelihood for potential impacts | Likelihood and potential magnitude of financial effects |
| Time horizons | Short, medium and long term | Short, medium and long term |
| Main audience | Affected stakeholders and wider users | Investors, lenders and creditors |
The two often overlap. Heavy emissions are a negative impact and, where carbon is priced, also a financial risk. But a matter can be material on one side only, and it must still be reported.
Where double materiality is required
Under the CSRD, companies report on the impacts, risks and opportunities (IROs) found material through this process. The revised ESRS adopted in 2026 keep double materiality but make it lighter: a top-down approach is now allowed, alone or alongside bottom-up analysis, and companies consider each year whether the assessment needs refreshing instead of starting from scratch. See our guide to CSRD and ESRS after the Omnibus for scope and timing.
Outside the EU, many companies run a double materiality assessment voluntarily. It answers GRI's impact focus and the ISSB's financial focus in one exercise, and it is a common request from EU customers and investors.
Double materiality assessment: step by step
Step 1: Understand the context
Map the business model, activities, locations, products and the upstream and downstream value chain. Note which sites, sectors and suppliers carry the most sustainability exposure. Identify affected stakeholders (workers, communities, customers) and users of the report (investors, lenders). Gather existing inputs: risk registers, due diligence findings, grievance data, emissions inventories and previous reports.
Step 2: Identify impacts, risks and opportunities
Build a long list of IROs. Start from the ESRS topic list (climate, pollution, water, biodiversity, resource use, own workforce, value-chain workers, communities, consumers, business conduct) and add sector-specific and entity-specific matters. A top-down approach starts from strategy and the business model; a bottom-up approach starts from sites, processes and suppliers. Many companies combine both.
For each IRO, record whether it is actual or potential, positive or negative, where it sits in the value chain, and over which time horizon it applies.
Step 3: Assess impact materiality
Score each negative impact for severity using three factors:
- Scale — how grave the impact is.
- Scope — how widespread it is (people affected, area, share of value chain).
- Irremediable character — how hard it would be to reverse.
For potential impacts, combine severity with likelihood. Positive impacts are assessed on scale, scope and likelihood. For potential human rights impacts, severity takes precedence over likelihood. The revised ESRS set out how mitigating measures are taken into account, so follow that text and record your approach; positive impacts are never netted against negative ones.
Step 4: Assess financial materiality
Score each risk and opportunity on the likelihood of occurrence and the potential magnitude of financial effects. Use the same scales your enterprise risk management uses where possible, so the board recognises the language. Many risks arise from impacts or dependencies: water scarcity at a plant, carbon pricing on emissions-intensive products, or supplier labour issues affecting customer contracts.
Step 5: Set thresholds and decide
The ESRS do not prescribe numeric thresholds. Companies set their own and justify them. A common approach uses a 1-5 scale for each factor and a cut-off agreed with management; for financial materiality, many link the cut-off to the risk appetite or to a share of revenue or EBITDA. Whatever you choose, apply it consistently and record why.
| Illustrative score | Severity (impact) | Financial magnitude |
|---|---|---|
| 1 — Minimal | Minor, local, easily reversed | Below internal reporting level |
| 3 — Significant | Serious harm to a group or area, hard to reverse | Noticeable effect on a business line |
| 5 — Critical | Widespread, severe, irreversible | Material to group results or financing |
Validate the outcome with stakeholders and senior management, and have it approved at the right governance level.
Step 6: Document the process
Assurance providers test the process, not just the result. Keep a record of the IRO long list and sources, the scoring and who did it, the thresholds and rationale, stakeholder engagement, management and board approval, and the link from each material IRO to the disclosures that follow.
The materiality matrix: useful, but not the method
A materiality matrix plots matters with impact materiality on one axis and financial materiality on the other. It is a good way to present results to a board, but it is not the assessment itself. Under double materiality, the cut-off is an L-shape, not a diagonal line: anything above the threshold on either axis is material. Avoid averaging the two scores, which can hide matters that are material on one side only.
Common mistakes
- Treating stakeholder surveys as the assessment instead of one input to it.
- Assessing topics too broadly ("climate") rather than specific IROs ("Scope 3 emissions from purchased steel").
- Ignoring the value chain, where most impacts usually sit.
- Netting positive impacts against negative ones.
- Poor documentation, leaving the auditor unable to trace a decision.
Climate is material for most companies. A complete Scope 1, 2 and 3 inventory gives the assessment real numbers; see Scope 1, 2 and 3 emissions explained.
How EKOTRACE helps
EKOTRACE includes a double materiality module in its ESG reporting tools. Teams record IROs, score impact and financial materiality, set thresholds, attach evidence and route the result through maker-checker approval, keeping a full audit trail. Material topics then map to ESRS, GRI, ISSB/IFRS S1-S2 and BRSR disclosures, with a content index export. The emissions figures come from the same approved GHG inventory. See ESG reporting and EKOTRACE.
Frequently asked questions
What is the difference between impact materiality and financial materiality?
Impact materiality looks at the company's effects on people and the environment. Financial materiality looks at how sustainability matters could affect the company's finances. A double materiality assessment covers both, and a matter is material if it meets either test.
How often should a double materiality assessment be done?
Under the revised ESRS, companies consider each year whether the assessment needs updating, rather than repeating it in full. A full refresh makes sense after significant changes such as acquisitions, new markets or new products.
Is a materiality matrix required?
No. The ESRS require a documented process and disclosure of its results, not a matrix. Many companies still use one to present results, but the threshold must treat each dimension separately.
Who should be involved?
The sustainability team usually leads, with input from risk, finance, operations, procurement and HR. Affected stakeholders and their representatives inform the impact assessment, and senior management or the board approves the outcome.