Posted: 28 May 2024 6 min. read

Applying the Double Materiality Principle

By Evan Harvey, Audit & Assurance Managing Director, Deloitte & Touche LLP

Talking points
  • Certain companies with an operational or commercial presence in the European Union—including many US companies—are subject to new disclosure regulations with a double materiality component.
  • In a double materiality assessment, the company must specify how it impacts the environment and society on the one hand, and how sustainability risks and opportunities affect the company financially on the other.
  • Considerations for a double materiality assessment include which topics to disclose and which stakeholders to engage, along with identification and scoring of likely material impacts, risks, and opportunities.
New reporting rules have drawn attention to a once-rare term in the sustainability lexicon: Double materiality

The Corporate Sustainability Reporting Directive, or CSRD, has started to take effect this year in the EU. Why does this matter? For multinational companies based in the United States, it means that operations in the EU may soon be subject to disclosures on sustainability-related matters. CSRD rules require a double materiality assessment as an important step in determining which matters merit material disclosure. This requirement could be a significant change for many organizations in their reporting—and one that may not be well understood.

So, what is a double materiality assessment, and how can companies get started on one? It’s a question I’m hearing more and more from sustainability leaders. Here’s an explainer.

What is double materiality?

In a double materiality assessment, the company aims to show how it impacts the environment and society on the one hand, and how sustainability risks and opportunities affect the company financially on the other. These two perspectives—one outbound (impact) and the other inbound (financial)—may offer a more sophisticated view of a company’s environmental, social, and governance (ESG) profile. An ESG topic is material for CSRD disclosure purposes if it’s material from both perspectives—or just one.

This, in turn, raises the question of materiality thresholds, which the company sets through ongoing due diligence or other risk management processes. According to the European Sustainability Reporting Standards (ESRS), the set of standards companies must use for CSRD reporting, thresholds may be qualitative or quantitative. Either way, the ESRS offers high-level guidance for companies performing a double materiality assessment. We’ll tackle that subject next.

Considerations for a double materiality assessment

First, it’s worth noting that while there are some prescriptive elements to the double materiality assessment as defined by the ESRS, many parts of the process are still open to interpretation. The ESRS does outline standards to help organizations determine which topics to disclose. Five of the topical standards are environmental, four are social, and one is about governance.

Stakeholder engagement can help you create a short list of ESG topics that are relevant to your company. It’s also an effective way to gather evidence that supports your materiality determination. Methods include (but aren’t limited to) direct interviews, focus groups, and surveys.

To identify stakeholders, you could make a list of individuals and groups whose interests are affected, or could be affected, by the organization’s activities. Keep in mind that the effects may be positive or negative. Here are some of the common stakeholder categories:

  • Customers
  • Governments
  • Shareholders and other investors
  • Suppliers
  • Employees and other workers
  • Local communities
  • Nongovernmental organizations

Now let’s go back to the two perspectives of double materiality: impact and financial effect. Under ESRS rules, impact materiality is determined by assessing the scale, scope, irremediability, and likelihood of each impact a company makes. Financial materiality is determined by assessing the size and likelihood of each financial risk it could encounter, as well as each financial opportunity.

Here’s an example. Suppose manufacturing is one of your ESG topics. Feedback from your stakeholders indicates that the impact and financial effect of your manufacturing activity breaks down as follows:

  • Impacts: Greenhouse gas emissions, water pollution, and health and safety
  • Risks: Carbon pricing mechanisms, fees and penalties, and injury or death
  • Opportunities: Product differentiation, resource efficiency, and employee satisfaction

Per the ESRS, your value chain is the starting point for identification of likely material impacts, risks, and opportunities. The impacts, risks, and opportunities you identify may eventually become the criteria for assessing the double materiality of your ESG topics.

Qualitative insights are fundamental to the materiality conclusion. However, you can also apply quantitative methodology to score your material impacts, risks, and opportunities. You can also prioritize ESG topics, as this illustration shows.


Seeing the value beyond compliance

Double materiality is a compliance exercise under CSRD, but it can also offer value if you simply want to gain a better grasp of your sustainability-related impacts, risks, and opportunities. From enhanced organizational efficiency and resiliency to meaningful engagement with stakeholders, a thoughtful approach to double materiality can help you keep your company’s strategy a step ahead of the curve.

Want to learn more? Watch a replay of our recent Dbriefs webcast for a deeper dive into double materiality, and visit our regulatory readiness page for additional insights into broader climate regulations. And if you have any questions or would like help getting started, please contact me

The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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Evan Harvey

Evan Harvey

Audit & Assurance Managing Director | Sustainability and ESG Services

Evan is an Audit & Assurance managing director, specializing in ESG and sustainability. He has more than 20 years of experience in the capital markets, most recently as the global head of sustainability for Nasdaq, and is recognized as an ESG measurement, reporting, and strategy speaker and thought leader around the world. Evan supports a wide array of client companies as they endeavor to become more transparent, efficient, responsible, and sustainable. In this capacity, he focuses on measuring and integrating material business concerns, clarifying ESG objectives and opportunities, developing innovative performance measurements, maximizing human capital, and diversifying stakeholder engagement. In addition, Evan has experience leading global volunteerism, social responsibility, and philanthropy programs focused on building a purpose-led culture. Evan is an active leader and participant in ESG-related organizations, including the Global Sustainability Standards Board and the Executive Advisory Board for the Boston College Center for Corporate Citizenship. He previously served for six years on the Network USA Board of the United Nations Global Compact, and his writings have appeared in Forbes and Capital Finance International.