How-to: Double materiality explained simply

From 2025, companies in the EU will have to report in detail on environmental, social and corporate governance issues in their annual reports - with retroactive effect for the 2024 financial year. Companies that do not comply with this risk sanctions under the Corporate Sustainability Reporting Directive (CSRD). The European Sustainability Reporting Standards (ESRS) specify in detail which disclosure obligations must be fulfilled. A central element of the ESRS is double materiality, also known as dual materiality. This method helps companies to identify important sustainability issues and forms the basis for CSRD reporting.

Which companies are affected by double materiality

The CSRD makes sustainability reporting mandatory for all companies that are listed on an EU-regulated market and fulfill at least two of the following criteria:

• Balance sheet total over 25 million euros,
• Net sales over 50 million euros,
• more than 250 employees.

Companies not based in the EU are also subject to the CSRD if they have EU subsidiaries that are listed SMEs or large companies, or if they generate more than 150 million euros in net sales on a consolidated basis. Third-country companies with branches in the EU are also required to report if they exceed certain turnover and revenue thresholds. In total, this affects around 15,000 companies in Germany and around 50,000 throughout the EU.

Micro-enterprises and non-capital-market-oriented companies are excluded.

Double materiality: How companies identify relevant ESG topics for their reports

As with financial reporting, sustainability reports should focus on relevant information that is important to readers, investors and the public. 

As sustainability encompasses various ESG aspects (environmental, social and governance), companies face the challenge of identifying which topics are truly material. In the past, it was therefore examined which sustainability topics could have financial risks for the company and are therefore important for a non-financial report. For the CSRD, this has changed and two perspectives are used to determine which sustainability topics are reportable: Dual materiality. 

How the CSRD defines dual materiality: Inside-Out and Outside-In

Dual materiality introduces a new way of thinking to reporting. The materiality of sustainability aspects is viewed from different perspectives:

• The "inside-out" perspective, also known as "impact materiality", looks at the effects of entrepreneurial activity on people, the environment and society. Both the positive factors and the negative effects are considered. For example, the protection of biodiversity represents a positive impact, while water consumption or the company's emissions represent a negative impact.
• The " outside-in" perspective, also known as "financial materiality", considers the influence of sustainability factors, such as climate change or the scarcity of resources, on the company's success and future cash flow.

An issue is important if it harbors financial risks or opportunities for the company. It is also important if it has a major impact on the environment and society. This means that it is already subject to reporting if it is classified as material from one of these two perspectives. 

How companies identify relevant topics for dual materiality

To determine which topics are material for companies, a double materiality analysis must be carried out. This process requires good preparation and the involvement of corporate management.

To begin with, companies should consider which sustainability aspects could potentially be important. It is helpful to use relevant standards and frameworks, such as the ESRS standards, as a guide. Companies should also consider their supply chain, as sustainability issues may also be relevant there.

In order to identify the key issues, companies should include the perspective of their stakeholders. This can be, for example

• Suppliers
• Customers
• the employees
• and other affected groups.

Safe and transparent: how to successfully implement dual materiality

The process of double materiality is transparent at best. Companies should disclose how exactly they have carried out the analysis. Publication in the management report is mandatory anyway, which also results in an audit by auditors. To avoid mistakes, it is advisable to have the materiality analysis supported by specialized consulting firms.

Double materiality: How often must it be carried out?

In order to act in accordance with the CSRD, the double materiality test should be repeated every year. This ensures that the relevant topics are up to date and can be reported on at the same time.

Software solutions such as Planted's ESG Management Platform support companies in implementing double materiality in accordance with ESRS. There are numerous advantages to using such a platform:

• Massive time savings thanks to automated processes
• Centralized data storage
• Simplified collaboration across teams or locations
• Close cooperation with a CSRD team of experts

More than compliance: the added value of dual materiality

Dual materiality helps companies to identify important sustainability issues and use their resources more efficiently. It helps to meet stakeholder expectations and strengthen trust in the company. It also enables the identification and assessment of sustainability risks and opportunities. This is particularly crucial for the publication of the sustainability report in the management report, which is new and mandatory as a result of the CSRD.

Conducting a double materiality analysis can be complicated, but it is worth it. It not only fulfills legal requirements, but also provides important insights for the further development of the sustainability strategy. Companies also benefit from this, as the management report is crucial for investments and loans in the financial market.

Simply realize the double materiality

With Planted, we support your company in implementing dual materiality in close cooperation with auditors. In a workshop and with the involvement of the Planted software solution, our team of experts works with your company to develop the double materiality analysis. Measures that have already been implemented, such as CO₂ accounting or reduction measures, are taken into account. 

Would you like to get to know the ESG management platform for implementing dual materiality without obligation? Then get in touch with us or book a free demo.

‍