Sustainability is one of the big issues of our time, if not the issue! If the EU is to achieve its long-term goal of net-zero greenhouse gas emissions (“climate neutrality”) by 2050 and comply with the EU Climate Law, it is essential that companies are made more accountable.
A major step forward is the Corporate Sustainability Reporting Directive (CSRD) and the EU taxonomy which oblige certain companies to prepare annual sustainability reports. At the heart of CSRD reporting is the concept of “double materiality”. But what exactly does this mean and why should you care?
What is double materiality?
Let’s start with the basics: “double materiality” refers to two perspectives of materiality in the context of sustainability reporting.
- External materiality, which emphasizes the impact of a company’s business activities on the environment and society.
- The internal materiality, which shows how environmental, social and governance issues (ESG issues for short) can influence the financial and economic performance of the company.
1. What exactly is the external materiality (inside-out)?
Inside-out materiality, also known as impact materiality, is primarily concerned with the effects and consequences that a company has on external stakeholders such as society and its surroundings, e.g. the environment.
Examples of external materiality based on Coca-Cola
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Environmental impact: Coca-Cola uses significant amounts of water to manufacture its products in many regions of the world. If the company does not use these important resources responsibly, this could lead to water shortages in these regions. This would be an example of a negative external materiality. To counteract this, Coca-Cola could introduce water treatment and reuse initiatives.
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Social impact: Let’s imagine that Coca-Cola employs workers in a certain country under poor working conditions. This would not only have a negative impact on the workers concerned, but could also lead to public outcry and boycotts. As a countermeasure, the company could invest in fair labor practices and better working conditions to minimize the social impact.
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Economic impact: In many countries, Coca-Cola supports local suppliers and small farmers, for example by buying ingredients such as sugar or fruit from them. If the company pays fair prices and invests in sustainable farming methods, this can have a positive economic impact on these local communities.
Each of these actions, whether positive or negative, is an example of external materiality. Companies that recognize and proactively manage the impact of their business practices on the environment and society are better prepared to minimize risks and take advantage of opportunities. At a time when consumers and stakeholders are increasingly conscious of their actions, attention to external materiality can be critical to a company’s long-term success.
2. What exactly is the internal materiality (outside-in)?
The outside-in perspective, also known as “financial materiality”, considers risks and opportunities arising from global or local ESG challenges that directly affect the company, whether in the form of financial impact, business interruption or reputational damage.
Examples of internal materiality based on Coca-Cola
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Environmental risks: Coca-Cola relies heavily on water as its main ingredient. If there is a water shortage in a region where the company produces, production costs could rise or production losses could occur. Proactive water management and investments in water-saving technologies can counteract such risks and ensure that Coca-Cola can continue to produce efficiently in the future.
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Governance opportunities: Coca-Cola can increase consumer trust through transparent reporting on ingredients, nutritional information and business practices. This could lead to increased customer loyalty and ultimately higher sales figures.
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Social risks: Coca-Cola is known for its global marketing campaigns. A misstep, for example in the form of culturally insensitive advertising, could lead to a loss of image, which would have a direct impact on sales figures and the share price. Conversely, effective diversity and inclusion management can lead to more innovative marketing campaigns that appeal to a broader target group.
Paying attention to internal materiality as part of “double materiality” enables companies like Coca-Cola to identify potential internal challenges and take appropriate action. A proactive approach in this area can not only prevent financial losses, but also open up new business opportunities.
Double materiality: When is an issue considered "material"?
The term “double materiality” suggests that the consideration of the internal and external perspectives should focus in particular on material aspects.
The European Sustainability Reporting Standards (ESRS) define materiality as follows:
External materiality (impact materiality):
A sustainability aspect is material from an impact perspective if it relates to the company’s significant actual or potential, positive or negative impacts on people or the environment in the short, medium or long term. Material sustainability aspects include the impacts that the company has caused or contributed to, as well as the impacts that are directly linked to the company’s own business activities, products and services through its business relationships. Business relationships include the company’s upstream and downstream value chain and are not limited to direct contractual relationships.
Internal materiality (financial materiality):
A sustainability aspect is material from a financial perspective if it triggers or may trigger the following: financial impact on the company’s development, including cash flows, financial position and results of operations, in the short, medium or long term.
A materiality analysis can be used to determine whether an issue is material for your company in financial terms (outside-in) or in terms of impact (inside-out). We have created a guide on how you can carry out your materiality analysis in 4 steps.
Wesentlichkeitsanalyse Vorlage
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When and why is double materiality relevant for me?
The CSRD can be explained in less than 100 words and specifies which companies must submit a sustainability report in accordance with the ESRS and when they are required to report. As double materiality is a central component of this directive, it is relevant for all affected companies and their stakeholders.
Here are some reasons and situations that highlight the relevance of double materiality:
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Strategic planning: When developing or revising your corporate strategy, it is crucial to consider both internal and external factors. Double Materiality helps to identify potential risks and opportunities arising from environmental, social and governance issues and integrate them into corporate planning.
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Investor relations: The EU is pursuing the goal of redirecting private financial flows specifically towards financing a sustainable transformation of the economy (keyword: sustainable finance). More and more investors are paying attention to ESG criteria in their investment decisions. A proactive approach to double materiality can make your company more attractive to such investors.
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Risk management: Environmental and social crises, whether due to the increasing number of natural disasters or social unrest, can have a direct impact on your company. By considering the external and internal materiality, you can better identify these risks and develop appropriate countermeasures.
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Reputation and brand value: At a time when consumers are increasingly conscious of their purchases and opt for brands that reflect their values, taking double materiality into account is crucial and can offer a significant competitive advantage.
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Stakeholder engagement: Whether it’s your workforce, your customers or the communities you operate in, they all have expectations of your business. By considering double materiality, you can interact more effectively with these stakeholders and meet or even exceed their expectations.
Overall, double materiality is relevant if you want to build and manage a sustainable and future-oriented company. It enables a holistic view that ensures you have an eye on both the internal and external aspects of your business activities.
What is a double materiality analysis?
In a double materiality analysis, both the internal materiality and the external materiality of a company are examined more closely. The company determines the ESG issues relevant to it in advance. Once both perspectives have been examined in detail and opportunities and risks have been identified, the material issues are prioritized. Ideally, this analysis is made more effective by involving various stakeholders and is updated regularly, as the environment and business conditions can change constantly.
By conducting a double materiality analysis, companies can not only better understand and manage their ESG impacts, but also ensure that they are addressing the issues that matter most to their stakeholders and their business. This not only promotes more sustainable business operations, but can also create competitive advantage and generate long-term value for the company and its stakeholders.
The analysis can be carried out using an Excel materiality analysis template or a specialized software such as Materiality Master.
What is a materiality matrix?
A materiality matrix is a graphical tool that companies use to visualize and present the results of their double materiality analysis. The matrix helps to determine the relevance and priority of ESG issues for both the company and its external stakeholders.
The materiality matrix usually has two axes:
- Vertical axis (y-axis): This shows the importance of the ESG topic for external stakeholders, such as customers, investors, NGOs or the local community. Topics of major importance for these groups are shown further to the right in the matrix.
- Horizontal axis (x-axis): This represents the importance of a particular ESG issue for the company itself. This can relate to financial impact, operational risks, brand image or other internal factors. Topics that are particularly important to the company are positioned higher up in the matrix.
Example of a materiality matrix

Source: www.deutscher-nachhaltigkeitskodex.de
By positioning ESG issues in this matrix, companies can see at a glance:
- Which topics are of high importance both for the company and for external stakeholders (usually in the upper right quadrant).
- Which topics are particularly important for external stakeholders, but have less direct internal impact on the company (in the top left quadrant).
- Which topics are primarily of internal relevance to the company, but are considered less important by external stakeholders (in the bottom right quadrant).
The materiality matrix thus provides companies with a clear and understandable representation of which ESG issues they should prioritize in their strategy, reporting and communication. It ensures that companies address the issues that are of greatest importance to both their business and their stakeholders. In times of growing expectations of corporate responsibility and transparency, such a tool is particularly valuable for stakeholder communication and engagement.
Conclusion: Double materiality (CSRD)
Double materiality is not just a new buzzword in the business world. It’s a crucial concept that helps companies shape their business strategies in a responsible and future-proof way. By addressing double materiality, you can ensure that your company is on the right track from both an ethical and financial perspective.
The materiality analysis benchmark studies by the University of Cologne and the DRSC provide a good insight. If you also look beyond the success of your company, you can also contribute to a more sustainable and fairer world with double materiality and a serious sustainability report with binding targets.