short and compact
The double materiality analysis (DWA) is a central instrument of the CSRD (Corporate Sustainability Reporting Directive) and the ESRS (European Sustainability Reporting Standards). It helps companies to determine which sustainability issues are relevant for their company and therefore also for their reporting. Two perspectives are considered:
- Financial materiality: How do sustainability factors affect the company?
- Impact materiality: What impact does the company have on the environment and society?
Companies that fall under the CSRD reporting obligation must carry out a double materiality analysis and disclose the results in their sustainability reporting. This ensures that both financial risks and social and environmental impacts are assessed transparently.
Helpful tools for your materiality analysis
DWA Knowledge
1 What is the double materiality analysis?
The double materiality analysis (DWA) is a key concept in sustainability-related corporate reporting and plays a central role in the CSRD. It helps companies to systematically identify and evaluate material sustainability issues. Both opportunity- and risk-based as well as impact-related aspects are taken into account, which is a decisive difference to previous reporting standards that often only focused on financial risks.
Importance of the DWA for companies
- Meets regulatory requirements: The CSRD obliges many companies to carry out a materiality analysis.
- Increases transparency & credibility: Clear disclosure of sustainability issues for stakeholders.
- Promotes sustainable business strategies: companies recognize risks and opportunities at an early stage.
- Improves investor valuation: ESG criteria are becoming increasingly important for capital markets.
Legal basis and obligations
Under the CSRD, many companies in the EU are obliged to carry out a double materiality analysis and disclose their sustainability information in accordance with the ESRS standards. This applies in particular to large companies and listed SMEs. The exact requirements are set out in ESRS 1 “General Requirements” and ESRS 2 “General Disclosures”.
For companies, this means Those who do not carefully assess sustainability risks and impacts risk violating legal requirements and risk not only reputational damage, but also financial penalties.
2 What does double materiality mean?
The double materiality analysis is based on two central perspectives: financial materiality and impact materiality. Both dimensions are relevant for sustainability reporting in accordance with CSRD and ESRS and complement each other.
Financial materiality
Financial materiality (also known as the outside-in perspective) refers to sustainability aspects that affect the company itself financially. This involves risks and opportunities arising from environmental, social or governance(ESG) factors that can influence a company’s financial position, performance or access to capital.
Examples of financial materiality:
- Climate risks: Rising CO₂ prices, stricter environmental regulations or extreme weather events can lead to financial burdens.
- Regulatory changes: New sustainability requirements may necessitate investments or influence business practices.
- Reputational risks: Negative public perception due to ESG violations can result in a decline in sales or loss of capital.
Relevance: Companies must disclose how sustainability risks affect their financial situation – similar to traditional financial risks.
Impact materiality
Impact materiality (also known as the inside-out perspective) looks at the company’s impact on the environment, society and governance. This is about the positive or negative effects that business activities have on people, natural resources or social structures.
Examples of impact materiality:
- Environmental impact: Greenhouse gas emissions, water consumption or waste production of a company.
- Social impact: Working conditions, human rights in the supply chain or fair pay.
- Governance factors: corporate ethics, corruption risks or diversity in management.
Relevance: Companies are obliged to present their sustainability-related impacts transparently, even if they are not directly noticeable in financial terms.
Interplay of both perspectives
Double materiality ensures that companies consider both financial risks and social and environmental impacts. Sustainability topics can be material at the same time in both dimensions- or only in one of the two perspectives. As soon as one of the perspectives is classified as material, the company must report on this topic.
Example:
- Climate change is financially significant for many companies (e.g. rising CO₂ costs) and impact-significant (e.g. due to high CO₂ emissions from the company).
- Data protection & IT security can be financially significant (risks from cyber attacks), but have no significant social impact.
- Biodiversity protection can have a high impact materiality (effects on ecosystems), but only limited financial significance for a company.
For each sustainability dimension, companies must assess whether it is financially material, impact-based from both perspectives or not material at all.
3 How is the double materiality analysis carried out?
A double materiality analysis is carried out in several systematic steps. Companies must assess both financial and impact materiality in order to identify relevant sustainability topics and include them in their reporting. In this process IROs (Impact, Risk & Opportunity) play a central role: it requires the assessment of impacts, risks and opportunities in connection with sustainability issues.
Understanding and classifying the corporate context
The first step is to analyze the company and its business model in order to understand which sustainability issues could potentially be relevant for the company. Various sources of information can be used for this:
- Internal analyses: What is the ESG relevance of the corporate strategy? What does the company’s value chain and business model look like? What products or services are sold and where is the organization located?
- Stakeholder analyses: What expectations do investors, customers, employees and NGOs have?
- Industry and market analyses: Which ESG risks are particularly relevant in the industry?
- Regulatory requirements: Which legal requirements apply (e.g. CSRD, ESRS, EU taxonomy)?
- Internal analyses: Which sustainability issues influence the corporate strategy and value chain?
Result: Together with the ESRS AR16 topic list, these company- and industry-specific topics result in a longlist of potentially material topics that will be further analyzed in the next steps.
Identification of IROs
EFRAG’s list of topics contains 10 topics, which are further subdivided into sub-topics and in some cases sub-sub-topics. Impacts, opportunities and risks (IROs) must now be identified and formulated for these topics.
Since the identification and formulation of IROs is very time-consuming, it is worth using pre-formulated IROs (e.g. from our IRO database) or AI-supported materiality analysis software solutions (e.g. Materiality Master).
Assessment of materiality using IROs
This phase examines which of the identified IROs and the associated topics are actually classified as material. Financial and impact materiality are assessed separately. Depending on the classification of the IRO, different factors must be assessed
- Scale: Thescale indicates the extent to which an activity or incident affects the ESG topic (IRO). A “very high” scale can indicate a significant impact, opportunity or risk.
- Scope: Thescope assesses how many people or which environmental area is affected. A “global/total” scope indicates impacts over large geographical areas or population groups.
- Reversibility: Assesses the ability to correct or mitigate a negative impact on ESG issues. “Irreversible” indicates that the impact is permanent and cannot be reversed.
- Probability: The likelihood of potential impacts or opportunities & risks on ESG issues occurring. A high probability indicates a significant risk that the impact will actually occur.
Internal or stakeholders can be involved in the evaluation of the IROs and data, facts and risk assessments (e.g. flood risk calculations) can be consulted.
For efficient CSRD implementation, it also helps to look at materiality analysis benchmark comparisons or to compare them with CSRD-compliant reports (see CSRD report list) from companies in the same industry.
Forms of presentation of the main topics
Once the relevant sustainability topics have been identified, they can be presented graphically. One of the most common forms of presentation is the materiality matrix, which depicts the topics on a two-dimensional axis. The horizontal axis shows the financial materiality, the vertical axis the impact materiality. This makes it clear which topics are particularly relevant both financially and in terms of their impact. A heat map or ranking tables are also useful for visually prioritizing the topics and focusing on the most important aspects.
Challenges in conducting the materiality analysis
Data availability and quality
The availability and quality of relevant ESG data is often limited. Companies should develop a targeted data strategy to identify data gaps. The use of specialized software solutions for data integration can help to ensure reliable data collection.
Involvement of relevant stakeholders in the materiality analysis
Involving different stakeholders can be a challenge, as it requires coordinated communication and is very time-consuming. By actively involving stakeholders (e.g. workshops and surveys), companies can ensure that all relevant perspectives are taken into account.
Interface to risk management
ESG risks and opportunities must be assessed differently to traditional risks. The use of risk management tools and impact assessment models can enable well-founded identification and quantification.
Adaptation to new regulatory requirements
Regulatory requirements such as the CSRD and ESRS are subject to constant change. Companies should regularly review their processes and ensure that they always meet the latest requirements. Close cooperation with consultants can help with this.
Complexity of the topics
The multitude of ESG topics requires in-depth analyses and interdisciplinary collaboration. Prioritization techniques, such as the Materiality Model Canvas, help to identify the most relevant topics and optimize the focus.
4 What aids and tools are available?
The implementation of a double materiality analysis (DWA) can be efficiently supported by the use of modern CSRD tools and ESG software solutions. Various approaches are used – from AI-supported tools to specialized software solutions compared to the still popular Excel models. Both approaches are examined below.
AI support for the materiality analysis
The use of artificial intelligence (AI) can support the analysis process in several areas. Materiality analysis AI prompts can be used independently of the tool. AI-supported systems are able to process large amounts of data, recognize patterns and correlations and thus provide valuable insights into the relevance of ESG issues. This can be particularly helpful when it comes to identifying trends or quickly assessing potential risks and opportunities. However, it is important to note that AI serves as a complementary tool and does not replace human expertise – the final interpretation of the results remains the responsibility of the experts.
Software vs. Excel
When selecting suitable tools for carrying out DMA, companies are often faced with the decision between specialized software solutions and conventional programs such as Excel.
- Excel: Excel is widely used and is often sufficient for smaller projects, as it offers a flexible and easily accessible way to manually record and structure data and carry out initial analyses.
- Specialized software: In comparison, dedicated software solutions often offer advanced features such as automated data integration, interactive visualizations (e.g. materiality matrices) and regular updates in relation to regulatory requirements. These solutions can enable significant efficiency gains, particularly with large volumes of data and complex analysis processes.
The decision between these approaches should always be made on the basis of the individual company’s needs, the existing data volume and the complexity of the analysis. While Excel can score points as an entry-level solution, specialized software tools often offer more automation and deeper insights in the long term – provided they are used in line with the company’s requirements.
5 Materiality analysis completed: What's next?
After the materiality analysis has been completed and the material topics have been identified, the next step is to incorporate these results into the CSRD reporting reporting. This is followed by a structured approach to ensure that all relevant data points are recorded and prepared correctly.
Step 1: Determining the relevant data points
Based on the key topics, concrete data points can be identified. EFRAG has compiled and published a comprehensive list of over 1,100 ESRS data points. As manual data point mapping of the material topics to the data points is very time-consuming and error-prone, it is recommended to use a data point mapping tool or, if necessary, to make use of CSRD consultancies or CSRD experts.
Step 2: Gap analysis and data collection
The next step is a gap analysis to determine whether the required data is already available or still needs to be collected. Internal reporting and external sources should be checked here. If data is missing, processes must be set up to collect it.
Step 3: Preparation of the sustainability report
The data collection is followed by the preparation of the sustainability report. This must present the relevant ESG key figures in a clear and transparent manner so that all regulatory requirements, such as the CSRD and ESRS, are met.
Smaller companies can decide to prepare a voluntary sustainability report in accordance with the ESRS VSME standard. Larger companies and capital market-oriented SMEs must publish the comprehensive CSRD report together with the financial report.
Step 4: Review and publication
Finally, the CSRD report must be audited by an auditor for completeness and accuracy. Once this audit has been completed, the report is finalized and published in accordance with the CSRD deadlines.
6 Where is further support available for the materiality analysis?
Assistance and guidelines for implementing the materiality analysis
There are many guidelines and tools that support companies in implementing the double materiality analysis and CSRD implementation:
- EFRAG: The EFRAG materiality analysis guide (IG 1) on implementing double materiality helps companies to understand how to conduct a materiality analysis and which environmental, social and governance (ESG) topics they need to address in their sustainability report. It explains step by step how to carry out the analysis and answers frequently asked questions.
- DNK: The German Sustainability Code offers a free quick guide to conducting the double materiality analysis in accordance with ESRS.
- CSR Tools articles: In our blog you will find numerous articles about materiality analysis, e.g. this one: Four steps to creating a materiality analysis
- CSR Tools Offer: Excel template for conducting the materiality analysis & matrix
- Materiality Master: AI-supported software for performing the double materiality analysis
- CSRD Compass Newsletter: Every 2 weeks you will receive practical implementation tips.
Further reading and links
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7 Frequently asked questions (FAQ)
1. What is the double materiality analysis?
The double materiality analysis is a process in which companies assess ESG issues from the perspective of both their financial relevance and their impact on the environment and society. It forms the basis for transparent and integrated sustainability reporting.
2. Why is the double materiality analysis important?
The analysis enables companies to identify key ESG risks and opportunities, comply with regulatory requirements such as the CSRD and ESRS and thus manage their sustainability strategy in a targeted manner.
3. which legal requirements relate to the double materiality analysis?
In particular, the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) require companies to carry out a double materiality analysis and present it transparently in their reporting.
4. what does "IRO" mean in the context of the double materiality analysis?
IRO stands for Impact, Risk & Opportunity. This approach ensures that companies consider not only the direct financial impact of ESG issues, but also their social and environmental impact as well as the associated risks and opportunities.
5. How is the double materiality analysis carried out?
The process comprises several steps: First, relevant ESG topics are identified, followed by data point mapping and an assessment of these topics according to financial and impact materiality – often visualized in a materiality matrix. The IRO principle is incorporated into the analysis.
6. What role does data point mapping play in the analysis?
The data point mapping assigns relevant data sources to the identified ESG topics. This ensures structured data collection and integration, which is essential in order to meet the requirements of the ESRS and provide a sound basis for the analysis.
7. how can modern technologies such as AI support the DWA?
AI-supported tools can analyse large amounts of data, identify patterns and trends and thus accelerate the process of prioritizing topics. The AI acts as a supporting tool, while the final assessment is still based on human expertise.
8. What are the advantages and disadvantages of specialized software compared to Excel?
Excel offers flexibility and is often sufficient for smaller projects. Specialized software solutions, on the other hand, offer advantages such as automated data integration, interactive visualizations (e.g. materiality matrix) and greater efficiency for complex analyses – which is particularly advantageous for large volumes of data and regulatory requirements.
9. how are stakeholders involved in the DWA process?
Companies involve stakeholders in the process through regular analyses, workshops and surveys. In this way, different perspectives from investors, employees, customers and NGOs are incorporated into the assessment of ESG issues and increase the acceptance of the results.
10. How is a materiality matrix created?
When creating a materiality matrix, identified ESG topics are presented on a two-dimensional graphic. One axis represents the financial relevance, the other the social and environmental impact. This allows topics to be prioritized and presented visually.
11. how often should the double materiality analysis be updated?
The analysis should be reviewed and updated regularly – ideally annually or whenever there are significant changes in the business environment – to ensure that it always reflects current ESG risks, opportunities and regulatory requirements.
