The double materiality assessment (DMA) is the foundation of every CSRD report. Without a properly conducted DMA, you cannot determine which ESRS standards to report on, which data points to collect and which targets to set. Yet the DMA remains the least understood element of the reporting process for many companies.
In this guide, we explain what a double materiality assessment entails, how to conduct one step by step and which pitfalls to avoid.
What is a double materiality assessment?
The double materiality assessment evaluates each sustainability topic from two perspectives:
- Impact materiality (inside-out): what positive and negative impacts does your organization have on people and the environment? Think of CO2 emissions, water consumption, working conditions and human rights in the supply chain
- Financial materiality (outside-in): which sustainability-related risks and opportunities affect the financial position of your organization? Think of climate risks, regulatory changes, reputational damage and market opportunities
A topic is material if it is significant from at least one of these two perspectives. This is the key difference from the traditional (single) materiality assessment, which only considers financial materiality, as was common under GRI and SASB.
The CSRD requires, through ESRS 1, that every reporting organization conducts a double materiality assessment. The result determines which of the ten topical standards (E1 through E5, S1 through S4, G1) you must report on.
Why is the DMA so important?
The DMA is not merely a formality. It is the steering instrument for your entire CSRD reporting process:
- Determines the scope: which ESRS standards do you report on? A topic that is not material does not need to be reported (provided this is substantiated)
- Drives data collection: you only collect the full set of data points for material topics. This saves considerable time and cost
- Basis for targets: your reduction and improvement targets flow from the material topics
- Audit-relevant: the auditor assesses whether your DMA has been properly conducted. A poor DMA leads to qualifications or adverse opinions
Step 1: Identify stakeholders
The first step is mapping your stakeholders. ESRS 1 distinguishes between two groups:
- Affected stakeholders: individuals or groups directly impacted by your business activities. These include employees, workers in the value chain, local communities, end users of your products and ecosystems
- Users of sustainability statements: parties that use your sustainability information for decision-making. These include investors, banks, insurers, customers and regulators
Create an overview of all your stakeholder groups and determine per group:
- What is their relationship with your organization?
- How are they affected by your activities (positively and negatively)?
- What influence do they have on your business operations?
- How will you engage them in the DMA (survey, interview, workshop)?
Practical tip for SMEs: you do not need to consult dozens of stakeholder groups. Focus on the five to ten most important groups. A combination of a short survey and two to three in-depth interviews typically provides sufficient input.
Step 2: Map sustainability topics
The ESRS provide a predefined list of topics as a starting point. The ten topical standards are:
Environment (E)
- E1 Climate change: greenhouse gas emissions, energy consumption, climate adaptation
- E2 Pollution: air, water and soil pollution, hazardous substances
- E3 Water and marine resources: water consumption, water pollution, impact on marine ecosystems
- E4 Biodiversity and ecosystems: impact on ecosystems, deforestation, land use
- E5 Circular economy: waste, resource use, product design for circularity
Social (S)
- S1 Own workforce: working conditions, equal pay, training, health and safety
- S2 Workers in the value chain: working conditions at suppliers and subcontractors
- S3 Affected communities: impact on local communities, land rights, health
- S4 Consumers and end-users: product safety, data protection, accessibility
Governance (G)
- G1 Business conduct: anti-corruption, lobbying, payment practices, whistleblowing
For each topic, you identify the specific sub-topics relevant to your sector and activities. A food processing company has different sub-topics under E1 (refrigeration, transport) than an IT company (data centers, electricity).
Step 3: Assess impact materiality
For each topic, you assess the impacts, risks and opportunities (IROs) from the inside-out perspective. The ESRS prescribe a specific methodology:
For negative impacts:
- Severity: how severe is the impact? This is determined by three factors:
- Scale: how significant is the impact?
- Scope: how widespread is the impact? How many people or ecosystems are affected?
- Irremediability: is the impact reversible?
- Likelihood: how likely is it that the impact will occur? (only for potential impacts, not for actual ones)
For positive impacts:
- Scale and scope: how significant and widespread is the positive contribution?
- Likelihood: how likely is it that the positive impact will materialize?
Use a scoring scale (for example, 1 to 5) for each criterion and multiply the scores to arrive at a total score per topic. Set a threshold above which a topic qualifies as material.
Step 4: Assess financial materiality
In parallel with impact materiality, you assess each topic from the outside-in perspective: what financial risks and opportunities does this topic entail?
Per topic, you assess:
- Financial risks: could this topic lead to higher costs, lower revenue, asset impairment, increased financing costs or fines?
- Financial opportunities: could this topic lead to new markets, cost savings, higher revenue or better financing terms?
Assess each risk and opportunity on:
- Magnitude: how large is the potential financial effect?
- Likelihood: how likely is it that the effect will materialize?
- Time horizon: over what timeframe does this apply? Short-term (0-1 year), medium-term (1-5 years), long-term (5+ years)
Example: for a manufacturing company, E1 (climate change) may be financially material due to: (1) carbon taxes increasing costs (risk, medium-term), (2) customers excluding suppliers with a high footprint (risk, short-term), and (3) energy savings through sustainability initiatives (opportunity, short-to-medium-term).
Step 5: Present and validate results
The DMA results are typically presented in a materiality matrix: a chart with impact materiality on one axis and financial materiality on the other. Topics scoring above the threshold on one or both axes are material.
Validation of the DMA includes:
- Internal validation: discuss the results with management and the supervisory board. They must formally approve the material topics
- Stakeholder validation: share the outcomes with the consulted stakeholders and ask whether they recognize the prioritization
- Documentation: document the entire DMA process: the methodology, the stakeholders involved, the scoring criteria, the thresholds and the rationale per topic. This is essential for the auditor
It is important not only to substantiate the material topics but also to document why non-material topics were excluded. The auditor will ask questions about the exclusion of topics that are typically considered material in your sector.
Common mistakes in the DMA
- Only considering financial materiality: this was the old approach (pre-CSRD). The CSRD explicitly requires that you also assess the impact on people and the environment. A topic may not be financially material but can still be material from an impact perspective
- Engaging too few stakeholders: a DMA conducted solely internally, without stakeholder consultation, will be criticized by the auditor. At minimum, involve employees, customers and suppliers
- Excluding topics without justification: if you exclude E4 (biodiversity), you must be able to explain why. "Not relevant" without analysis is insufficient
- Treating the DMA as a one-off exercise: the DMA must be updated annually. New regulations, changing market conditions and stakeholder expectations can alter the materiality of topics
- No link to business strategy: the material topics must be reflected in your strategy, targets and KPIs. A DMA disconnected from business operations is a paper tiger
Need help with your double materiality assessment?
Kroll SR guides organizations through the entire DMA process, from stakeholder identification to the materiality matrix and audit-ready documentation. Our approach is pragmatic: we focus on a sound process that fits the size and complexity of your organization.
- Stakeholder analysis: we help identify and consult the relevant stakeholders
- IRO assessment: we guide the scoring of impacts, risks and opportunities per topic
- Materiality matrix: we produce a visual overview of the material topics
- Documentation: we ensure audit-ready documentation of the entire DMA process
- Link to reporting: we translate the DMA outcomes directly into the required ESRS data points
Want to learn more about our ESG reporting or ESG advisory services? Or are you curious about the CSRD timeline? Contact us for a no-obligation consultation.
