Double Materiality in non-financial reporting (Updated ESRS 2025)

Update 2025: The revised materiality concept clarifies that topics and sub-topics are considered material only where they are linked to one or more material impacts, risks, or opportunities (IROs). These are identified in accordance with the criteria set out in Chapters 3.2.1 and 3.2.2 of ESRS 1. The materiality assessment may explicitly be conducted using a top-down approach. Based on an analysis of the undertaking’s strategy and business model, including its sectors of operation, geographic footprint, and the characteristics of its upstream and downstream value chain, the undertaking may directly conclude on the materiality or non-materiality of topics, sub-topics, or specific IROs. This is possible without performing further detailed assessments, provided that materiality is clearly evident from this analysis.

Where materiality cannot be unequivocally determined through the top-down analysis, a targeted and more granular assessment of the relevant impacts, risks, or opportunities is required. Alternatively, the undertaking may apply a bottom-up approach by assessing materiality exclusively at the level of impacts, risks, and opportunities and subsequently deriving the material topics and sub-topics. This framework introduces methodological flexibility. It enables a focused, strategy-driven, and proportionate materiality assessment while ensuring robustness, consistency, and audit readiness.

The concept of double materiality was mentioned first in the non-financial reporting guidelines by the European Commission. It reads as follow:

1. A company shall provide “information to the extent necessary for an understanding of the undertaking’s development, performance, position.” This is the outside-in view i.e. describing how industry trends (e.g. e-mobility, CO2-pricing) or ESG-factors are affecting the business and the decision-making process of a company.
2. A company shall provide information about the “impact of its activity”.  This is the inside-out view, i.e. describing how the company impacts society or environment.

The explanation of both directions (outside-in and inside-out) is called double materiality (see our guide about CSRD und ESRS).

Outside-in view

The outside-in view of double materiality shall include the following information:

• How the business model, strategy and principal risks are affected by external developments: company’s goals, strategies, management approach and systems, values, tangible and intangible assets, value chain and principal risks are relevant considerations.
• Main sectoral issues: issues that are affecting the sector and are likely to be material to companies operating in the same sector, or sharing supply chains. Topics already identified by competitors, customers or suppliers are likely to be relevant for a company.
• Interests and expectations of relevant stakeholders and their impact on the company: companies are expected to engage with relevant stakeholders and seek a good understanding of their interests and concerns.
• Public policy and regulatory drivers: Public policies and regulation may have an effect on the specific circumstances of a company and may influence materiality.

Companies should also disclose information on their principal risks and how they are managed and mitigated. Those risks may relate to their operations, their products or services, their supply chain and business relationships, or to other aspects. This would include an appropriate perspective on short, medium, and long-term principal risks. Furthermore, companies are expected to explain how principal risks may affect their business model, operations, and financial performance. They should also discuss the impact of their activities.

The nonfinancial report is expected to provide insights into a company’s business model, strategy, and its implementation. It should explain the short-term, medium-term, and long-term implications of the information reported. Companies are expected to disclose relevant information on their business model. This includes their strategy and objectives. Disclosures should provide insight into the strategic approach to relevant non-financial issues; what a company does, how and why it does it.

Forward-looking information enables users of information to better assess the resilience and sustainability of a company’s development, position, performance, and impact over time. Moreover, it helps users measure the company’s progress towards achieving long-term objectives.

Materiality:  Materiality is a concept already commonly used by preparers, auditors and users of financial information. A company’s thorough understanding of the key components of its value chain helps identify key issues, and assess what makes information material. Material disclosures are expected to provide a comprehensive picture of a company in the reporting year. This refers to the breadth of information disclosed. However, the depth of information reported on any particular issue depends on its materiality. A company should focus on providing the breadth and depth of information that will help stakeholders understand its development, performance, position.

Inside-out view

The inside-out view of double materiality shall include the following information:

• Impact of the activities: Companies are expected to consider the actual and potential severity and frequency of impacts. This includes impacts of their products, services, and their business relationships (including supply chain aspects)
• as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters should be described

Those ESG topics should be covered in the report (impact, risks and measures):

E (Environment): The “E” for “Environment” stands for environmental protection measures with regard to climate protection and climate change. It aims to reduce environmental pollution or hazards, prevent greenhouse gas emissions, or improve energy efficiency. Environmental matters: A company is expected to disclose relevant information on the actual and potential impacts of its operations on the environment. They should also address how current and foreseeable environmental matters may affect the company’s development, performance, or position.

This may include:

• material disclosures on pollution prevention and control
• environmental impact from energy use

S (Social): The “S” for “Social” stands for corporate social responsibility and includes aspects such as occupational health and safety, diversity, or social commitment. Companies are expected to disclose material information on social and employee matters (3). These include:

• the implementation of fundamental conventions of the International Labour Organisation;
• diversity issues, such as gender diversity and equal treatment in employment and occupation (including age, gender, sexual orientation, religion, disability, ethnic origin, and other relevant aspects)

G (Governance): The “G” for “Governance” stands for controlled and transparent corporate management. It includes topics that support sustainable corporate management, such as corporate values or management and control processes.

• Companies are expected to disclose material information on potential and actual impacts of their operations on right-holders. It is considered best practice for a company to express its commitment to respecting human rights. This commitment may define what the company expects from its management, employees, and business partners in relation to human rights, including core labor standards. The information may explain whose rights the commitment addresses. Examples are the rights of children, women, indigenous peoples (1), persons with disabilities (2), local communities, smallholder farmers, and victims of trafficking in human beings. The rights of workers, including those working under temporary contracts, workers in the supply chains or subcontractors, migrant workers, and their families should also be included.
• Companies are expected to disclose material information on how they manage anti-corruption and bribery matters and occurrences. Companies may consider making disclosures on organization, decisions, management instruments, and on the resources allocated to fighting corruption and bribery. Additionally, companies may consider explaining how they assess fighting corruption and bribery. They should also explain how they take action to prevent or mitigate adverse impacts, monitor effectiveness, and communicate on the matter internally and externally.

Conclusio

If you are preparing your first non-financial report or if you’re planning to extend your existing report and looking for fresh content: Contact us to improve the ESG-related data and content in your non-financial report.

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