Materiality assessment

Reflections on the Application of the Double Materiality Concept in ESG Reporting under Directive 2022/2464

Directive 2022/2464, commonly known as the Corporate Sustainability Reporting Directive (CSRD), introduces a subtle yet significant methodological evolution in the practice of sustainability reporting. From a pragmatic perspective, it reshapes and refines several of the discipline’s foundational concepts.

Among these, the notion of materiality assessment merits particular attention. While traditionally linked to the auditing field, the concept plays a distinct and central role in ESG reporting. Building on the European Commission’s 2019 guidelines on non-financial reporting, the CSRD firmly establishes the principle of double materiality. This approach is essential for companies preparing ESG disclosures, as it enables them to determine the information that is truly relevant for their stakeholders.

Double materiality, which lies at the heart of sustainability reporting, encompasses two dimensions. The first, known as impact materiality, refers to the actual or potential impacts a company may have on people and the environment in the short, medium, and long term. It adopts an "outside-in" perspective, focusing on how business activities affect the world around them. The second, financial materiality, relates to the risks and opportunities arising from ESG factors that may influence the company’s financial performance. In this case, the view is "inside-out," considering how the external environment affects the business.

Double materiality can be visualized as the intersection of these two dimensions—a space that forms the conceptual foundation of ESG reporting. From this point of departure, companies are expected to carry out a comparative analysis against the European Sustainability Reporting Standards (ESRS), both cross-cutting and sector-specific, in order to define entity-specific disclosures. This process helps identify material issues that may not be fully addressed by existing accounting standards.

Importantly, the CSRD does not impose a prescribed methodology for conducting the materiality analysis. However, a purposive interpretation of the European Financial Reporting Advisory Group (EFRAG) guidelines points to a three-step approach: assessing the company’s operating context and stakeholders, identifying potentially material sustainability issues, and validating a final set of relevant topics.

For companies already familiar with sustainability reporting practices, EFRAG identifies the Global Reporting Initiative (GRI) materiality matrix as a useful starting point for evaluating impact materiality. This can then be expanded to include financial materiality considerations, resulting in a more comprehensive and nuanced assessment.

In conclusion, the adoption of double materiality under the CSRD underscores the continuity between ESRS and previous ESG frameworks, while also highlighting how this phase of transition represents an opportunity for technical refinement and greater coherence in sustainability reporting.

Dott. Valerio Locatelli

Dott. Alessio Ghidone