Within the Corporate Sustainability Reporting Directive (CSRD), the concept of dual materiality plays a crucial role. Companies required to report on their ESG performance under the CSRD are required to perform a dual materiality analysis. With this analysis, you determine which topics and themes are and are not relevant to report on. It sounds complex, but the concept actually makes a lot of sense. In this article, we explain exactly what dual materiality means, how to set up a materiality matrix and give practical tips and examples to get started yourself.
What exactly is dual materiality?
The concept of dual materiality is the foundation of CSRD. Double materiality sounds complicated, but it is simpler than you think. Indeed, material here means relevant. So an ESG theme or sustainability theme is material to an organization when it is relevant to that organization and its stakeholders. Then to determine whether a theme is relevant, it is analyzed from two perspectives. And so that’s why it’s called “dual materiality”: from an impact perspective and from a financial perspective. Is a theme relevant from one or both perspectives? Then it passes the double materiality test and must be reported on according to the CSRD.
Impact materiality: the inside-out approach
A topic or theme is impact material when it has a positive or negative impact on people and the environment. This is about how your business activities affect the world around you. Think of suppliers in the supply chain who violate human rights, the CO2 emissions of your production processes, or just the positive contribution your products make to a more sustainable world. This includes both actual and potential impact, in the short, medium and long term.
Financial materiality: the outside-in approach
An issue or theme is material from a financial perspective when it has or could have a positive or negative impact on the company’s financial performance. Here you look at how ESG topics affect your organization: costs, revenues, assets and access to capital markets. Consider cost reductions due to improved energy performance, new carbon taxes that increase your costs, flood risks due to climate change, or opportunities for developing circular products.
Why is dual materiality so important within the CSRD?
Dual materiality is essential within CSRD because it guides the entire sustainability analysis and, ultimately, therefore, the reporting on it. By starting with a thorough analysis of what is and is not important to an organization, it ensures that in the remainder of the analysis the organization actually focuses on the things that have the most impact on the organization itself, its stakeholders and the planet.
The analysis also provides greater transparency and better decision-making in the future. For example, a thorough analysis of the value chain provides guidance for strategic choices in terms of supplier selection. And when the financial risks are properly identified, it is possible to actively manage to avoid these risks and increase corporate value. It thus becomes not just a compliance exercise, but a strategic tool that adds real value to your organization.
The AFM also emphasizes the importance of transparent and well-supported dual materiality analysis. The regulator sees this as the cornerstone for good sustainability reporting and will assess how companies deal with it starting in fiscal year 2024.
How to create a materiality matrix? The complete roadmap
The CSRD itself does not provide any specific requirements with respect to conducting a dual materiality test. The idea behind this is that each organization is unique. However, the European Financial Reporting Advisory Group (EFRAG) does impose conditions on the analysis, such as the condition that all topics potentially relevant to an organization must be analyzed. Based on the EFRAG guidelines, the AFM navigation points and our experience at Empact, we developed the process into eight concrete steps:
Step 1: Identification of all possible ESG themes
A dual materiality analysis starts by making a longlist of all possible ESG themes, risks and opportunities. A good start are the themes, data points and sector-specific topics as described in the European Sustainability Reporting Standards (ESRS). Include internal experts from different departments, benchmarks from similar organizations and sector-specific guidelines. It is crucial to sharply define the topics: what does climate change mean in the context of your company? Is it about your own emissions, or more about risks and opportunities? Is it within your Dutch facilities or in your production chain?
Step 2: Thorough assessment of each theme
Next, all themes identified in Step 1 are thoroughly evaluated from both a financial and impact perspective. For this, the process of due diligence is applied and all themes are assessed based on both qualitative and quantitative criteria. In impact assessment, you look at scale, scope, likelihood and Corrigibility of the impact. In financial assessment, you evaluate the impact on costs, revenue, assets and access to capital. Importantly, you also consider different time horizons: short, medium and long term.
Step 3: Prioritization and visualization in a materiality matrix
After conducting the analysis from step 2, all results are aggregated to reveal any overlaps and connections. Next, these themes are ranked and visualized in a materiality matrix. One axis shows the degree of impact materiality and the other the degree of financial materiality. The advantage of this matrix is that you can clearly see at a glance how the themes are distributed. Also determine clear thresholds above which themes are considered material.
Step 4: Review by stakeholders
It is crucial to have the results validated by peers and external experts and stakeholders. This ensures a more holistic approach and organization-wide support for the process. The AFM emphasizes the importance of thorough stakeholder dialogue. Make sure you involve both internal stakeholders (employees, management) and external stakeholders (customers, suppliers, investors, NGOs). Document who you spoke to, why, and how their input was incorporated.
Step 5: Board approval
After validation by internal and external stakeholders, the process of obtaining approval from the Executive Board and possibly the Board of Directors, Supervisory Board and/or Supervisory Board begins. This is essential because strategic goals and changes can only be determined at the management level. Provide a clear presentation that clearly presents the methodology, key findings and implications for strategy.
Step 6: Auditor validation.
After Board approval, the materiality analysis should be reviewed by an auditor. This also provides opportunities to gather feedback and areas for improvement. It is wise to involve the auditor early in the process. After all, if the auditor only later concludes that other topics should also be reported on, it is difficult to still include that information in the annual report.
Step 7: Management and annual update
Develop a plan for managing material perspectives so that it can be reviewed every year. The materiality analysis is not a static document but should move dynamically with changes in your business, industry and regulations. Plan an annual review where you assess whether the analysis is still current.
Step 8: Report on the material themes.
The last step is to report on the materiality analysis. In the first place about how the double materiality test took place (the process), but of course also about the results (according to ESRS 2: SBM-3 and IRO-2). Transparently describe your methodology, stakeholders involved, thresholds used and the results.
Examples of duplicate materiality analyses
Philips: pioneer with dual materiality
Philips is one of the Dutch companies that applied a double materiality test early on. In their annual report, they applied the double materiality test to their company. It is interesting to study this report because it provides insight into how the double materiality test can be applied in practice.
Identifying ESG themes and prioritization
Philips must identify which Environment, Social and Governance topics have the greatest impact on the company itself and are most important to stakeholders in the value chain. Philips identifies these topics through a multi-stakeholder process. The stakeholders with whom Philips is in dialogue are customers, suppliers, investors, employees, peer organizations, social partners, regulators, NGOs and academics.
In addition to stakeholder dialogue, Philips uses various other sources (such as GRI standards and the media) and has gathered a lot of information through an AI-based application to identify ESG topics. Topics were then prioritized by sending a survey to a large and diverse group of stakeholders and combining the outcome with input from the application.
A strong example of a materiality matrix
The materiality matrix shows how Philips’ activities are ranked in terms of materiality. On the y-axis the impact on stakeholders, on the x-axis the impact on the company itself. The result: a clear visualization distinguishing between themes with low, medium and high materiality. Philips’ conclusion is that the double materiality test did not lead to significant changes in the identified material topics compared to their previous analyses.
Financial materiality test
Subsequently, Philips chose to also perform a financial materiality test. As this test is not yet a requirement, Philips has chosen to subject only the above medium and high materiality activities to this test. The result of this double materiality test is shown below.
CBS: government organization as frontrunner
Statistics Netherlands is the first government organization in the Netherlands to publish a CSRD-based sustainability report, even before it is mandatory. Empact has supported CBS in this process. CBS shows that a thorough materiality analysis leads to concrete results: a 73% COâ‚‚ reduction compared to 2019 and 88% renewable energy consumption. Their approach shows how to get from analysis to action.
Other sectors and companies
More and more Dutch companies are now performing their dual materiality analysis. Our overview of strong CSRD reporting includes examples from ABN AMRO (financial sector), VodafoneZiggo (telecom), Ahold Delhaize (retail) and NS (transport). Each company has its own approach, but all show that a thorough materiality analysis is the basis for effective sustainability reporting.
Impact of the Omnibus proposal on dual materiality
As of February 2025, the Omnibus proposal that limits CSRD to companies with more than 1,000 employees is in effect. About 80% of previously CSRD-compliant companies are now excluded from the obligation. However, the principle of double materiality remains intact, and large companies are still likely to request information from their suppliers.
The ESRS standards are being simplified with fewer mandatory data points, but the core remains intact. This makes a strategic approach to your materiality analysis all the more important: focus on what is truly relevant to your organization. Even for companies that voluntarily choose CSRD reporting, materiality analysis remains a valuable strategic tool.
Material themes: what do you focus on?
The ESRS standards contain potential material themes divided between Environment (climate, pollution, water, biodiversity, circularity), Social (employees, value chain, communities, consumers) and Governance (business ethics, lobbying, anti-corruption). Not everything is material to your organization. A chemical company has different priorities than an IT service provider. The materiality analysis determines what is relevant to you.
Practical tips for a successful analysis
The AFM published ten navigation points for good dual materiality analysis in July 2024. Combined with our experience at Empact, we arrive at these essential tips:
- Start on time: count on a lead time of 3 to 6 months for the analysis.
- Assemble a multidisciplinary project team: this ensures a complete picture and broad support.
- Be transparent: clearly explain the methodology and sources you use and how stakeholders are involved.
- Document carefully: ensure complete substantiation for audit purposes.
- Make it concrete: translate abstract concepts into measurable themes relevant to your organization.
Key points of interest:
- State the relationship between due diligence and materiality.
- Treat the analysis as a living document that is updated annually.
- Focus on the quality of stakeholder input over quantity.
- Use industry-specific guidance where available, but remain critical of its applicability to your situation.
From analysis to action
A materiality analysis is the starting point, not the end point. The results form the basis for your ESG strategy and determine where you deploy resources. It provides insight into where you can make the biggest impact and where risks and opportunities lie. At Empact, we help you translate these insights into concrete goals, KPIs and implementation plans. In this way, the CSRD becomes a springboard to meaningful change.
Want to get started on your dual materiality analysis? Contact us for a conversation about how we can support your organization on this important journey.