A materiality assessment is the process a company uses to decide which sustainability matters to report. Double materiality, required by ESRS, treats a matter as material if it is material from an impact perspective, a financial perspective, or both.
Three kinds of materiality
Materiality decides what goes into a sustainability report. The concept comes from financial reporting: would leaving this out, or getting it wrong, change an investor’s decision? Standards apply it in different ways.
| Financial materiality | Impact materiality | Double materiality | |
|---|---|---|---|
| Question | Could this matter affect cash flows, access to finance, or cost of capital? | Does the company have a significant actual or potential impact on people or the environment? | Is either true? |
| Direction | Outside-in | Inside-out | Both |
| Main audience | Investors and lenders | Affected stakeholders | Both |
| Used by | IFRS S1 and S2 | GRI | ESRS |
Under ESRS, the unit of assessment is an IRO, an impact, risk, or opportunity, rather than a broad topic. The interoperability guidance from the IFRS Foundation and EFRAG confirms that financial materiality under ESRS is aligned with the ISSB definition.
The four-step process
No standard mandates a fixed sequence, but EFRAG’s implementation guidance (IG 1) describes four common steps:
- Understand the context: business model, products, locations, the value chain from raw materials to end of life and affected stakeholders.
- Identify IROs: work through the ESRS topics and sector guidance to list actual and potential impacts, risks and opportunities, including company-specific ones.
- Assess and decide: rate impacts by severity (scale, scope, irremediable character) and, for potential impacts, likelihood; rate risks and opportunities by likelihood and size of financial effect over the short, medium and long term. Set thresholds you can explain, and have management and the board review the results.
- Report: disclose the process, assumptions, thresholds, material IROs and the disclosure requirements applied as a result.
Repeat the assessment each reporting period. You can carry forward last year’s conclusions if nothing significant has changed, but acquisitions, new markets, or new regulations call for a fresh review.
Climate in a materiality assessment
- Impact side: a company’s contribution to climate change, measured by its Scope 1, 2 and 3 emissions. EFRAG guidance notes that impacts with scientific consensus, such as climate change, can be concluded material without detailed severity analysis, which is why energy-intensive companies almost always report under E1.
- Financial side: transition and physical risks, low-carbon opportunities and dependencies on energy and water, assessed by likelihood and financial effect.
- Data that follows: if climate is material, ESRS E1 requires transition plans, targets, Scope 1, 2 and 3 emissions, and energy data, often from subsidiaries and suppliers.
How companies respond
- Keep results separate by standard: a financial-materiality assessment for IFRS S2 is not a double-materiality assessment for ESRS.
- Record the reasoning for each IRO, not just the topic.
- Treat stakeholder surveys as input on severity and completeness, not as a vote.
- Include the upstream and downstream value chain, or Scope 3 and impact assessment will have gaps.
Aentscope keeps the emissions and energy data that a material climate topic requires in one place, ready for ESRS E1 and IFRS S2.
Related regulations and standards
| Type | Name | Relevance |
|---|---|---|
| EU standard | ESRS 1 General requirements | Definition of double materiality |
| EFRAG guidance | IG 1 Materiality assessment implementation guidance | Four-step example process |
| Disclosure standard | IFRS S1 | Source of the financial materiality definition |
| Voluntary standard | GRI 3 Material Topics | Impact materiality process |