The Corporate Sustainability Reporting Directive (CSRD) came into force in 2024 and requires approximately 49,000 companies in the EU to gradually publish information on their sustainability metrics, starting in 2025. A key component of this process is Materiality Assessment.
What is Materiality Assessment?
A Materiality Assessment identifies the relevant ESG (Environmental, Social, and Governance) topics for a company. It forms the basis for sustainability management and nonfinancial reporting.
The CSRD requires companies to apply double materiality. A sustainability topic is considered material under double materiality if it meets the criteria from either or both of the following perspectives:
- Inside-out perspective (impact to society): Determines a company’s effects on people and the environment.
- Outside-in perspective (impact to business): Analyzes which financial and non-financial topics influence a company’s business activities.
How to conduct a Materiality Assessment
The CSRD creates the legal framework for sustainable reporting, while the European Sustainability Reporting Standards (ESRS) provide guidelines for identifying and reporting material topics. The ESRS aim to ensure consistent and transparent reporting in order to improve comparability between companies. In practice, the Materiality Assessment is often divided into the following steps:
1. Identification and evaluation of relevant topics
Under the CSRD, the ESG topics reported by companies depend on their individual materiality. In other words, companies decide which topics to include in their reporting, provided they emerge clearly from a prior Materiality Assessment.
Although the ESRS help companies to identify relevant material topics to analyze in their business and supply chain, it is advisable not to rely solely on these standards. To go beyond mere compliance, sustainable development frameworks, independent of reporting requirements, should also be taken into account.
The set of indicators published by the European Union in 2017 to measure progress towards the Sustainable Development Goals (SDGs) at the European level offers such an option. This includes approximately 100 indicators relating to the 17 goals of the United Nations’ Agenda 2030. The Eurostat database shared this list, which is freely accessible to all EU Member States.
2. Assessment of relevant topics
There are various ways to select the relevant topics for a company from the multiple possible indicators. The ESRS only requires to set “appropriate quantitative and/or qualitative thresholds” for assessing materiality (ESRS 1). This is often done through surveys, interviews, or workshops with stakeholders such as employees, investors, and customers.
Impact Valuation complements stakeholder surveys by translating qualitative information into monetized, quantitative data. Instead of relying on subjective opinions, Impact Valuation allows for a science-based prioritization and comparability of impacts. It offers the following methods for setting quantitative thresholds:
- Comparison within the same industry: This method examines how a company compares with its competitors for certain environmental and social indicators. It analyzes, for example, whether a company extracts more fresh water than the industry average or invests an above-average amount in further training programs for employees.
- Highest impact: This method focuses on the societal costs that a company incurs through its activities. For example, if a company has the highest impact along its supply chain due to greenhouse gas emissions, this may mean that other environmental impacts, such as water consumption or waste production, are considered less material by comparison. This prioritization helps companies to focus their resources where the greatest social and environmental impacts arise.
- Relationship to the net profit generated for the year: This approach uses a financial metric, such as net income, to identify material topics. In this case, a certain percentage of net income (e.g., 5% or 10%) is set as a threshold. Topics with impacts that exceed this threshold are deemed material due to their potential to affect the organization’s ongoing operations.
Combining the above methods allows companies to fully exploit the potential of each. For example, integrating methods 1 and 3 helps companies balance financial performance with sustainability metrics, addressing sustainability goals within the context of their industry and the national economy. These quantitative thresholds provide the framework for engaging stakeholders in determining materiality in the following steps.
3. Creation of an evaluation logic
Next, an evaluation logic is defined in which the collected topics are assessed according to their relevance. The aforementioned differentiation between the outside-in and inside-out perspectives is applied in order to analyze topics comprehensively.
4. Stakeholder Analysis
In this step, the relevant stakeholders are identified and then ranked according to their importance to the company. This includes creating a ranking that takes into account both the stakeholders’ influence on the company and the degree to which they are affected by ESG measures. Stakeholders include customers, employees, investors, suppliers, regulatory authorities, and the general public.
5. Integration of the stakeholders’ perspectives
To ensure that the stakeholders’ perspectives are effectively integrated into the analysis process, companies should actively seek feedback. This can be done through regular surveys, workshops, or dialogue formats that enable various agents to directly express their concerns and expectations. For example, an annual stakeholder survey can collect and evaluate opinions on relevant ESG topics.
6. Creation of a materiality matrix
A materiality matrix is an effective way to visualize the results of the Materiality Assessment, illustrating the priorities of both companies and stakeholders. For example, the x-axis represents the impact of individual ESG topics on a company (ranging from low to high), while the y-axis reflects the degree of a company’s impacts on society.
7. Publication of results
The Materiality Assessment is valuable for both sustainability reporting and internal strategy documents. Furthermore, the insights gained from the analysis may serve as a basis for developing and implementing ESG strategies that not only fulfill legal requirements but also meet stakeholder expectations.
How does Impact Valuation support Materiality Assessment?
Impact Valuation is a method that measures the value of corporate activities for society beyond mere business results. An essential component of Impact Valuation are value factors (also: Impact Valuation factors) that reflect the social significance of individual sustainability indicators for society. Multiplying physical quantities by these coefficients converts them into a common currency (e.g., euros or US dollars). By expressing indicators such as water consumption or greenhouse gas emissions in a standardized monetary unit (instead of in liters and tons, for example), they can be compared more easily.
Outside-in perspective and ESG topics
For the outside-in perspective, current business performance indicators and direct supplier relationships are analyzed. Next, projections enable the estimation of opportunities and risks that may result from changes in regulation, technology, or market conditions. These changes are also referred to as transition opportunities and risks.
Stakeholder perspective and societal relevance
An important feature of Impact Valuation is the objective and scientifically-backed inclusion of the stakeholder perspective. The quantitative results show the actual impact of a company’s activities on society and their importance to stakeholders. This subsequently allows companies to align their strategies with the opportunities and risks with the highest impacts.
Transparency and consistency in sustainability assessment
For effective sustainability reporting, it is advisable to choose a Materiality Assessment model that is transparent, easy to understand, and replicable on an annual basis. Impact Valuation provides such a consistent analytical framework. By conducting the assessment each year, changes in material topics become evident through both the company’s actions and developments at national and global levels.
Practical examples and visualization of the Materiality Assessment in a matrix
The materiality analysis takes into account both the impact of a company on society and the impact of social changes on a company. For example, an industrial company uses double materiality as follows:
1. Inside-out perspective:
- Contribution to social justice: An industrial company that offers fair working conditions and development programs for employees actively contributes to improving social equality. By creating equitable opportunities and supporting the professional development of all employees, the company helps to break down social barriers and increase social participation.
- Environmental impact: Water use in industrial production processes, for example, can have a significant environmental impact. Excessive water withdrawal can deplete local sources, affecting both ecosystems and surrounding communities.
- Economic effects: The use of innovative technologies can increase the gross value added of a business. By improving production processes, the economic value of products can therefore grow. In the long term, this can translate to a more stable financial foundation and greater job creation.
2. Outside-in perspective:
- Social pressure: Companies are increasingly being challenged to rethink and improve their impact to society. Social pressure can take the form of customer reviews, social media, or public discussions that critically question corporate behavior. If the company does not respond to these expectations, it risks losing the trust of external stakeholders. Consequently, this can lead to a decline in customer loyalty and a loss of revenue.
- Water scarcity: The extraction of fresh water for industrial production is contributing to the global scarcity of water resources. While this shortage is currently affecting ecosystems and agriculture in particular, in the future it could also lead to supply chain bottlenecks or price increases for agricultural products. These challenges, in the context of adapting to new circumstances, can jeopardize the strategic direction and competitiveness of the company.
- Market opportunities: The growing market for environmentally-friendly products offers industrial companies new business opportunities. By developing and offering sustainable products and services, companies can strengthen their market position and gain the trust of customers. In addition, adapting to these changes can also lead to innovative solutions that set the company apart from competitors and promote brand loyalty.
Visualization in a materiality matrix
In a materiality matrix, the topics are arranged along two axes:
- Y-axis: A company’s impact on people and nature (from low to high)
- X-axis: The influence of ESG issues on a company (from low to high)
The topics that are highly relevant to both stakeholders and the organization are located in the upper right quadrant. Here is an example of how topics can be arranged in the matrix:
This matrix enables companies to see at a glance which topics should be prioritized. This allows companies to clearly define their strategic direction and focus on the most relevant aspects of their sustainability strategy.
Checklist for a robust Materiality Assessment
A successful Materiality Assessment is characterized by several factors:
- Clear identification of topics: The relevant topics must be clearly identified and described without overlaps.
- Concentrate on challenges: The analysis focuses on identifying key challenges; solutions are developed at a later stage.
- Consideration of the entire value chain: Companies should consider all parts of the value chain to ensure a comprehensive analysis.
- Priorities: The Materiality Assessment is used to identify the topics that are most important to stakeholders.
- Focus on opportunities: A well-conducted Materiality Assessment that can be repeated annually reduces the data collection work for reporting in the long term. The effort involved in a comprehensive materiality analysis is therefore worthwhile – and can be significantly lowered with the help of specialized partners.
Why is Materiality Assessment important?
Materiality Assessment is a key tool for complying with the CSRD and other relevant legislation. By systematically analyzing material topics, organizations can ensure that they are providing the necessary information and complying with legal standards.
Moreover, the CSRD also requires companies to have their sustainability reports independently audited based on materiality analysis. From 2025 to 2030, the audit requirement will be gradually extended to an increasing number of companies, with the depth of the audit also growing. The aim is to make sustainability data transparent and comparable – both between companies and financial years and in relation to overall social sustainability goals.
Basis for the sustainability report
By utilizing a Materiality Assessment, mandatory areas and data points are defined. The analysis therefore provides a comparable framework for sustainability reports. While it may initially be a complex task, a structured materiality analysis process ultimately helps make the collection of sustainability data more efficient in the long run.
Cross-divisional function for reporting and due diligence
ESRS 1 recommends using the OECD due diligence process to identify significant negative impacts. This process also forms the basis for the risk analysis required by the Supply Chain Due Diligence Protection Act (LkSG) and the corresponding EU Corporate Sustainability Due Diligence Directive (CS3D). A well-established process for a materiality analysis can therefore be the starting point for demonstrating corporate due diligence.
Informed decision-making
Materiality Assessments not only help companies to meet legal requirements: they also enable them to systematically address the economic, environmental, and social impacts of their activities. By identifying and prioritizing relevant topics, executives can make informed decisions that not only address current challenges but also take into account future risks and opportunities.
Targeted sustainability strategy
The results of a Materiality Assessment provide a solid foundation for formulating specific, quantifiable, and realistic sustainability goals. Companies can develop targeted measures that focus on the identified priorities and regularly monitor their progress. This is how they can ensure that their strategies are aligned with stakeholder expectations and global sustainability objectives. Moreover, this not only promotes internal alignment on sustainability, but also conveys the company’s commitment to sustainable development towards external stakeholders .
Efficient use of resources
By identifying the most important topics and challenges, companies can deploy their human and financial resources more efficiently. Instead of taking broad measures with an unclear focus, they can make targeted investments that achieve the greatest impact on their sustainability goals. This increases the efficiency of initiatives and maximizes the return on investment in sustainable projects.
Enhanced credibility
A transparent and thorough Materiality Assessment strengthens the confidence of stakeholders — including customers, investors, and the public — in a company’s sustainability strategy. When businesses communicate openly about their challenges and progress, they position themselves as responsible actors and create a positive image. This can lead to stronger customer loyalty and an improved reputation in the industry.
Future security
The insights gained from a Materiality Assessment help companies to secure their long-term competitiveness and adapt to changing market conditions. Additionally, by proactively responding to material issues and driving innovation in the area of sustainability, companies can not only minimize risks but also develop new business opportunities. This helps to strengthen the company’s resilience to future challenges and remain sustainably successful.
Conclusion
Materiality Assessment is a crucial part of sustainability reporting, especially in light of the introduction of the CSRD. It enables companies to systematically identify the relevant ESG topics that are of key importance to their organization and stakeholders. Impact Valuation offers a helpful method for translating qualitative data into quantitative, monetarily assessable information, enabling an objective prioritization of relevant topics.
By considering both the inside-out and outside-in perspectives, companies can make informed strategic decisions, allocate their resources efficiently, and formulate sustainability goals. In addition, a transparent and data-driven approach helps to strengthen stakeholder trust and ensure long-term competitiveness.
