Materiality in Transition: Challenges and Opportunities in Corporate Sustainability Reporting under the CSRD

Abstract

This article examines the concept of materiality in sustainability reporting, tracing its development from financial materiality to the adoption of double materiality under the Corporate Sustainability Reporting Directive (CSRD). It explores the distinction between financial and impact materiality, highlighting the regulatory and ideological shifts that have shaped their integration. The discussion also includes the challenges companies face in implementing double materiality, such as data collection complexities, methodological inconsistencies, and the risks of selective disclosure. Additionally, the article contains an analysis of potential solutions, including additional regulatory guidance, independent oversight, and best practices for balancing transparency with strategic reporting. Ultimately, the author argues that double materiality represents a significant transformation in corporate governance, and that there exists concrete measures to be taken by both companies and regulators to improve the application of the CSRD.

I. Introduction

The growing attention paid to sustainability both in legislation and in contemporary academic scholarship has made the topic of sustainability reporting, and with it the principle of materiality, a contentious point of discussion.¹ There are many approaches one could take when identifying the key issues or guiding principles in the field of sustainability reporting, but this article will focus singularly on the principle of materiality, perhaps the single principle which guides the practice of sustainability reporting the most.² The principle of materiality represents the key tool with which companies can single out certain sustainability topics as important enough to report on, and others as unimportant and thus discarded.³ For over 40 years, the question of materiality has been poked and prodded from different directions in order to gain a better understanding of the principle.⁴ Some of these studies have concerned the importance of materiality as a principle weighed against other guiding principles, while others have concerned themselves with the task of how to identify what is material. This article aims to contribute to the materiality discussion through promoting discussion of the term materiality from a novel perspective, aiming to relate it to the legal field in a broader sense and discuss the content of the principle both from a sustainability reporting and a general legal standpoint. Still, the main contribution of this article lies in its effort to produce new discussion and arguments surrounding the relatively new principle of double materiality, and illustrating the journey from financial materiality to double materiality which has been elevated to the forefront of the contemporary materiality discussion by the introduction of the CSRD.⁵ This article employs a traditional corporate law approach to describe and critically examine the principle of materiality in sustainability reporting, focusing on its role as a legal principle at the center of several sustainability frameworks and its evolution under the CSRD. The jurisprudential foundations of corporate law lie in efficiency analysis, and while this article makes no attempt at a sensu stricto analysis of efficiency as a result of the materiality principle, the discussion culminates with an evaluation of the materiality principle and the value or non-value it provides companies, which can be considered a derivative of the efficiency analysis.⁶

Concerning the interdisciplinary nature of this article, materiality has traditionally been examined through an accounting and finance lens, focusing on quantitative thresholds and investor-driven reporting standards. However, the advent of sustainability reporting, particularly under the CSRD, demands a broadened perspective that recognises materiality not only as a technical benchmark but also as a legal principle that can trigger enforceable obligations and influence corporate behavior. Approaching this discussion from a legal perspective can help understand how statutory mandates, regulatory oversight, and corporate law doctrines add a normative dimension to what was once a purely finance-oriented question. In other words, while the accounting perspective continues to offer crucial tools for defining and measuring materiality, legal scholarship can look at how those definitions acquire real-world impact through compliance obligations, liability risks, etc., thereby making the principle of materiality genuinely interdisciplinary.

II. An overview of materiality

1. Materiality as a legal principle

Materiality, in simple terms, or more precisely, material information, refers to information, facts, or issues that are important enough to influence certain predetermined factors, such as a certain measure or event’s effect on the financial well-being of a company or a society.⁷ The objective of requiring the identification of specifically material information is to remove irrelevant or insignificant information, I.E. immaterial information, thus leaving only that information which is truly significant for legal determinations or regulatory compliance.⁸ Different reporting standards, such as the GRI standards, IR standards and IFRS standards utilise wholly different definitions of materiality,⁹ but the loose definition described above is one which all the standards share. The question of whether materiality constitutes a legal principle can be addressed by examining its function, its normative nature, and its alignment with the theories distinguishing principles from rules. Legal principles are normative standards that express values or goals fundamental to the legal order. Unlike rules, which prescribe specific behaviors or outcomes under defined conditions, principles provide frameworks for balancing competing interests or values.¹⁰ Some scholars suggest that principles, in contrast to rules, aim at the realisation of broader goals and influence legal reasoning through their normative weight rather than rigid applicability.¹¹ In the context of accounting standards, rules are described by some as detailed, rigid and inflexible, while principles are considered flexible, and judgment-dependent, although scholars are split as to the extent of the flexibility or advantages that principles offer over rules.¹² Materiality, revealing itself to be a principle in nature, does not dictate specific behaviors but requires contextual interpretation. The aim of materiality is functionally to realise the goal of reducing reporting bloat and bring vital information into the limelight, doing so by virtue of its normative weight while remaining flexible by allowing for a significant margin of interpretation.¹³

2. Materiality as a protective principle

Materiality also serves as an interpretive guideline, directing how regulatory texts, business disclosures, and legal duties are understood. For instance, a certain legal framework might provide a requirement for a company to disclose information which is material to its impact on the environment. In such a situation, it would be self-evident, for example, that a forestry company ought to disclose its effect on threatened species or local wildlife, as well as its’ carbon impact or impact on deforestation. For a beverage company, perhaps none of those topics would be material to report on, instead the company finds it material to report on such things as water consumption, or air pollution.¹⁴ In this sense, materiality serves as a tool for determining which bits of information, facts, or legal responsibilities are significant in the context of a larger framework. Looking outside sustainability reporting, in British and American corporate law for example, a materiality assessment is to be conducted in order to determine which facts a corporation must disclose to shareholders, investors, and the general public.¹⁵ The same language, that of needing to identify material facts, likewise appears in the EU’s market abuse regulation.¹⁶ The concept of identifying material facts is therefore familiar to lawyers working not only in the specific niche of sustainability reporting, but in the field of corporate law as a whole. In this setting, the function of the materiality principle is to ensure that only information that may impact potential investment decisions is made public.¹⁷

3. Inherent challenges with materiality: balancing freedom, responsibility, cost, and risk

Materiality offers flexibility, choice, and a large degree of both freedom and responsibility for the companies who are not only able, but required, to designate which topics or what information is material. While materiality is in part intended to help organisations prioritise and disclose relevant information, its implementation reveals inherent challenges.¹⁸ I will highlight three particular issues which emerge from the current approach to the materiality assessment: selective under-reporting, over-disclosure, and the cost of assessing materiality. Materiality assessments rely heavily on corporate judgment to identify relevant issues, but this judgment is not immune to bias. Companies may maliciously or unwittingly prioritise issues that align with their strategic goals or minimise reputational risks. For instance, a company may focus on reporting positive environmental initiatives such as planting trees, while deemphasising or outright omitting significant but less favorable impacts, such as violations of labour rights in its supply chain or contributions to air pollution. The risk of malicious selective disclosure is particularly concerning since stakeholders, including regulators, investors, and civil society, depend on the accuracy of materiality assessments to provide a complete picture of a company’s impacts.¹⁹ When companies under-report, it creates an asymmetry of information that can mislead or potentially defraud investors, as well as hinder efforts by regulators and other stakeholders to hold companies accountable for their societal and environmental impacts.²⁰

Paradoxically, the same freedom and responsibility that allow for under-reporting may also lead to over-disclosure. In environments where legal or reputational penalties for omissions are a significant concern, companies may adopt a conservative approach, disclosing excessive amounts of information to mitigate potential risks. This over-disclosure, while ostensibly thorough, creates its own set of problems. When companies disclose too much information, it becomes difficult for stakeholders to identify the truly material issues amidst a sea of non-essential data. Over-disclosure can, whether done maliciously or out of genuine concern, obscure critical information, defeating the purpose of materiality assessments by diluting their focus and reducing the usability of the reports.²¹ Stakeholders, including regulators and investors, may struggle to extract useful information from the report, leading to inefficiencies in accountability and decision-making.²²

Lastly, a critical issue with materiality assessments lies in the significant resources required to determine whether a particular topic is material. For large companies with complex operations, identifying material issues is not always unambiguous. While some impacts are intuitively material based on the company’s industry or core activities, others require extensive analysis and data collection to assess their relevance. This process can strain resources, especially when the boundaries of materiality are ambiguous or contested.²³ Certain topics are universally or industry-specifically recognised as material, such as water usage for a beverage company or carbon emissions for an energy company. These topics are inherently tied to the core activities of the business and their environmental, social, or financial impact is readily apparent. However, companies often face a myriad of other potential issues such as air pollution, diversity in hiring practices, or labour union contracts which may or may not meet the threshold of materiality depending on their specific circumstances. For instance, a beverage company may intuitively identify the material importance of its water usage due to its reliance on water as a key resource for production, but the question of air pollution or workers’ union contracts may require a deeper, more resource-intensive evaluation. These topics could still have significant implications for stakeholders, but determining whether they qualify as material through a double materiality analysis requires stakeholder engagement, data collection, and impact analysis.²⁴ The process of assessing materiality for a wide range of potential issues therefore demands significant financial and operational resources. Depending on the size of the company, it may need to hire consultants, conduct stakeholder interviews, perform environmental and social impact assessments, and analyse vast amounts of internal and external data.²⁵ However, the cost associated with identifying material matters and topics tends to decline over time as companies become more accustomed to sustainability reporting. A company that maintains largely consistent business operations year after year will not need to undertake a full-scale reassessment of material topics to the same extent as it did in its initial year of sustainability reporting.²⁶

The inherent challenges in materiality assessments, such as the risks of under-reporting, over-disclosure, and the resource-intensive nature of determining materiality, have led to numerous proposed solutions, some of which have since been implemented. Examples of these include enhanced regulatory guidance,²⁷ and mandating independent oversight and verification.²⁸ While these solutions certainly aim to address key concerns, the question of their applicability and effectiveness remains unanswered as the CSRD has not yet been in force long enough for any substantive conclusions to be drawn.

4. The great divide – financial materiality, impact materiality and double materiality

In the past decades there have been many attempts to provide a clear template for identifying what material information is, and what it is not. Some hold the view that the determination of material information ought to be based on the interests of the shareholders, while others mean that interests of stakeholders outside the company should also be considered, such as regulatory agencies, environmental protection groups, etc. This divide, which is visible throughout the field of corporate sustainability,²⁹ is strikingly apparent in the discussion surrounding the materiality principle. The split is clear not only in how companies have conducted their materiality assessments, but in how the different reporting regimes present different alternatives concerning how to conduct that assessment.³⁰ The shareholder side of the argument stems from the basic position of the non-responsibility of companies in the social dimension. According to this view, a company exists only to produce value for the shareholder, and that is the extent of its’ social responsibility, as famously stated by Milton Friedman.³¹ Meanwhile, the stakeholder side of the argument concerns itself with the negative side effects of shareholder based profit maximisation, as well as the positive consequences of successfully enabling a stakeholder-friendly corporate management.³² The reverberations of this split between the shareholder and stakeholder perspectives are visible throughout the different sustainability reporting standards used by companies, with the differences between these standards being described by some as irreconcilably different.³³ Understanding the different concepts of materiality is essential for recognising that, while financial materiality and impact materiality (and later double materiality) represent distinct approaches, they are rooted in deeper ideological debates about corporate social responsibility. The choice between financial materiality and impact materiality/double materiality in reporting standards and frameworks is not merely a neutral technical decision by standard setters; rather, it reflects an overarching alignment with one of the central positions in the CSR debate; the tension between the shareholder and stakeholder perspectives.

a. Financial materiality

The shareholder-centric perspective is referred to as financial materiality, which is defined by the European Financial Reporting Advisory Group (EFRAG)³⁴ as material information about risks and opportunities related to a sustainability matter.³⁵ Put simply, this means that financial materiality, also called the outside-in perspective, refers to information that is significant in influencing investment and economic decisions.³⁶ The primary standard for evaluating financial materiality provided by EFRAG is the general principle of decision-usefulness, meaning that materiality is assessed based on the extent to which disclosed information supports informed decision-making. The primary audience for financial materiality assessments is investors, creditors and other stakeholders with a financial interest in the company.³⁷ Take, for example, a beverage company operating in a region experiencing increasing water scarcity due to climate change. Water is a critical resource for its production processes, and local governments are introducing stricter regulations on water use, including higher fees and potential usage restrictions. From a financial materiality perspective, this issue is material because higher water costs and regulatory compliance expenses could reduce profit margins, and investors and creditors need to assess whether the company has a long-term strategy to mitigate these risks, such as investing in water efficiency technology or diversifying supply sources.

b. Impact materiality

The stakeholder-centric perspective on the other hand is referred to as impact materiality and is defined by EFRAG as material information about the undertaking’s impacts on people or the environment related to a sustainability matter.³⁸ These impacts can arise from the company’s own operations or throughout its upstream and downstream value chain, including business relationships.³⁹ Unlike financial materiality, which focuses on how external sustainability risks affect a company’s financial performance, impact materiality assesses how the company’s activities influence external stakeholders, including employees, communities, ecosystems and other affected groups, the so-called inside-out perspective.⁴⁰ EFRAG clarifies that impact materiality must be assessed independently of financial materiality, denoting that a sustainability matter may be material even if it does not generate direct financial risks for the company.⁴¹ Take, for example, a company sourcing leather from suppliers linked to cattle farming in the Amazon rainforest. Despite not being directly involved in deforestation, the company contributes to the impact by purchasing leather from suppliers who clear forests for grazing land. From an impact materiality perspective, this issue is material because deforestation has substantial environmental consequences, including biodiversity loss, and carbon emissions, and the company is linked to this impact through its supply chain, making it responsible for assessing and mitigating its role in driving deforestation.⁴²

c. Double materiality

The term double materiality is a combination of financial materiality and impact materiality and requires companies to consider both the shareholder and stakeholder perspectives. The principle of double materiality is favored by the EU through its implementation of the CSRD, and is to be understood as simply applying impact and financial materiality in sequence.⁴³ Generally, EFRAG advises companies to begin with the impact materiality assessment, and proceeding to the financial materiality assessment afterwards.⁴⁴ The shift toward double materiality represents a fundamental evolution in sustainability reporting, where sustainability is no longer viewed merely as a reputational or compliance issue but as a critical determinant of long-term business viability.⁴⁵ Given this context, the next section explores the CSRD in greater detail, examining its origin, scope and detailed materiality assessment.

III. Materiality in the context of the CSRD

1. Origin, purpose and scope of the CSRD

The Non-Financial Reporting Directive (NFRD),⁴⁶ amending the Accounting Directive,⁴⁷ was adopted by the EU institutions in 2014, but despite non-binding reporting guidelines published by the European Commission, the quality of disclosed information as a function of the NFRD had not significantly improved from the directive’s inception until 2019.⁴⁸ The European Commission, left dissatisfied with the impact of the NFRD, and as part of the European Green Deal and its 2020 Work Programme, proposed revising the NFRD, a measure which was met with approval from the European Parliament.⁴⁹ The proposal for a new and revised reporting directive appeared in 2021 alongside international initiatives for harmonising sustainability reporting standards.⁵⁰ The result of the proposal was the CSRD, a legislative initiative by the EU aimed at significantly enhancing and standardising sustainability reporting by companies. The EU intended for the CSRD to build on the NFRD and address its shortcomings by expanding the scope, improving the quality of reported information, and ensuring that sustainability data is reliable, comparable, and relevant to users.⁵¹

As for the specifics of what needs to be reported under the CSRD, the general outline of what information is to be reported can be found in Article 19a.1-3. Summarily, the affected companies are to report on the sustainability risks associated with their business, the opportunities the companies have related to sustainability, the companies’ sustainability policies, the usage of incentive schemes related to sustainability within the company, etc. Much of the information which requires disclosure is not specified within the CSRD itself but is instead described in greater detail in the European Sustainability Reporting Standards (ESRS) reporting standards published by EFRAG.⁵² Additionally, the information contained within the sustainability reports is, for some companies, required to be published alongside the general management report and to be published in a machine-readable format for digital access.⁵³ This represents a substantial change from the NFRD regime wherein reports, if they existed at all, were only accessible through physical copies or difficult to access websites, which made an overview of the existing reports very difficult.

2. Understanding and applying the CSRD materiality assessment

EFRAG emphasise in their implementation guidelines for the CSRD that the materiality assessment process is not a one-size-fits-all situation, rather it is absolutely necessary for companies to design an assessment process which suits their company and industry.⁵⁴ Despite this, the implementation guidelines offer a model assessment process which companies are free to adopt. This recommended assessment is divided into four primary steps: understanding the context, identification of Impacts, Risks and Opportunities (IROs), assessment and determination of material IRO’s, and reporting.⁵⁵ The following section will examine the first three steps in detail, while reporting, the fourth step, is excluded as it does not require extensive analysis.

a. Understanding the context

The first step in the materiality assessment process under the CSRD involves understanding the context in which a company operates. This step establishes the groundwork for later identifying and evaluating sustainability-related IROs. Not before analysing the business environment, operational processes and stakeholder relationships, can companies gain the insights to conduct an effective materiality assessment that reflects that company’s unique circumstances.⁵⁶ Firstly, a comprehensive understanding of an undertaking’s value chain is essential for accurately identifying potential IROs.⁵⁷ This involves mapping all stages of the value chain, including upstream activities (e.g., raw material sourcing, supplier operations) and downstream activities (e.g., product use, disposal, and recycling).⁵⁸ By examining how the company’s activities interact with different systems in the value chain, it becomes possible to identify points of significant impact, dependency or vulnerability.⁵⁹ For example, a manufacturing company might assess how its sourcing of raw materials contributes to deforestation or labour rights violations in supplier operations. Similarly, a technology firm producing smartphones may consider the environmental and social impacts of its products’ end-of-life disposal and recycling processes, especially when toxic or otherwise dangerous materials are involved in production.

Secondly, to conduct an effective materiality assessment, companies must assess the legal and regulatory landscape in which they operate, identifying laws, policies, and market expectations that influence sustainability performance.⁶⁰ This includes both domestic and international frameworks, as the CSRD requires attention to cross-border activities and global supply chains. Regulatory trends, such as stricter emissions limits for vehicles or labour protections, may elevate the materiality of certain IROs that would otherwise be overlooked. The economic environment also plays a significant role in contextual analysis. Market trends, consumer behavior and investor priorities can shape the relevance of specific sustainability issues.⁶¹ For instance, rising consumer demand for ethically sourced products or investor focus on net-zero transition plans may mean a company’s products are no longer sought after, thereby making certain sustainability IRO’s more relevant for the business.

Finally, certain industries face unique sustainability challenges that directly influence the materiality of their IROs. Companies are encouraged to benchmark their sustainability issues against sector-specific risks and opportunities.⁶² For example, CO2 emissions are an inherently material topic for airlines, while data privacy and cybersecurity may be material for technology firms. Understanding these sectoral dynamics allows companies to identify issues that are universally significant within their industry and prioritise them accordingly. Additionally, stakeholder engagement is a central feature of contextual analysis under the CSRD. Companies must consider the perspectives of a wide range of stakeholders, including employees, communities, customers, investors and regulators. Stakeholder expectations often highlight issues that might not immediately appear material from an internal perspective but are nonetheless significant for external accountability.⁶³ For example, local community concerns about air or water pollution near manufacturing facilities may significantly affect the company and require a shift in the materiality assessment.

b. Identification of IROs

Once a company has concluded their contextual analysis, the next stage calls for the identification of IROs. This step builds on the contextual analysis by translating the context into a list of sustainability topics and matters that are relevant to the company’s operations and value chain. The identification phase is structured to ensure that all potentially material IROs are captured, regardless of whether they are predefined in the ESRS or specific to the entity’s unique circumstances. The terminology used within the ESRS and the CSRD including impacts, risks, opportunities (IROs), matters, and topics, can be confusing due to their overlapping meanings and the sometimes interchangeable way they are employed in guidance documents. Sustainability matters and topics both refer to ESG issues that a company must consider in its materiality assessment. Examples include climate change, air pollution, labour rights, and biodiversity. The difference between the two lies in whether the issue is explicitly addressed in the ESRS. A topic refers to an ESG matter that is covered by the ESRS standards.⁶⁴ For instance, air pollution is a sustainability matter covered under the ESRS E2 topical standard on pollution, therefore it is also a topic. A matter, on the other hand, includes all relevant ESG issues, so long as they fulfill the criteria of being either impact material, financially material or both, regardless of whether they are explicitly mentioned in the ESRS.⁶⁵ Put simply, while all topics are matters, not all matters are topics. Companies are responsible for identifying and assessing sustainability matters broadly, and to ensure that matters which are not pre-defined in the ESRS are not excluded from reporting if deemed material.

In turn, the concept of impacts, risks and opportunities, provides a framework for determining the materiality of sustainability matters. These three elements are distinct but interconnected. Impacts refer to the actual or potential effects that a company has on people and society.⁶⁶ These effects can be positive or negative and may occur directly through a company’s operations or indirectly through its value chain. For example, a manufacturing company’s emissions might negatively affect air quality, impacting the health of local communities and biodiversity. Risks are the potential negative consequences that sustainability-related issues could have on a company’s financial performance, operations, or reputation.⁶⁷ These are typically inward-facing, focusing on how external ESG factors could influence the company itself. For instance, stricter emissions regulations could create operational risks for companies reliant on high-emission processes.⁶⁸ Opportunities are the positive potential that sustainability issues present, either through mitigating risks or creating new business avenues. These might include access to green financing, innovation in sustainable technologies, or meeting the growing market demand for environmentally friendly products.⁶⁹ For example, a logistics company transitioning to electric delivery vehicles may capitalise on both regulatory incentives, by taking advantage of EV subsidies, and consumer preferences, by being able to market themselves as green.

In summary; the relationship between matters, topics, and IROs is hierarchical in the materiality assessment process. The first step is identifying sustainability matters, which represent the broad spectrum of ESG issues relevant to the company. These may include both predefined topics in the ESRS and entity-specific matters unique to the company’s operations or context. Once matters are identified, the company evaluates their related impacts, risks, and opportunities to determine whether they are material. For instance, a company assessing air pollution as a sustainability matter would examine both its impacts (e.g., health effects on local communities) and risks (e.g., potential regulatory fines) to decide if the matter is material. If a matter is deemed material, it forms the basis of disclosure requirements. For predefined topics in the ESRS, the company follows the topical standard’s reporting criteria. For matters not covered by ESRS, the company must still report on them in accordance with the general disclosure guidelines.

c. Assessment and determination of material IROs

The assessment and determination phase in the materiality process evaluates the significance of identified IROs to determine their materiality. Materiality is assessed through the lens of both impact materiality and financial materiality. Additionally, at this stage of the assessment, companies are encouraged to establish thresholds to help determine the level of significance required for inclusion in reporting.⁷⁰ These can include quantitative thresholds, such as measurable financial or environmental metrics, as well as qualitative thresholds, such as reputational or stakeholder concerns. An example of a quantitative threshold could be any sustainability issue affecting more than 5% of annual revenue. By setting such a threshold, a company might assess whether disruptions in its supply chain due to deforestation could result in significant revenue loss. Conversely, a qualitative threshold could be any issue identified as a significant concern by more than 20% of surveyed stakeholders.⁷¹ The object of this threshold could be to identify stakeholder concerns. If local communities, for example, highlight water scarcity or pollution as a major issue, this could qualify the topic as material. Importantly, while the CSRD allows flexibility in setting thresholds, companies are expected to document and justify their choices to ensure transparency and comparability. Since thresholds are to some extent arbitrary by nature, it is important for a company to be able to rationalise their choice.⁷²

IV. Implementation challenges in the context of the CSRD – evidence from early case studies

In this early stage, the adoption of the CSRD by companies has been the subject of a limited number of preliminary studies.⁷³ These initial studies give some insight into the difficulties that organisations encounter as they seek to comply with the directive’s requirements. Chief among the challenges identified are the complexities of aligning existing reporting practices with new reporting standards, integrating double materiality assessments, and managing the operational and resource demands of compliance. This section will examine these challenges in detail and offer potential strategies and best practices for addressing these issues.

1. Conceptual ambiguity and complexity in double materiality implementation

The implementation of double materiality under the CSRD presents a challenge in part due to its conceptual ambiguity and inherent complexity. While the dual approach of double materiality aims to provide a more well-rounded understanding of sustainability, it creates several hurdles for effective implementation. One of the primary challenges lies in the lack of clarity surrounding what constitutes a material issue under both financial and impact materiality. Unlike traditional financial materiality, which is guided by well-established accounting principles and investor-centric perspectives,⁷⁴ impact materiality expands the scope to include stakeholders such as employees, communities, and ecosystems. This broader focus requires companies to define thresholds for materiality that balance diverse and sometimes conflicting stakeholder priorities.⁷⁵ The broader focus causes a degree of ambiguity, which is only further exacerbated by the absence of universally accepted methodologies for assessing materiality, particularly for impact materiality. Companies are often left to interpret high-level guidance provided by the EFRAG and other bodies, leading to inconsistent practices.⁷⁶ Additionally, the double materiality assessment process itself is highly complex, requiring the integration of qualitative and quantitative data from different sources.⁷⁷ Companies evaluate the magnitude and likelihood of risks for financial materiality, while also considering the severity and likelihood of impacts for impact materiality. This two-pronged approach demands significant resources, such as high-quality data, analytical tools, and a base level of expertise in both sustainability and financial analysis. Another key issue highlighted in early case studies is the misalignment between regulatory expectations and the practical realities faced by companies. For example, while the CSRD emphasises the integration of materiality assessments into business strategy, many companies approach double materiality as a compliance exercise rather than a strategic tool for creating value. This mindset can lead to box-ticking practices, where companies focus on meeting minimum disclosure requirements rather than providing meaningful insights.⁷⁸ To remedy this issue, companies may consider adopting structured, evidence-based approaches that combine quantitative data with qualitative insights from internal experts and stakeholders.⁷⁹ Implementing standardised criteria for impact assessment, adopting sector-specific guidance and practices, and integrating best practices from existing frameworks such as GRI and ISSB can help ensure consistency, especially across separate reporting regulations.⁸⁰

2. Data gaps and value chain complexity

One of the most significant challenges in implementing double materiality under the CSRD is addressing data gaps and value chain complexity. This issue comes to light as companies struggle to gather comprehensive, accurate and actionable data about both the financial and impact dimensions of sustainability-related risks and opportunities across their entire value chains. Companies often face difficulties in collecting reliable information, particularly regarding upstream and downstream activities in their value chains.⁸¹ For example, while many companies are proficient in reporting Scope 1 and 2 greenhouse gas (GHG) emissions, Scope 3 emissions, which encompass indirect emissions occurring across the value chain, are frequently underreported or omitted due to inadequate data from suppliers and distributors.⁸² Compounding this problem is the issue of value chain complexity. The difficulty of mapping extensive global supply chains further complicates the issue of lack of data.⁸³ Many companies lack the tools and resources to conduct thorough evaluations beyond their direct (Tier 1) suppliers. Issues such as geographical separation, diverse regulatory requirements across reporting regimes, and the fluid nature of subcontracting networks, especially in sectors such as construction, hinder visibility and accountability further down the value chain.⁸⁴ To address their data gaps, collaborative supplier engagement programs can seek to enhance transparency across value chains. Companies can, in order to gradually ease their data collection burden, prioritise a phased approach to data collection. This could entail focusing first on high-risk areas or “hotspots” before gradually expanding to full-spectrum reporting.⁸⁵ Additionally, shared databases and partnerships to improve data access and quality, particularly for Scope 3 emissions, could reduce investment costs in data collection and analysis.

V. Conclusions

Traditional financial materiality, rooted in investor-centric reporting, has long shaped corporate disclosure practices by requiring companies to disclose only information relevant to financial decision-making. However, as global sustainability challenges have intensified, ranging from climate change to unionisation, it has become increasingly apparent that financial materiality alone is insufficient to capture the full scope of a company’s impacts and dependencies. The emergence of double materiality broadens the assessment criteria to include external stakeholders and the environment, thereby necessitating a two-pronged approach. In practice, however, the implementation of double materiality poses substantial challenges. Companies must navigate the difficulties of integrating both financial and impact materiality assessments into their reporting procedures, often requiring extensive data collection and analysis, stakeholder engagement, and methodological adaptation. Some of the most pressing issues are the lack of standardised methodologies for evaluating impact materiality, data gaps, particularly in assessing indirect impacts across their value chains, and the risk of selective disclosure, either through underreporting material impacts or overloading reports with excessive, non-essential data. While double materiality as a principle is intended to enhance transparency, it also grants companies a substantial degree of discretion in determining which matters to include in their reports. In some cases, this discretion can be maliciously used to downplay negative impacts or highlight positive but relatively insignificant initiatives. Conversely, the fear of non-compliance can lead companies to engage in over-disclosure, where reports are excessively detailed but lack clear prioritisation, ultimately reducing their usefulness for stakeholders.

Looking ahead, the successful integration of double materiality into corporate reporting hinges on a shift in organisational mindset, from treating sustainability reporting as a compliance exercise to using it as a strategic tool for value creation. Companies that proactively engage with double materiality stand to benefit not only from regulatory compliance but also from enhanced risk management, reputational advantages, and access to sustainable investment capital. Concerning the future development of ESG regulation in the EU, even if the European Commission adopts further synthesised sustainability standards or imposes more detailed sector-specific metrics, the logic of double materiality is likely to retain its status as a core reference point for corporate ESG reporting. Its strength lies in its flexible approach, which not only acknowledges the concerns of shareholders but also accounts for the effects on external stakeholders.

Nevertheless, as the EU contemplates new measures, the line between materiality as a guiding principle and mandatory disclosures could blur. Imposing mandatory data points on companies, such as specific Scope 3 emission figures or explicit information on supply chain impacts, could limit the space for companies to decide unilaterally what constitutes “material” matters. In such a scenario, materiality might evolve into more of a threshold check than a framework requiring deeper reflection. On the regulatory side, the current call for companies to adopt genuine behavioral changes rather than simply comply with reporting requirements stands to benefit from greater policy interventions. Harmonised EU-level enforcement and oversight may increase the likelihood that double materiality better serves its intended purpose. These checks could be complemented by a heavier focus on sector-specific guidelines issued by EFRAG or similar bodies, helping companies focus on issues demonstrably central to their industry. Additionally, measures that combine carrots and sticks, such as monetary penalties for misleading reporting and incentives like preferential lending rates or favorable procurement terms for high-quality disclosures, could further align corporate reporting with true behavioral change. Finally, policymakers might support the development of open-source data platforms or shared industry tools to reduce the operational and financial burden of collecting complex, value-chain spanning data.