Understanding EU CSRD and Double Materiality: What Every Company Needs to Know
Since the introduction of the European Green Deal in 2020, the European Union (EU) has proposed a number of major pieces of environmental legislation designed to support the EU’s ambition of becoming the first carbon-neutral continent by 2050.
Core to those major pieces of legislation is the Corporate Sustainability Reporting Directive (CSRD). Officially launched in January 2023, CSRD aims to enhance and expand the existing Non-Financial Reporting Directive (NFRD) — essentially mandating that a company’s sustainability metrics be treated with just as much importance as traditional financial reporting. According to EU rules, CSRD requires large companies and listed companies to report on their sustainability performance, including environmental, social, and governance (ESG) factors as well as how their operations impact people and the environment.
CSRD legislation features many key components ranging from the usual financial reporting, risk assessment, and mandatory assurance, but one of the most important components is double materiality. An innovative reporting aid that comprehensively analyzes ESG from two lenses, double materiality assesses business activity impacts to people and the environment and financial risks and opportunities across a given value chain due to environmental and social shifts.
Related to CSRD is the complementary Corporate Sustainability Due Diligence Directive (CSDDD). And while the CSRD aims to standardize and improve the quality of sustainability information disclosed by companies operating in the EU, the CSDDD requires companies to implement due diligence processes to identify, prevent, mitigate, and account for negative impacts of their operations and value chains on human rights and the environment.
In this article, SCS Consulting Services unpacks both of these important EU legislative mandates, focusing on how double materiality factors into the broader landscape of sustainability reporting along with what your company needs to meet double materiality requirements within CSRD and the related CSDDD.
At a Glance: EU Sustainability Legislation Background & Timelines
The CSRD and CSDDD are complementary regulations developed by the EU. The CSRD provides the framework for companies to report on their sustainability efforts, while the CSDDD requires them to take concrete actions to address their impacts. On a fundamental level, information gathered through the CSDDD processes can inform the reporting required by the CSRD. Leveraging the premise that accounting powers economic practices, together CSRD and CSDDD aim to create a more sustainable and responsible corporate landscape within the EU.
In essence, the CSRD mandates what companies need to report about their sustainability performance, while the CSDDD focuses on how companies should conduct their business to be more sustainable and responsible, particularly regarding human rights and environmental impacts.
Since developing CSRD and CSDDD, the European Commission received crucial feedback from companies subject to both regulations, including considerable concerns regarding the timing of expected implementation. Specifically, companies and business associations expressed concerns that reporting required in CSRD and CSDDD might increase the regulatory burden and impede the competitivity of EU corporations. The Draghi report, an important publication on European competitiveness published in 2024, also lightly touched on this topic and recommended simplifying — in general — the administrative requirements of companies.
These developments, together with a volatile geopolitical context, gave way to the recent Omnibus 1 package, a proposal from the European Commission to amend already existing legislation. The Omnibus package contains two directives:
- “Stop the Clock” — a directive that was super fast-tracked so as to create legal certainty for companies. “Stop the Clock” only pauses the requirements by postponing the application date for some companies by two years. It does not have any impact on the content of the legislation.
- A ‘Content’ directive, which is currently being discussed within the European Parliament. This content directive will bring potentially heavy changes to the current text by, for example, increasing application thresholds. In parallel, EFRAG (formerly known as the European Financial Reporting Advisory Group) has been tasked to review and simplify the European Sustainability Reporting Standards (ESRS) — more on this below.
The next step in the process will be the transposition — meaning, integration of the directives’ requirements into national laws — by the EU Member States before December 31, 2025. In its April 2025 press release, the EU Council outlines these delays relative to CSRD and CSDDD:
- delay by two years the entry into application of the CSRD requirements for large companies that have not yet started reporting, as well as listed small- to medium-sized enterprises (SMEs); and,
- delay by one year the transposition deadline and the first phase of the application (covering the largest companies) of the CSDDD.
Some countries (such as France) have already begun measures to transpose the directive in advance.
The more challenging phase will now commence, as the Council and Parliament will need to discuss in depth how the content of CSRD and CSDDD will evolve, including aspects such as thresholds, timelines, and responsibilities. Within the Parliament's Legal Affairs Commission, the first discussion was scheduled for the end of April, with a report expected by the end of June and a vote around mid-October.
EFRAG acts as a technical advisor to the European Commission and authors the ESRS. As noted above, EFRAG is working in parallel to transposition and has been officially assigned by the European Commission to streamline the ESRS, which are detailed reporting standards developed by EFRAG. ESRS operationalize the CSRD by defining what information companies must disclose and how this information should be structured. If we think of CSRD as the "who, when, and why" — then ESRS can be viewed as the "what and how."
EFRAG is supposed to deliver a first exposure draft by the end of summer (August - September 2025) and provide its advice by October 31, 2025. Among the guidelines provided to EFRAG by the Commission include substantially reducing the number of mandatory ESRS data points, prioritizing quantitative over qualitative data points, and providing clearer instructions on how to apply the materiality principle.
Which companies are subject to CSRD?
The interpretation of how CSRD applies to which companies is a topic currently being discussed at the European Parliament. So while CSRD broadly applies to EU-based companies as well as non-EU companies with operations in the EU, the classification of sizes of business (micro, small, medium, and large enterprises) and their reporting thresholds are likely to change due to the influence of the recent Omnibus package. Originally, classification of companies under CSRD was determined by three criteria: balance sheet total, net turnover, and average number of employees. A company could be classified based on its size and whether it meets at least two of those three criteria.
The official documentation outlined in the EU’s Accounting Directive (2013/34/EU) includes the parameters for each size of business under Article 3 — but again, these classifications and thresholds are subject to change now that the Omnibus package is under consideration.
As a reminder, “SMEs” refers to micro, small, and medium sized enterprises. “Listed” companies are those included on EU regulated markets and tracked across a number of institutions including the European Securities and Markets Authority (ESMA) Register of Regulated Markets, Euronext, and the National Stock Exchanges.
Here we note again that “Stop the Clock” has postponed application of CSRD by two years for companies in Wave 2 (January 2025) and Wave 3 (January 2026). Wave 1 Companies have already reported in 2025 covering operations in 2024 and are expected to continue reporting.
We urge companies with questions or concerns about whether CSRD is applicable to them and when to get in touch with us.
What is materiality?
The concept of materiality comes from the legal and accounting realms, and it’s very much linked to strategic business decision making. Materiality refers specifically to the idea that the correct information — that which is deemed most relevant or ‘material’ — is provided to the stakeholders who are responsible for making such strategic business decisions.
In most business cases, such stakeholders or “users of material facts” have almost exclusively been synonymous with financial investors. But as the impacts of climate change leave no individual person, company, or community untouched, we see that the assumed understanding of decision makers and users of material facts is evolving.
What is double materiality?
Double materiality as a principle remains at the core of CSRD in the proposed simplification version and is considered a significant European innovation in terms of sustainability reporting. Double materiality assumes that both the financial effects of sustainability issues on a company and the company's impact on society and the environment are relevant and should be disclosed.
How does double materiality relate to sustainability reporting?
Sustainability reporting frameworks such as CSRD and CSDDD include double materiality requirements, meaning that a company’s material, sustainability-related data must be systematically organized and reported. Double materiality assessments in sustainability reporting enable stakeholders to make more informed decisions in two directions: on the company’s financial viability and operational integrity in light of various sustainability risks or concerns and the company’s impact on the environment, communities, and other stakeholders.
Who are the stakeholders or users of sustainability information and data?
Stakeholders and users of sustainability information are both seen as highly important to consider according to the ESRS. Firstly, assessors should consider their affected stakeholders – which are individuals or groups that have the potential to be affected by an undertaking’s activities through the value chain. This could include groups such as investors, customers, corporate strategists, current and potential employees, and community members, among other interested groups and users.
The ESRS considers users of sustainability information and general purpose financial reporting to be the company’s partners, trade unions and social partners, civil society, non-governmental organizations, government analysts, and academics. ESRS adopt a very broad view with regard to which groups might be interested in sustainability data that is disclosed to encourage more due diligence in considering how operations could affect outside parties. ESRS’s interpretation of users of sustainability information stands in contrast to that of the International Financial Reporting Standards (IFRS), for example, which identify primary users as existing and potential investors, lenders, and other creditors.
When is a sustainability issue or concern considered material?
According to the ESRS, nature is approached as a whole and treated as a silent stakeholder whose interest can be affected positively or negatively by an undertaking's activity. On a related level, ESRS deem a sustainability issue material from a financial point of view if an incident occurring within the natural world (wildfire, flooding, etc.) generates risks or opportunities that affect or could affect the undertaking's financial performance, cash flow, or any key performance indicators (KPIs) that a company uses along short-, medium-, and long-term timelines. This can also encompass impacts generated by the company's products and services.
In terms of sustainability reporting, double materiality assessments will help companies assess whether a sustainability matter is material based on a number of IROs — impacts, risks, and opportunities — and whether those matters overcome a threshold from various perspectives including impact, financial, or a combination of both.
How does double materiality work within CSRD?
The CSRD's approach to double materiality aims to guide companies to comprehensively understand both their influence on the world and the reciprocal impacts of external factors on their operations — with the aim of identifying the sustainability topics most significant to each business.
The implementation framework for CSRD outlines several exercises designed to facilitate this understanding. These recommendations advocate the development of a contextual framework that enhances the accuracy and efficacy of double materiality assessments and emphasizes the following key activities:
- mapping the value chain
- identifying impacts, risks, and opportunities (IROs)
- engaging with relevant stakeholders.
These key activities (also referred to as context gathering exercises) serve two main purposes. First, they play an integral role in establishing a robust foundation for sustainability reporting relative to the CSRD requirements by providing environmental and social impact information and financial considerations. Second, these three key activities can help inform businesses of the best approach to consolidating reporting efforts — something that can be useful when companies are subject to multiple sustainability reporting regulations.
What is involved in mapping the value chain for double materiality assessments?
elative to CSRD, the value chain considers a company’s activities, resources, and relationships to its external environment within which it operates and upon which it relies to create products or services. This interpretation of the value chain is also consistent with the definitions put forth in both the Global Reporting Initiative (GRI) and the International Sustainability Standards Board (ISSB). Each of these relationships and exchanges mapped along the value chain should include information from concept to end of life.
Why is the value chain exercise critical in double materiality assessments?
A double materiality assessment serves as a strategic exercise and a way to strengthen the resilience of a company’s business model; looking thoroughly at the value chain can help prevent blind spots and enhance transparency in business operations. Failing to include a thorough analysis of your value chain, in other words, can bring about serious problems for your organization.
Our first practical recommendation for mapping your value chain, then, is not to stop at tier one suppliers. Tier one suppliers are those that a company contracts to provide goods or services directly to the original company, as opposed to tier two and three suppliers, which might be contracted or leveraged by tier one suppliers.
Stated plainly in terms of CSRD, though, examining only tier one suppliers or customers is absolutely not enough. CSRD asks that the reporting business consider where, how, and who is involved in bringing a product or service concept to market and where, how, and whom that product ultimately impacts.
The value chain can be complex, so build up your understanding of it over time and create partnerships that can enhance your understanding. Thinking about the upstream and downstream implications — raw material extraction, workforce dependencies, transportation, industrial processing, among other activities — of every product your company creates is a great start to mapping your value chain.
How does a company identify impacts, risks, and opportunities (IROs) relative to double materiality?
After mapping the value chain, identifying IROs is the second context gathering exercise for completing double materiality relative to CSRD requirements. We recommend identifying IROs by compiling a list based on the ESRS 1 Application Requirements (AR) 16 material topics and sub-topics guide. Some of the material topics specified within the AR16 include: climate change, pollution, water and marine resources, as well as workforce, workers in the value chain, and affected communities, among many others.
Here it’s important to note that at this time ESRS have not provided any sector-specific guidance — and with the Omnibus 1 package in place, such specific guidelines may never be drafted. This means that if a company would prefer to reference sector-specific guidance ahead of determining IROs, looking to those provided by GRI and the Sustainability Standards Accounting Board (SASB, part of IFRS) is a reliable starting point. And while sector-specific guidance may be a useful tool offering more context for IROs, sector-specific guidance alone can sometimes give too narrow of a focus — for instance, there could be other relevant sectors operating across your value chain, as in delivering to you custom products that support your operations. Compliance with CSRD requires a full and holistic assessment of a company’s value chain over short- and long-term timeframes and that covers all contingencies.
What does CSRD stakeholder engagement look like?
Stakeholder engagement serves as the third context gathering exercise. And perhaps the most important thing to know about stakeholder engagement under CSRD is that it’s technically not a requirement.
Another way to think about stakeholder engagement relative to double materiality requirements under CSRD is to see it as a value-add — an activity that offers more specificity and evidence to assess material matters. In this sense, a company incorporating stakeholder engagement will be stepping into a more proactive position in support of stronger double materiality reporting under CSRD and CSDDD — which is especially important when preparing for the possibility of changes in the law associated with both frameworks.
Under the good-faith auspices of stakeholder engagement, companies will once again want to align to the value chain context, that is, identifying who is actually being affected by your operations and honestly assessing risks your company faces. The previous exercises in collecting value chain context and identifying IROs can also support a company’s stakeholder engagement, especially in identifying who may be important to engage with.
How can I get started with stakeholder engagement relative to CSRD?
We recommend identifying the broadest stakeholder groups first and then narrowing those into sub-groups using more refined filters and offering finer details both about how these groups are impacted and how they impact your business. Consider internal stakeholders such as employees, management, or the board, as well as external stakeholders like suppliers, investors, material processors or customers, product users, and distributors.
Recognizing so-called silent stakeholders can mean considering more amorphous factors such as how other potential environmental or social risks affect your operations from the perspectives of health, knowledge, or social capital. Identifying these more abstract concepts can help account for different relationship dynamics between your company and the wider world along with the value or risk they pose for your business.
Taking action: Putting double materiality to work under CSRD
Understanding the nuances of CSRD's double materiality requirements begins with preparing to meet the three core exercises: mapping value chains, identifying impacts, risks, and opportunities (IROs), and engaging stakeholders.
These efforts inform your double materiality assessment by identifying what is truly material to your undertaking from a financial or impact lens. EFRAG provides some guidance on how to calculate material results through assessing severity, and this is a good place to start as you develop a methodology that makes sense for your business. Simply stated, the goal is to understand which ESG factors are deemed critically material, material, or not material. These results will not only help identify what you need to report through CSRD for compliance, but they will also enhance a company’s transparency and bolster resilience by enabling companies to anticipate and mitigate controversies and diminish risks before they arise.
Looking for more specific examples and answers to more questions related to CSRD’s double materiality requirements? Be sure to watch the replay of our webinar, “Understanding the EU CSRD: The Dos and Don’ts of Double Materiality Assessments.” You can also schedule an appointment with us here.
