How to Conduct Your Double Materiality Analysis According to ESRS
Double materiality is not a mere formality. It is the foundation of your sustainability report. If poorly executed, it undermines everything that follows. This guide details the methodology as it applies in 2026: what the ESRS require, where companies fall short, and how to produce an analysis that stands up to audit.
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Double materiality, double analysis
Double materiality is based on two independent dimensions.
The first is the impact materiality : what effects does the company have on people and the environment? The second is the financial materiality : what sustainability issues can affect the company's financial performance?
These two dimensions produce two distinct scores. Confusing them in a single scoring exercise is one of the most common mistakes. A sustainability issue can be material under only one dimension, or under both. What it cannot be is assessed without distinguishing between the two logics.
Step 1: Map your value chain
The materiality analysis begins with a mapping of your value chain, upstream and downstream, including direct operations and indirect relationships.
The ESRS explicitly require this: impact materiality must be assessed across the entire value chain, not just within the company's legal scope. An industrial company that excludes its raw material suppliers produces an incomplete analysis. So does a distributor who ignores the use and end-of-life of their products.
The correct sequence is as follows:
- Describe your business model
- Identify your activities, inputs, outputs, and business relationships
- Map the stages of your value chain, from upstream suppliers to downstream customers
Only once this scope is defined can you identify which sustainability issues are relevant for which parts of this chain.
Step 2: Build a list of issues without pre-filtering
The ESRS structure sustainability issues into three categories:
- Environment (E1 Climate change, E2 Pollution, E3 Water and marine resources, E4 Biodiversity, E5 Resource use)
- Social (S1 Own workforce, S2 Value chain workers, S3 Affected communities, S4 Consumers and end-users)
- Governance (G1 Business conduct)
This list is not exhaustive. Each company may identify additional sectoral or specific issues, but it forms the baseline.
The identification phase should draw on several sources: internal expertise, sectoral benchmarks, regulatory signals, stakeholder contributions, and existing risk registers. In practice, the main difficulty is not methodological; it's operational. Many teams struggle to avoid omitting anything when starting from scratch. This is why pre-qualified sectoral issue libraries, such as Harnest's, organized by NACE code and aligned with ESRS topics, provide a solid starting point.
Do not pre-filter at this stage. The temptation to exclude uncomfortable or commercially sensitive issues is real. Premature exclusions are precisely what auditors and EFRAG guidelines identify as a methodological weakness.
Note: A delegated act revising the ESRS is expected by mid-2026. The broad guidelines remain stable, but certain topics and disclosure requirements might be adjusted. It is recommended to follow EFRAG's publications in parallel with your process.
From Issue to IRO: Identifying What Truly Matters
Once the long list of issues has been compiled, the next step is to identify for each issue the impacts, risks, and opportunities (IROs) concrete ones for the company. The analysis becomes very operational.
A material issue must be documented by the actual or potential impacts it generates, the financial risks it creates, and the opportunities it opens up.
ESRS topics are macroscopic by nature. Translating "climate change" or "working conditions" into concrete IROs for a specific activity, value chain, and stakeholders requires an intermediate step: that of implications, i.e., translating each issue into concrete manifestations within the company's context. This step allows for involving business teams in the identification process and building a documented basis upon which subsequent evaluations can rely.
Step 3: Assess Impact Materiality
For each potentially relevant topic, the ESRS require an assessment of actual and potential impacts on people and the environment. The scoring criteria are explicit:
- Actual Impacts : assessed based on severity alone
- Potential Impacts : assessed based on the combination of severity and likelihood
The three dimensions of severity
Severity is broken down into three dimensions:
- Magnitude : what is the severity of the harm?
- Extent : what is the scope of the impact?
- Irreversibility : to what extent is it reversible?
For human rights impacts, irreversibility carries additional weight.
This is not a qualitative exercise based on impressions. It requires documented evidence: internal data, industry research, supplier assessments, incident logs. Companies that rely solely on management opinion without supporting data will be exposed during limited third-party assurance, for which the final standard is expected before July 2027.
Step 4: Assess financial materiality across multiple horizons
Financial materiality as defined by the ESRS aligns closely with the approach developed in the ISSB standards, although the two frameworks are not identical, particularly regarding the scope of stakeholders considered and the definition of materiality itself.
The assessment must identify risks and opportunities that could reasonably affect financial performance across three horizons:
- Short term : less than 2 years
- Medium term : 2 to 5 years
- Long term : beyond 5 years
What constitutes a financial impact
Included in the scope of financial materiality are:
- Impacts on revenue and cost changes
- Asset depreciation
- Access to financing and borrowing conditions
- Regulatory penalties
- Reputational effects on customer and partner relationships
The keyword is "reasonably." You are not required to model every imaginable scenario, but you must demonstrate that your assessment is rooted in the specific circumstances of your business, and not in a generic industry model.
ESG is fundamentally a risk management discipline. Financial materiality assessment is where this logic becomes most operationally concrete.
Step 5: Engage Stakeholders
The ESRS do not impose a specific engagement methodology, but they require the process to consider the perspectives of two distinct groups.
Affected Stakeholders and Information Users
The affected stakeholders, employees, communities, customers, suppliers, possess knowledge of impacts that internal management often lacks. The information users, investors, lenders, analysts, possess knowledge of financial risks that are most critical for capital allocation decisions.
These two groups have different interests and different types of knowledge. A materiality analysis based exclusively on internal workshops is methodologically incomplete.
Engagement does not need to be exhaustive or costly. But it must be:
- Documented and traceable
- Genuinely impactful for the outcome
- Conducted before conclusions, not as post-hoc validation
The insights gathered must be directly linked to the relevant issues and IROs to ensure the traceability required by auditors.
Step 6: Define Thresholds and Document the Rationale
Once the topics have been scored according to the two materiality criteria, you must apply thresholds to determine what is material and what is not. The ESRS do not impose specific numerical thresholds. It's a judgment call. However, they do require these thresholds to be defined, consistently applied, and disclosed.
Auditability as a Non-Negotiable Requirement
Companies unable to explain why a topic fell below the materiality threshold face challenges during assurance and credibility issues.
Document everything:
- The adopted methodology
- The data sources used
- The scoring logic for each topic
- Stakeholder input
- The rationale behind the chosen thresholds
The materiality analysis is not just a deliverable. It's a process that must be auditable at all times.
The materiality score calculated from the IROs guides the decision but does not replace it. Marking a topic as material remains an explicit, documented decision owned by the company.
Step 7: Translating material topics into reporting obligations
Once material topics are identified, the analysis determines which ESRS disclosure requirements apply, and consequently which data points must be reported.
Topics assessed as non-material can be omitted from the report. However, the omission itself must be disclosed, along with the corresponding reasoning.
This step is consistently underestimated. A company that identifies climate change (ESRS E1) as material must then engage with the full architecture of this standard:
- Governance
- Strategy and transition plans
- Risk and opportunity management
- Metrics and targets
Each of these blocks breaks down into specific data points to be documented and audited. The materiality assessment is the gateway. What lies beyond represents substantial collection and management work. This is where the quality of your non-financial data infrastructure makes all the difference: data is not merely collected for reporting; it is governed to continuously serve multiple purposes.
Materiality, a living process
The ESRS require companies to update their materiality analysis when significant changes occur in their business model, value chain, or external context. In practice, this means treating materiality as an ongoing process integrated into ESG governance, rather than a project to be completed and filed away.
Several events can alter the mapping of material topics:
- New regulations or changes to ESRS
- Supply chain disruptions
- Acquisitions or divestitures
- Major geopolitical developments
- Changes in the business model
Companies that integrate this update into their annual governance cycle are better positioned to maintain the robustness that auditors and investors now expect.
From analysis to management infrastructure
A well-documented materiality analysis, regularly updated and rooted in verifiable data, is what separates credible reporting from a mere compliance exercise. It's also what allows regulatory constraints to be transformed into a real management lever.
The trajectory of ESG data is moving towards increasing industrialization and standardization. Companies that treat their materiality analysis as an infrastructure rather than an annual document will gain a structural advantage: governed, auditable, and reusable data throughout the year.