Dual Materiality in the Sustainability Report According to CSRD – Part 2

Dual Materiality in the Sustainability Report According to CSRD – Part 2
March 1, 2022
Insights overview

In our first part of the series "Sustainability according to CSRD," we outlined the basic features of the new draft guidelines in November 2021. The following article aims to delve more deeply into the significance of double materiality in the mentioned CSRD reports.

As a reminder:

In the CSRD, with the aim of treating the three pillars of sustainability (environmental, social, and economic) equally, reporting contents are required on the following aspects:

  • Environmental matters
  • Employee matters
  • Social matters
  • Respect for human rights
  • Combating corruption and bribery
  • Governance factors

 The content of each aspect is determined by the so-called materiality principle. The interpretation of the associated materiality is measured based on the company-specific manifestation of two criteria. For this reason, this principle is also referred to as the so-called Double Materiality. It is important to first understand the two underlying perspectives.

1.Outside-in Perspective – "Financial Materiality"

  • Information necessary for understanding the course of business, the financial performance, or the position of the company.
  • Primary stakeholders: Financial investors

2.Inside-out Perspective – "Ecological and Social Materiality"

  • Information necessary for understanding the impact of business activities on sustainability aspects.
  • Primary stakeholders: Consumers, society, employees, financial investors 

Double materiality has already been integrated into the currently applied CSR directive. However, this version stipulates that both aspects must be fulfilled simultaneously. This means that both the outside-in and inside-out perspectives must demonstrate materiality, and consequently, only a small intersection of both perspectives is incorporated into the GRC Sustainability Report. Therefore, no disclosure is required in the report if a company causes significant environmental pollution through its business activities (material in terms of the inside-out perspective) but does not expect any fines in the respective country because it does not violate any existing laws (not material in terms of the outside-in perspective). 

The described issue is resolved in the draft of the new directive, the CSRD, by changing the "and-connection" of the mentioned perspectives to an "or-connection" between the outside-in and inside-out perspectives. As a result, significant content from both perspectives must now be reported equally. In the example mentioned above, following the double materiality analysis, there is now materiality in reporting the environmental pollution, even if no existing law is violated. The new formulation of double materiality (sustainability) thus expands reporting obligations and aligns with the requirements of the three pillars of sustainability (environmental, social, and economic)

Particularly noteworthy is the integration into risk management: Many companies may have primarily considered outside-in risks so far, such as risks from unforeseen weather events or stricter regulations. With the CSRD, companies will now explicitly have to integrate inside-out risks into their Risk Management Systems (RMS) and introduce corresponding control measures. This includes addressing issues such as the aforementioned environmental pollution or the company's impact on social inequality, human rights, or biodiversity.

With the new materiality definition, the interests of more stakeholders are covered, shifting reporting from a shareholder perspective to a stakeholder perspective. Many stakeholders (employees, customers, NGOs, etc.) are highly interested in the impact of a company's business activities on sustainability aspects (inside-out perspective). Additionally, more information is now provided for the circle of financial investors, necessary for assessing the investment, than defined by the intersection of the outside-in and inside-out perspectives. The integration of the GRC Sustainability Report into the existing management report of companies, as envisaged by the CSRD, appears as a logical consequence. 


The new interpretation of double materiality leads to an expansion of significant and thus reportable content. Both significant aspects of the so-called outside-in perspective and the inside-out perspective are considered equally, instead of a small intersection of both perspectives. This brings the aspects of ecology, social, and economic closer together, aligning with the approach of strong sustainability.

In our next article in the series "Sustainability Report according to CSRD," we will focus on the new EU-wide standards for sustainability reporting.