Materiality in sustainability

Materiality in sustainability is the principle used to identify which environmental, social and governance (ESG) topics are significant enough to warrant a company's attention and disclosure. A topic is material when it has a meaningful bearing on the company's performance or on the decisions and expectations of its stakeholders, such as investors, customers, employees, regulators and local communities.

Out of the dozens of ESG topics a business could in theory address, materiality is the filter that separates the few that genuinely matter from the rest. It is the starting point of almost every credible sustainability strategy and of every robust sustainability report.

Single materiality and double materiality

There are two complementary lenses for judging what is material:

• Financial (or outside-in) materiality: how sustainability matters such as climate change or resource scarcity affect the company's value, cash flows and risk profile. This is the focus of investor-oriented frameworks like the ISSB standards (IFRS S1 and S2).
• Impact (or inside-out) materiality: how the company's own activities affect people and the environment, regardless of any financial consequence for the business.

When both perspectives are applied together, the result is double materiality. This is the approach required by the European Union's Corporate Sustainability Reporting Directive (CSRD) and operationalised through the European Sustainability Reporting Standards (ESRS): a topic is reportable if it is material from either the financial or the impact side, or both. The double materiality assessment is the cornerstone that determines what a company must disclose under the CSRD.

How to run a materiality assessment

A materiality assessment usually follows a structured sequence:

1. Identify candidate topics. Review sustainability frameworks, sector standards and peers to build a long list of potentially relevant ESG topics across the value chain.
2. Assess impact and financial relevance. For each topic, evaluate the company's actual and potential impacts on people and the environment, and the risks and opportunities the topic creates for the business.
3. Engage stakeholders. Consult investors, customers, employees, suppliers and communities through surveys, interviews and workshops to understand their priorities.
4. Prioritise. Combine the evidence to decide which topics cross the materiality threshold, often visualised in a materiality matrix.
5. Validate and disclose. Have management and the board confirm the material topics, then report them and explain the methodology used.

Why materiality matters

A well-run materiality assessment delivers tangible benefits:

• Sharper strategy and resource allocation, by concentrating effort on the topics that move the needle.
• Better risk management, surfacing ESG risks such as climate, water or supply-chain issues before they escalate.
• Stronger reputation and trust, through transparent and credible reporting.
• Easier access to finance, as investors increasingly screen for sound ESG management.
• Regulatory readiness, since double materiality is the entry point to CSRD and ESRS compliance.

Materiality and carbon footprint

For most companies, measuring and reducing the carbon footprint is one of the clearest material topics. Tightening climate regulation, rising stakeholder expectations and investor scrutiny of emissions mean that greenhouse gas performance is frequently material from both the financial and the impact perspectives.

At Manglai we help companies measure their carbon footprint and run the double materiality assessment that underpins CSRD and ESRS reporting. Discover how Manglai can help you.