Skip to main content
Back to Glossary
Definition

Materiality

Materiality is the test a company uses to decide which sustainability topics matter enough to manage or report because they could affect its finances, reflect significant impacts on people or the environment, or both.

What is materiality?

Materiality is the filter that decides which sustainability topics belong in a report. The answer depends on the lens: effects on your company, your company's impacts on people or the environment, or both.

Why does materiality matter to you?

A customer, lender, standard, or platform may ask why you chose certain topics and left out others. A documented assessment keeps the report focused and explains each choice. Without one, you can spend time on popular topics while missing a risk to a major contract or serious harm connected to your operations.

How do you decide what is material?

Start with your operations, products, locations, suppliers, customer requests, legal duties, incidents, and complaints. Ask finance and operations how each topic could affect revenue, costs, cash flow, funding, or the ability to operate. Speak with stakeholders, meaning people or groups affected by the business, such as workers, suppliers, customers, and local communities.

Assess each topic under the lens your report requires. For financial materiality, consider the likely size and timing of effects on cash flow, access to finance, and the cost of capital. For impact materiality, consider scale (severity of harm), scope (reach of harm), and ability to remedy (whether harm is reversible) for actual or potential harm, then consider likelihood for potential impacts. Set and document the threshold for inclusion. Record the evidence, judgement, owner, and reason for each inclusion or exclusion, and review the result each reporting period or after a major change.

What mistakes should you avoid?

  • Copying a peer's topic list without testing it against your own business, locations, and relationships.
  • Using only management views and getting no input from affected stakeholders or relevant experts.
  • Treating the assessment as a one-off exercise instead of reviewing changes in impacts, risks, and opportunities.
  • Assuming double materiality means a topic must pass both tests; under the European Sustainability Reporting Standards (ESRS), either test is enough.

What is the difference between financial, impact, and double materiality?

Financial materiality asks whether a sustainability topic could affect your company's cash flow, borrowing costs, access to funding, or other business prospects. Impact materiality asks whether your company has significant positive or negative effects on people or the environment, including through its products and business relationships. Double materiality applies both lenses. A topic is material if it passes the financial test, the impact test, or both.

Which materiality test do ISSB, AASB S2, ESRS, and GRI use?

The International Sustainability Standards Board (ISSB) uses financial materiality in IFRS S1 and IFRS S2. Its test asks whether missing, wrong, or hidden information could influence investors and lenders (IFRS Foundation guidance). Australia's AASB S2 applies the same single lens to climate information that could affect the entity's prospects. In that standard, the “[D]” prefix marks paragraphs added in an Australian appendix; the test appears in paragraphs [D]17 and [D]18.

ESRS use double materiality. The in-force ESRS 1 paragraphs 21, 28, 43, and 49 set the two tests, while ESRS 2 IRO-1 paragraph 53 asks how the company identifies and assesses the topics. The Global Reporting Initiative (GRI) uses impact materiality: GRI 3 Disclosures 3-1 and 3-2 ask for the process, stakeholder and expert input, and the resulting list of topics.

How do CDP and EcoVadis ask about materiality?

CDP's 2026 full corporate Questions 2.2, 2.2.1, and 2.2.2 ask about environmental dependencies, meaning the natural resources a business relies on, along with impacts, risks, and opportunities. This resembles both lenses but is not proof that you completed an ESRS assessment.

EcoVadis tailors its questionnaire to your industry, size, and location and activates relevant issues across four themes. Its methodology assesses the evidence behind your company's policies, actions, and results. Answer the activated questions with company evidence rather than substituting a financial-risk list.

Example

Illustrative supplier scenario: A 420-person coatings supplier is deciding what to include in reports requested by a lender, an EU customer, and EcoVadis. It starts with three candidate topics instead of copying a competitor's list.

  • Climate transition: a customer representing 30% of sales requires emissions data and a reduction plan at contract renewal. Finance finds that losing the contract would affect revenue and cash flow. The topic passes the financial test.
  • Worker solvent exposure: worker interviews report repeated symptoms, and safety records show measured exposure above the site's occupational limit on one production line. Because the possible harm is serious and repeated, the topic passes the impact threshold even though no large cost has reached the accounts.
  • Local water use: site records show that water is reused in a closed system in an area without water scarcity. Local stakeholder input identifies no significant effect. It does not pass either threshold today, so the supplier records the reason and keeps it under review.

The ISSB-style lender response focuses on the climate-related financial effect. The GRI report includes the significant worker impact. An ESRS report includes both topics because either lens is enough. The EcoVadis response answers the questions activated for that company and attaches evidence.

Where it comes up

AASB S2 material climate information for primary usersAASB S2 paragraphs [D]17-[D]18 and reassessment at [D]B28ESRS double materiality assessment and disclosure processIn-force ESRS 1 paragraphs 21, 28, 43 and 49; ESRS 2 IRO-1 paragraph 53CDP environmental dependencies, impacts, risks and opportunities processCDP 2026 full corporate questionnaire, Questions 2.2-2.2.2 and 2.4EcoVadis activated key sustainability issues across four themesEcoVadis Sustainability Rating questionnaire, industry risk profile and activated criteriaBRSR material responsible business conduct issuesSEBI BRSR Section A, Question 24: risk or opportunity, rationale, response and financial implications

Related terms

Sustainability Reporting

Sustainability reporting is the process of publishing evidence-backed information about a company's environmental, social, and governance impacts, risks, opportunities, policies, targets, and performance for a defined period and business boundary.

Corporate Sustainability Due Diligence

Corporate sustainability due diligence is an ongoing, risk-based process for finding and addressing harm to people or the environment connected to a company's operations and business relationships.

Scope 3 Emissions

Scope 3 emissions are the indirect greenhouse gas emissions from goods, services, transport, product use, investments, and other upstream and downstream activities outside your company's Scope 1 and Scope 2 boundary.

Greenwashing

Greenwashing is a false or misleading environmental message that makes a product, service, investment, or business appear more beneficial or less harmful to the environment than the evidence supports.

Double materiality assessment

A double materiality assessment is the ESRS process for deciding which impacts, risks and opportunities enter a sustainability statement after testing both effects on people or the environment and financial effects on the company.

GRI Standards

The GRI Standards give organizations a common structure for disclosing their most significant impacts on people, the environment and the economy.

Sources

Sources checked 2026-08-18

Ready to start?

Tell us what you need.

Bring us the sustainability request, reporting deadline, or strategy question you are facing. We will read it and suggest a practical first step, and the first conversation is free.

Get in touch
Materiality Definition | Keslio