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Materiality in Transition: Challenges and Opportunities in Corporate Sustainability Reporting under the CSRD

Published online by Cambridge University Press:  13 June 2025

Måns Dunfjäll Open the ORCID record for Måns Dunfjäll [Opens in a new window]
Måns Dunfjäll*
Affiliation:
Faculty of Law, University of Copenhagen, Copenhagen, Denmark
*
Email: mdun@jur.ku.dk
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Abstract

This article examines the concept of materiality in sustainability reporting, tracing its development from financial materiality to the adoption of double materiality under the Corporate Sustainability Reporting Directive (CSRD). It explores the distinction between financial and impact materiality, highlighting the regulatory and ideological shifts that have shaped their integration. The discussion also includes the challenges companies face in implementing double materiality, such as data collection complexities, methodological inconsistencies, and the risks of selective disclosure. Additionally, the article contains an analysis of potential solutions, including additional regulatory guidance, independent oversight, and best practices for balancing transparency with strategic reporting. Ultimately, the author argues that double materiality represents a significant transformation in corporate governance, and that there exists concrete measures to be taken by both companies and regulators to improve the application of the CSRD.

Keywords

CSRDmaterialitysustainability reporting

Information

Type
Articles
Information
European Journal of Risk Regulation , Volume 16 , Special Issue 3: Special Issue on Rule of Law in Practice: Conditionality and Regulatory Challenges in the European Union , September 2025 , pp. 927 - 941
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This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial licence (https://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original article is properly cited. The written permission of Cambridge University Press must be obtained prior to any commercial use.
Copyright
© The Author(s), 2025. Published by Cambridge University Press

I. Introduction

The growing attention paid to sustainability both in legislation and in contemporary academic scholarship has made the topic of sustainability reporting, and with it the principle of materiality, a contentious point of discussion.Footnote 1 There are many approaches one could take when identifying the key issues or guiding principles in the field of sustainability reporting, but this article will focus singularly on the principle of materiality, perhaps the single principle which guides the practice of sustainability reporting the most.Footnote 2 The principle of materiality represents the key tool with which companies can single out certain sustainability topics as important enough to report on, and others as unimportant and thus discarded.Footnote 3 For over 40 years, the question of materiality has been poked and prodded from different directions in order to gain a better understanding of the principle.Footnote 4 Some of these studies have concerned the importance of materiality as a principle weighed against other guiding principles, while others have concerned themselves with the task of how to identify what is material. This article aims to contribute to the materiality discussion through promoting discussion of the term materiality from a novel perspective, aiming to relate it to the legal field in a broader sense and discuss the content of the principle both from a sustainability reporting and a general legal standpoint. Still, the main contribution of this article lies in its effort to produce new discussion and arguments surrounding the relatively new principle of double materiality, and illustrating the journey from financial materiality to double materiality which has been elevated to the forefront of the contemporary materiality discussion by the introduction of the CSRD.Footnote 5 This article employs a traditional corporate law approach to describe and critically examine the principle of materiality in sustainability reporting, focusing on its role as a legal principle at the center of several sustainability frameworks and its evolution under the CSRD. The jurisprudential foundations of corporate law lie in efficiency analysis, and while this article makes no attempt at a sensu stricto analysis of efficiency as a result of the materiality principle, the discussion culminates with an evaluation of the materiality principle and the value or non-value it provides companies, which can be considered a derivative of the efficiency analysis.Footnote 6

Concerning the interdisciplinary nature of this article, materiality has traditionally been examined through an accounting and finance lens, focusing on quantitative thresholds and investor-driven reporting standards. However, the advent of sustainability reporting, particularly under the CSRD, demands a broadened perspective that recognises materiality not only as a technical benchmark but also as a legal principle that can trigger enforceable obligations and influence corporate behavior. Approaching this discussion from a legal perspective can help understand how statutory mandates, regulatory oversight, and corporate law doctrines add a normative dimension to what was once a purely finance-oriented question. In other words, while the accounting perspective continues to offer crucial tools for defining and measuring materiality, legal scholarship can look at how those definitions acquire real-world impact through compliance obligations, liability risks, etc., thereby making the principle of materiality genuinely interdisciplinary.

II. An overview of materiality

1. Materiality as a legal principle

Materiality, in simple terms, or more precisely, material information, refers to information, facts, or issues that are important enough to influence certain predetermined factors, such as a certain measure or event’s effect on the financial well-being of a company or a society.Footnote 7 The objective of requiring the identification of specifically material information is to remove irrelevant or insignificant information, I.E. immaterial information, thus leaving only that information which is truly significant for legal determinations or regulatory compliance.Footnote 8 Different reporting standards, such as the GRI standards, IR standards and IFRS standards utilise wholly different definitions of materiality,Footnote 9 but the loose definition described above is one which all the standards share. The question of whether materiality constitutes a legal principle can be addressed by examining its function, its normative nature, and its alignment with the theories distinguishing principles from rules. Legal principles are normative standards that express values or goals fundamental to the legal order. Unlike rules, which prescribe specific behaviors or outcomes under defined conditions, principles provide frameworks for balancing competing interests or values.Footnote 10 Some scholars suggest that principles, in contrast to rules, aim at the realisation of broader goals and influence legal reasoning through their normative weight rather than rigid applicability.Footnote 11 In the context of accounting standards, rules are described by some as detailed, rigid and inflexible, while principles are considered flexible, and judgment-dependent, although scholars are split as to the extent of the flexibility or advantages that principles offer over rules.Footnote 12 Materiality, revealing itself to be a principle in nature, does not dictate specific behaviors but requires contextual interpretation. The aim of materiality is functionally to realise the goal of reducing reporting bloat and bring vital information into the limelight, doing so by virtue of its normative weight while remaining flexible by allowing for a significant margin of interpretation.Footnote 13

2. Materiality as a protective principle

Materiality also serves as an interpretive guideline, directing how regulatory texts, business disclosures, and legal duties are understood. For instance, a certain legal framework might provide a requirement for a company to disclose information which is material to its impact on the environment. In such a situation, it would be self-evident, for example, that a forestry company ought to disclose its effect on threatened species or local wildlife, as well as its’ carbon impact or impact on deforestation. For a beverage company, perhaps none of those topics would be material to report on, instead the company finds it material to report on such things as water consumption, or air pollution.Footnote 14 In this sense, materiality serves as a tool for determining which bits of information, facts, or legal responsibilities are significant in the context of a larger framework. Looking outside sustainability reporting, in British and American corporate law for example, a materiality assessment is to be conducted in order to determine which facts a corporation must disclose to shareholders, investors, and the general public.Footnote 15 The same language, that of needing to identify material facts, likewise appears in the EU’s market abuse regulation.Footnote 16 The concept of identifying material facts is therefore familiar to lawyers working not only in the specific niche of sustainability reporting, but in the field of corporate law as a whole. In this setting, the function of the materiality principle is to ensure that only information that may impact potential investment decisions is made public.Footnote 17

3. Inherent challenges with materiality: balancing freedom, responsibility, cost, and risk

Materiality offers flexibility, choice, and a large degree of both freedom and responsibility for the companies who are not only able, but required, to designate which topics or what information is material. While materiality is in part intended to help organisations prioritise and disclose relevant information, its implementation reveals inherent challenges.Footnote 18 I will highlight three particular issues which emerge from the current approach to the materiality assessment: selective under-reporting, over-disclosure, and the cost of assessing materiality. Materiality assessments rely heavily on corporate judgment to identify relevant issues, but this judgment is not immune to bias. Companies may maliciously or unwittingly prioritise issues that align with their strategic goals or minimise reputational risks. For instance, a company may focus on reporting positive environmental initiatives such as planting trees, while deemphasising or outright omitting significant but less favorable impacts, such as violations of labour rights in its supply chain or contributions to air pollution. The risk of malicious selective disclosure is particularly concerning since stakeholders, including regulators, investors, and civil society, depend on the accuracy of materiality assessments to provide a complete picture of a company’s impacts.Footnote 19 When companies under-report, it creates an asymmetry of information that can mislead or potentially defraud investors, as well as hinder efforts by regulators and other stakeholders to hold companies accountable for their societal and environmental impacts.Footnote 20

Paradoxically, the same freedom and responsibility that allow for under-reporting may also lead to over-disclosure. In environments where legal or reputational penalties for omissions are a significant concern, companies may adopt a conservative approach, disclosing excessive amounts of information to mitigate potential risks. This over-disclosure, while ostensibly thorough, creates its own set of problems. When companies disclose too much information, it becomes difficult for stakeholders to identify the truly material issues amidst a sea of non-essential data. Over-disclosure can, whether done maliciously or out of genuine concern, obscure critical information, defeating the purpose of materiality assessments by diluting their focus and reducing the usability of the reports.Footnote 21 Stakeholders, including regulators and investors, may struggle to extract useful information from the report, leading to inefficiencies in accountability and decision-making.Footnote 22

Lastly, a critical issue with materiality assessments lies in the significant resources required to determine whether a particular topic is material. For large companies with complex operations, identifying material issues is not always unambiguous. While some impacts are intuitively material based on the company’s industry or core activities, others require extensive analysis and data collection to assess their relevance. This process can strain resources, especially when the boundaries of materiality are ambiguous or contested.Footnote 23 Certain topics are universally or industry-specifically recognised as material, such as water usage for a beverage company or carbon emissions for an energy company. These topics are inherently tied to the core activities of the business and their environmental, social, or financial impact is readily apparent. However, companies often face a myriad of other potential issues such as air pollution, diversity in hiring practices, or labour union contracts which may or may not meet the threshold of materiality depending on their specific circumstances. For instance, a beverage company may intuitively identify the material importance of its water usage due to its reliance on water as a key resource for production, but the question of air pollution or workers’ union contracts may require a deeper, more resource-intensive evaluation. These topics could still have significant implications for stakeholders, but determining whether they qualify as material through a double materiality analysis requires stakeholder engagement, data collection, and impact analysis.Footnote 24 The process of assessing materiality for a wide range of potential issues therefore demands significant financial and operational resources. Depending on the size of the company, it may need to hire consultants, conduct stakeholder interviews, perform environmental and social impact assessments, and analyse vast amounts of internal and external data.Footnote 25 However, the cost associated with identifying material matters and topics tends to decline over time as companies become more accustomed to sustainability reporting. A company that maintains largely consistent business operations year after year will not need to undertake a full-scale reassessment of material topics to the same extent as it did in its initial year of sustainability reporting.Footnote 26

The inherent challenges in materiality assessments, such as the risks of under-reporting, over-disclosure, and the resource-intensive nature of determining materiality, have led to numerous proposed solutions, some of which have since been implemented. Examples of these include enhanced regulatory guidance,Footnote 27 and mandating independent oversight and verification.Footnote 28 While these solutions certainly aim to address key concerns, the question of their applicability and effectiveness remains unanswered as the CSRD has not yet been in force long enough for any substantive conclusions to be drawn.

4. The great divide – financial materiality, impact materiality and double materiality

In the past decades there have been many attempts to provide a clear template for identifying what material information is, and what it is not. Some hold the view that the determination of material information ought to be based on the interests of the shareholders, while others mean that interests of stakeholders outside the company should also be considered, such as regulatory agencies, environmental protection groups, etc. This divide, which is visible throughout the field of corporate sustainability,Footnote 29 is strikingly apparent in the discussion surrounding the materiality principle. The split is clear not only in how companies have conducted their materiality assessments, but in how the different reporting regimes present different alternatives concerning how to conduct that assessment.Footnote 30 The shareholder side of the argument stems from the basic position of the non-responsibility of companies in the social dimension. According to this view, a company exists only to produce value for the shareholder, and that is the extent of its’ social responsibility, as famously stated by Milton Friedman.Footnote 31 Meanwhile, the stakeholder side of the argument concerns itself with the negative side effects of shareholder based profit maximisation, as well as the positive consequences of successfully enabling a stakeholder-friendly corporate management.Footnote 32 The reverberations of this split between the shareholder and stakeholder perspectives are visible throughout the different sustainability reporting standards used by companies, with the differences between these standards being described by some as irreconcilably different.Footnote 33 Understanding the different concepts of materiality is essential for recognising that, while financial materiality and impact materiality (and later double materiality) represent distinct approaches, they are rooted in deeper ideological debates about corporate social responsibility. The choice between financial materiality and impact materiality/double materiality in reporting standards and frameworks is not merely a neutral technical decision by standard setters; rather, it reflects an overarching alignment with one of the central positions in the CSR debate; the tension between the shareholder and stakeholder perspectives.

a. Financial materiality

The shareholder-centric perspective is referred to as financial materiality, which is defined by the European Financial Reporting Advisory Group (EFRAG)Footnote 34 as material information about risks and opportunities related to a sustainability matter.Footnote 35 Put simply, this means that financial materiality, also called the outside-in perspective, refers to information that is significant in influencing investment and economic decisions.Footnote 36 The primary standard for evaluating financial materiality provided by EFRAG is the general principle of decision-usefulness, meaning that materiality is assessed based on the extent to which disclosed information supports informed decision-making. The primary audience for financial materiality assessments is investors, creditors and other stakeholders with a financial interest in the company.Footnote 37 Take, for example, a beverage company operating in a region experiencing increasing water scarcity due to climate change. Water is a critical resource for its production processes, and local governments are introducing stricter regulations on water use, including higher fees and potential usage restrictions. From a financial materiality perspective, this issue is material because higher water costs and regulatory compliance expenses could reduce profit margins, and investors and creditors need to assess whether the company has a long-term strategy to mitigate these risks, such as investing in water efficiency technology or diversifying supply sources.

b. Impact materiality

The stakeholder-centric perspective on the other hand is referred to as impact materiality and is defined by EFRAG as material information about the undertaking’s impacts on people or the environment related to a sustainability matter.Footnote 38 These impacts can arise from the company’s own operations or throughout its upstream and downstream value chain, including business relationships.Footnote 39 Unlike financial materiality, which focuses on how external sustainability risks affect a company’s financial performance, impact materiality assesses how the company’s activities influence external stakeholders, including employees, communities, ecosystems and other affected groups, the so-called inside-out perspective.Footnote 40 EFRAG clarifies that impact materiality must be assessed independently of financial materiality, denoting that a sustainability matter may be material even if it does not generate direct financial risks for the company.Footnote 41 Take, for example, a company sourcing leather from suppliers linked to cattle farming in the Amazon rainforest. Despite not being directly involved in deforestation, the company contributes to the impact by purchasing leather from suppliers who clear forests for grazing land. From an impact materiality perspective, this issue is material because deforestation has substantial environmental consequences, including biodiversity loss, and carbon emissions, and the company is linked to this impact through its supply chain, making it responsible for assessing and mitigating its role in driving deforestation.Footnote 42

c. Double materiality

The term double materiality is a combination of financial materiality and impact materiality and requires companies to consider both the shareholder and stakeholder perspectives. The principle of double materiality is favored by the EU through its implementation of the CSRD, and is to be understood as simply applying impact and financial materiality in sequence.Footnote 43 Generally, EFRAG advises companies to begin with the impact materiality assessment, and proceeding to the financial materiality assessment afterwards.Footnote 44 The shift toward double materiality represents a fundamental evolution in sustainability reporting, where sustainability is no longer viewed merely as a reputational or compliance issue but as a critical determinant of long-term business viability.Footnote 45 Given this context, the next section explores the CSRD in greater detail, examining its origin, scope and detailed materiality assessment.

III. Materiality in the context of the CSRD

1. Origin, purpose and scope of the CSRD

The Non-Financial Reporting Directive (NFRD),Footnote 46 amending the Accounting Directive,Footnote 47 was adopted by the EU institutions in 2014, but despite non-binding reporting guidelines published by the European Commission, the quality of disclosed information as a function of the NFRD had not significantly improved from the directive’s inception until 2019.Footnote 48 The European Commission, left dissatisfied with the impact of the NFRD, and as part of the European Green Deal and its 2020 Work Programme, proposed revising the NFRD, a measure which was met with approval from the European Parliament.Footnote 49 The proposal for a new and revised reporting directive appeared in 2021 alongside international initiatives for harmonising sustainability reporting standards.Footnote 50 The result of the proposal was the CSRD, a legislative initiative by the EU aimed at significantly enhancing and standardising sustainability reporting by companies. The EU intended for the CSRD to build on the NFRD and address its shortcomings by expanding the scope, improving the quality of reported information, and ensuring that sustainability data is reliable, comparable, and relevant to users.Footnote 51

As for the specifics of what needs to be reported under the CSRD, the general outline of what information is to be reported can be found in Article 19a.1-3. Summarily, the affected companies are to report on the sustainability risks associated with their business, the opportunities the companies have related to sustainability, the companies’ sustainability policies, the usage of incentive schemes related to sustainability within the company, etc. Much of the information which requires disclosure is not specified within the CSRD itself but is instead described in greater detail in the European Sustainability Reporting Standards (ESRS) reporting standards published by EFRAG.Footnote 52 Additionally, the information contained within the sustainability reports is, for some companies, required to be published alongside the general management report and to be published in a machine-readable format for digital access.Footnote 53 This represents a substantial change from the NFRD regime wherein reports, if they existed at all, were only accessible through physical copies or difficult to access websites, which made an overview of the existing reports very difficult.

2. Understanding and applying the CSRD materiality assessment

EFRAG emphasise in their implementation guidelines for the CSRD that the materiality assessment process is not a one-size-fits-all situation, rather it is absolutely necessary for companies to design an assessment process which suits their company and industry.Footnote 54 Despite this, the implementation guidelines offer a model assessment process which companies are free to adopt. This recommended assessment is divided into four primary steps: understanding the context, identification of Impacts, Risks and Opportunities (IROs), assessment and determination of material IRO’s, and reporting.Footnote 55 The following section will examine the first three steps in detail, while reporting, the fourth step, is excluded as it does not require extensive analysis.

a. Understanding the context

The first step in the materiality assessment process under the CSRD involves understanding the context in which a company operates. This step establishes the groundwork for later identifying and evaluating sustainability-related IROs. Not before analysing the business environment, operational processes and stakeholder relationships, can companies gain the insights to conduct an effective materiality assessment that reflects that company’s unique circumstances.Footnote 56 Firstly, a comprehensive understanding of an undertaking’s value chain is essential for accurately identifying potential IROs.Footnote 57 This involves mapping all stages of the value chain, including upstream activities (e.g., raw material sourcing, supplier operations) and downstream activities (e.g., product use, disposal, and recycling).Footnote 58 By examining how the company’s activities interact with different systems in the value chain, it becomes possible to identify points of significant impact, dependency or vulnerability.Footnote 59 For example, a manufacturing company might assess how its sourcing of raw materials contributes to deforestation or labour rights violations in supplier operations. Similarly, a technology firm producing smartphones may consider the environmental and social impacts of its products’ end-of-life disposal and recycling processes, especially when toxic or otherwise dangerous materials are involved in production.

Secondly, to conduct an effective materiality assessment, companies must assess the legal and regulatory landscape in which they operate, identifying laws, policies, and market expectations that influence sustainability performance.Footnote 60 This includes both domestic and international frameworks, as the CSRD requires attention to cross-border activities and global supply chains. Regulatory trends, such as stricter emissions limits for vehicles or labour protections, may elevate the materiality of certain IROs that would otherwise be overlooked. The economic environment also plays a significant role in contextual analysis. Market trends, consumer behavior and investor priorities can shape the relevance of specific sustainability issues.Footnote 61 For instance, rising consumer demand for ethically sourced products or investor focus on net-zero transition plans may mean a company’s products are no longer sought after, thereby making certain sustainability IRO’s more relevant for the business.

Finally, certain industries face unique sustainability challenges that directly influence the materiality of their IROs. Companies are encouraged to benchmark their sustainability issues against sector-specific risks and opportunities.Footnote 62 For example, CO2 emissions are an inherently material topic for airlines, while data privacy and cybersecurity may be material for technology firms. Understanding these sectoral dynamics allows companies to identify issues that are universally significant within their industry and prioritise them accordingly. Additionally, stakeholder engagement is a central feature of contextual analysis under the CSRD. Companies must consider the perspectives of a wide range of stakeholders, including employees, communities, customers, investors and regulators. Stakeholder expectations often highlight issues that might not immediately appear material from an internal perspective but are nonetheless significant for external accountability.Footnote 63 For example, local community concerns about air or water pollution near manufacturing facilities may significantly affect the company and require a shift in the materiality assessment.

b. Identification of IROs

Once a company has concluded their contextual analysis, the next stage calls for the identification of IROs. This step builds on the contextual analysis by translating the context into a list of sustainability topics and matters that are relevant to the company’s operations and value chain. The identification phase is structured to ensure that all potentially material IROs are captured, regardless of whether they are predefined in the ESRS or specific to the entity’s unique circumstances. The terminology used within the ESRS and the CSRD including impacts, risks, opportunities (IROs), matters, and topics, can be confusing due to their overlapping meanings and the sometimes interchangeable way they are employed in guidance documents. Sustainability matters and topics both refer to ESG issues that a company must consider in its materiality assessment. Examples include climate change, air pollution, labour rights, and biodiversity. The difference between the two lies in whether the issue is explicitly addressed in the ESRS. A topic refers to an ESG matter that is covered by the ESRS standards.Footnote 64 For instance, air pollution is a sustainability matter covered under the ESRS E2 topical standard on pollution, therefore it is also a topic. A matter, on the other hand, includes all relevant ESG issues, so long as they fulfill the criteria of being either impact material, financially material or both, regardless of whether they are explicitly mentioned in the ESRS.Footnote 65 Put simply, while all topics are matters, not all matters are topics. Companies are responsible for identifying and assessing sustainability matters broadly, and to ensure that matters which are not pre-defined in the ESRS are not excluded from reporting if deemed material.

In turn, the concept of impacts, risks and opportunities, provides a framework for determining the materiality of sustainability matters. These three elements are distinct but interconnected. Impacts refer to the actual or potential effects that a company has on people and society.Footnote 66 These effects can be positive or negative and may occur directly through a company’s operations or indirectly through its value chain. For example, a manufacturing company’s emissions might negatively affect air quality, impacting the health of local communities and biodiversity. Risks are the potential negative consequences that sustainability-related issues could have on a company’s financial performance, operations, or reputation.Footnote 67 These are typically inward-facing, focusing on how external ESG factors could influence the company itself. For instance, stricter emissions regulations could create operational risks for companies reliant on high-emission processes.Footnote 68 Opportunities are the positive potential that sustainability issues present, either through mitigating risks or creating new business avenues. These might include access to green financing, innovation in sustainable technologies, or meeting the growing market demand for environmentally friendly products.Footnote 69 For example, a logistics company transitioning to electric delivery vehicles may capitalise on both regulatory incentives, by taking advantage of EV subsidies, and consumer preferences, by being able to market themselves as green.

In summary; the relationship between matters, topics, and IROs is hierarchical in the materiality assessment process. The first step is identifying sustainability matters, which represent the broad spectrum of ESG issues relevant to the company. These may include both predefined topics in the ESRS and entity-specific matters unique to the company’s operations or context. Once matters are identified, the company evaluates their related impacts, risks, and opportunities to determine whether they are material. For instance, a company assessing air pollution as a sustainability matter would examine both its impacts (e.g., health effects on local communities) and risks (e.g., potential regulatory fines) to decide if the matter is material. If a matter is deemed material, it forms the basis of disclosure requirements. For predefined topics in the ESRS, the company follows the topical standard’s reporting criteria. For matters not covered by ESRS, the company must still report on them in accordance with the general disclosure guidelines.

c. Assessment and determination of material IROs

The assessment and determination phase in the materiality process evaluates the significance of identified IROs to determine their materiality. Materiality is assessed through the lens of both impact materiality and financial materiality. Additionally, at this stage of the assessment, companies are encouraged to establish thresholds to help determine the level of significance required for inclusion in reporting.Footnote 70 These can include quantitative thresholds, such as measurable financial or environmental metrics, as well as qualitative thresholds, such as reputational or stakeholder concerns. An example of a quantitative threshold could be any sustainability issue affecting more than 5% of annual revenue. By setting such a threshold, a company might assess whether disruptions in its supply chain due to deforestation could result in significant revenue loss. Conversely, a qualitative threshold could be any issue identified as a significant concern by more than 20% of surveyed stakeholders.Footnote 71 The object of this threshold could be to identify stakeholder concerns. If local communities, for example, highlight water scarcity or pollution as a major issue, this could qualify the topic as material. Importantly, while the CSRD allows flexibility in setting thresholds, companies are expected to document and justify their choices to ensure transparency and comparability. Since thresholds are to some extent arbitrary by nature, it is important for a company to be able to rationalise their choice.Footnote 72

IV. Implementation challenges in the context of the CSRD – evidence from early case studies

In this early stage, the adoption of the CSRD by companies has been the subject of a limited number of preliminary studies.Footnote 73 These initial studies give some insight into the difficulties that organisations encounter as they seek to comply with the directive’s requirements. Chief among the challenges identified are the complexities of aligning existing reporting practices with new reporting standards, integrating double materiality assessments, and managing the operational and resource demands of compliance. This section will examine these challenges in detail and offer potential strategies and best practices for addressing these issues.

1. Conceptual ambiguity and complexity in double materiality implementation

The implementation of double materiality under the CSRD presents a challenge in part due to its conceptual ambiguity and inherent complexity. While the dual approach of double materiality aims to provide a more well-rounded understanding of sustainability, it creates several hurdles for effective implementation. One of the primary challenges lies in the lack of clarity surrounding what constitutes a material issue under both financial and impact materiality. Unlike traditional financial materiality, which is guided by well-established accounting principles and investor-centric perspectives,Footnote 74 impact materiality expands the scope to include stakeholders such as employees, communities, and ecosystems. This broader focus requires companies to define thresholds for materiality that balance diverse and sometimes conflicting stakeholder priorities.Footnote 75 The broader focus causes a degree of ambiguity, which is only further exacerbated by the absence of universally accepted methodologies for assessing materiality, particularly for impact materiality. Companies are often left to interpret high-level guidance provided by the EFRAG and other bodies, leading to inconsistent practices.Footnote 76 Additionally, the double materiality assessment process itself is highly complex, requiring the integration of qualitative and quantitative data from different sources.Footnote 77 Companies evaluate the magnitude and likelihood of risks for financial materiality, while also considering the severity and likelihood of impacts for impact materiality. This two-pronged approach demands significant resources, such as high-quality data, analytical tools, and a base level of expertise in both sustainability and financial analysis. Another key issue highlighted in early case studies is the misalignment between regulatory expectations and the practical realities faced by companies. For example, while the CSRD emphasises the integration of materiality assessments into business strategy, many companies approach double materiality as a compliance exercise rather than a strategic tool for creating value. This mindset can lead to box-ticking practices, where companies focus on meeting minimum disclosure requirements rather than providing meaningful insights.Footnote 78 To remedy this issue, companies may consider adopting structured, evidence-based approaches that combine quantitative data with qualitative insights from internal experts and stakeholders.Footnote 79 Implementing standardised criteria for impact assessment, adopting sector-specific guidance and practices, and integrating best practices from existing frameworks such as GRI and ISSB can help ensure consistency, especially across separate reporting regulations.Footnote 80

2. Data gaps and value chain complexity

One of the most significant challenges in implementing double materiality under the CSRD is addressing data gaps and value chain complexity. This issue comes to light as companies struggle to gather comprehensive, accurate and actionable data about both the financial and impact dimensions of sustainability-related risks and opportunities across their entire value chains. Companies often face difficulties in collecting reliable information, particularly regarding upstream and downstream activities in their value chains.Footnote 81 For example, while many companies are proficient in reporting Scope 1 and 2 greenhouse gas (GHG) emissions, Scope 3 emissions, which encompass indirect emissions occurring across the value chain, are frequently underreported or omitted due to inadequate data from suppliers and distributors.Footnote 82 Compounding this problem is the issue of value chain complexity. The difficulty of mapping extensive global supply chains further complicates the issue of lack of data.Footnote 83 Many companies lack the tools and resources to conduct thorough evaluations beyond their direct (Tier 1) suppliers. Issues such as geographical separation, diverse regulatory requirements across reporting regimes, and the fluid nature of subcontracting networks, especially in sectors such as construction, hinder visibility and accountability further down the value chain.Footnote 84 To address their data gaps, collaborative supplier engagement programs can seek to enhance transparency across value chains. Companies can, in order to gradually ease their data collection burden, prioritise a phased approach to data collection. This could entail focusing first on high-risk areas or “hotspots” before gradually expanding to full-spectrum reporting.Footnote 85 Additionally, shared databases and partnerships to improve data access and quality, particularly for Scope 3 emissions, could reduce investment costs in data collection and analysis.

V. Conclusions

Traditional financial materiality, rooted in investor-centric reporting, has long shaped corporate disclosure practices by requiring companies to disclose only information relevant to financial decision-making. However, as global sustainability challenges have intensified, ranging from climate change to unionisation, it has become increasingly apparent that financial materiality alone is insufficient to capture the full scope of a company’s impacts and dependencies. The emergence of double materiality broadens the assessment criteria to include external stakeholders and the environment, thereby necessitating a two-pronged approach. In practice, however, the implementation of double materiality poses substantial challenges. Companies must navigate the difficulties of integrating both financial and impact materiality assessments into their reporting procedures, often requiring extensive data collection and analysis, stakeholder engagement, and methodological adaptation. Some of the most pressing issues are the lack of standardised methodologies for evaluating impact materiality, data gaps, particularly in assessing indirect impacts across their value chains, and the risk of selective disclosure, either through underreporting material impacts or overloading reports with excessive, non-essential data. While double materiality as a principle is intended to enhance transparency, it also grants companies a substantial degree of discretion in determining which matters to include in their reports. In some cases, this discretion can be maliciously used to downplay negative impacts or highlight positive but relatively insignificant initiatives. Conversely, the fear of non-compliance can lead companies to engage in over-disclosure, where reports are excessively detailed but lack clear prioritisation, ultimately reducing their usefulness for stakeholders.

Looking ahead, the successful integration of double materiality into corporate reporting hinges on a shift in organisational mindset, from treating sustainability reporting as a compliance exercise to using it as a strategic tool for value creation. Companies that proactively engage with double materiality stand to benefit not only from regulatory compliance but also from enhanced risk management, reputational advantages, and access to sustainable investment capital. Concerning the future development of ESG regulation in the EU, even if the European Commission adopts further synthesised sustainability standards or imposes more detailed sector-specific metrics, the logic of double materiality is likely to retain its status as a core reference point for corporate ESG reporting. Its strength lies in its flexible approach, which not only acknowledges the concerns of shareholders but also accounts for the effects on external stakeholders.

Nevertheless, as the EU contemplates new measures, the line between materiality as a guiding principle and mandatory disclosures could blur. Imposing mandatory data points on companies, such as specific Scope 3 emission figures or explicit information on supply chain impacts, could limit the space for companies to decide unilaterally what constitutes “material” matters. In such a scenario, materiality might evolve into more of a threshold check than a framework requiring deeper reflection. On the regulatory side, the current call for companies to adopt genuine behavioral changes rather than simply comply with reporting requirements stands to benefit from greater policy interventions. Harmonised EU-level enforcement and oversight may increase the likelihood that double materiality better serves its intended purpose. These checks could be complemented by a heavier focus on sector-specific guidelines issued by EFRAG or similar bodies, helping companies focus on issues demonstrably central to their industry. Additionally, measures that combine carrots and sticks, such as monetary penalties for misleading reporting and incentives like preferential lending rates or favorable procurement terms for high-quality disclosures, could further align corporate reporting with true behavioral change. Finally, policymakers might support the development of open-source data platforms or shared industry tools to reduce the operational and financial burden of collecting complex, value-chain spanning data.

Acknowledgments

This research article is a contribution to the NASDAQ Nordic Sustainability Law project kindly financed by the NASDAQ Nordic Foundation.

Competing interests

Author has received a grant from the NASDAQ Nordic Foundation.

References

1 Daniel Reimsbach and Others, “In the Eyes of the Beholder: Experimental Evidence on the Contested Nature of Materiality in Sustainability Reporting” (2020) 33 Organization & Environment 624; Chiara Mio, Marisa Agostini and Francesco Scarpa, Sustainability Reporting: Conception, International Approaches and Double Materiality in Action (Palgrave Macmillan, London, United Kingdom).

2 David Murillo and Josep M Lozano, “SMEs and CSR: An Approach to CSR in Their Own Words” (2006) 67 Journal of Business Ethics 227; Jeffrey Unerman and Franco Zappettini, “Incorporating Materiality Considerations into Analyses of Absence from Sustainability Reporting” (2014) 34 Social and Environmental Accountability Journal 172; William F Messier, Nonna Martinov-Bennie and Aasmund Eilifsen, “A Review and Integration of Empirical Research on Materiality: Two Decades Later” (2005) 24 AUDITING: A Journal of Practice & Theory 153; Carla Edgley, “A Genealogy of Accounting Materiality” (2014) 25 Critical Perspectives on Accounting 255.

3 Riccardo Torelli, Federica Balluchi and Katia Furlotti, “The Materiality Assessment and Stakeholder Engagement: A Content Analysis of Sustainability Reports” (2020) 27 Corporate Social Responsibility and Environmental Management 470.

4 See for example; Craig Deegan and Michaela Rankin, “The Materiality of Environmental Information to Users of Annual Reports” (1997) 10 Accounting, Auditing & Accountability Journal 562; Peter Jones, Daphne Comfort and David Hillier, “Materiality in Corporate Sustainability Reporting within UK Retailing” (2016) 16 Journal of Public Affairs 81; Supra, note 2, Messier, Martinov-Bennie and Eilifsen; David E Vance, “A Meta-Analysis of Empirical Materiality Studies” (2011) 27 Journal of Applied Business Research (JABR) 53; Supra, note 2, Murillo and Lozano; Supra, note 2, Unerman and Zappettini; Stephen Brammer, et al, “Corporate Social Performance and Stock Returns: UK Evidence from Disaggregate Measures”; Marco Fasan and Chiara Mio, “Fostering Stakeholder Engagement: The Role of Materiality Disclosure in Integrated Reporting” (2017) 26 Business Strategy and the Environment 288; Dennis M Patten, “The Relation between Environmental Performance and Environmental Disclosure: A Research Note” (2002) 27 Accounting, Organizations and Society 763; Kimberley A Webb, Steven F Cahan and Jerry Sun, “The Effect of Globalization and Legal Environment on Voluntary Disclosure” (2008) 43 The International Journal of Accounting 219.

5 There remains some scholarly opposition to double materiality being the way forward for sustainability reporting, see for example: Subhash Abhayawansa, “Swimming against the Tide: Back to Single Materiality for Sustainability Reporting” (2022) 13 Sustainability Accounting, Management and Policy Journal 1361.

6 Jody S Kraus and Steven D Walt (eds), The Jurisprudential Foundations of Corporate and Commercial Law (1st edn, Cambridge University Press 2000, Cambridge, United Kingdom).

7 See for example, Global Reporting Initiative, The GRI Perspective, The Materiality Madness: Why Definitions Matter, Issue 3, 2022, p 1; International Financial Reporting Standards, IFRS S1 Sustainability Disclosure Standard, General Requirements for Disclosure of Sustainability-related Financial Information, 2023, paras. 17–18; International Financial Reporting Standards, International <IR´> Framework, 2021, p 7.

8 Ibid.

9 These so-called “Reporting Standards” are a set of accounting standards that govern how particular types of transactions and events should be reported in financial, or in this case, non-financial, reports. Examples of these standards include the Global Reporting Initiative (GRI) sustainability reporting standards, Integrated Reporting (IR) framework and International Financial Reporting Standards (IFRS) General Sustainability-related Disclosures. These standards serve the purpose of standardising the reports, enabling the reports to be compiled and analysed by stakeholders. Since these standards are compiled by different organisations from different countries with different objectives, their definitions of materiality also tend to differ.

10 Humberto Bergmann Ávila, Theory of Legal Principles, Law and Philosophy Library, v. 81 (Dordrecht, Springer 2007) pp 29–40.

11 See, for example; Robert Alexy, “Zum Begriff des Rechtsprinzips” in Werner Krawietz, Kasimierz Opalek, Aleksander Peczenik, Alfred Schramm (eds), Argumentation und Hermeneutik in der Jurisprudenz, Rechtstheorie, Beiheft 1, (Berlin, Dunckler und Humblot 1979) pp 59–88; Claus-Wilhelm Canaris, “Funktion, Struktur und Falsifikation juristischer Theorien‘ (1993) 8 Juristen Zeitung 377; Ronald M Dworkin, “The Model of Rules” (1967) 35 The University of Chicago Law Review 14.

12 See, for example; David Cabán, “Principles versus Rules Based Standards: Differential Impact on Accounting Quality and Relevance” (2024) 35 Journal of Corporate Accounting & Finance 174; Stefan F Schantl and Alfred Wagenhofer, “Principle-Based versus Rules-Based Accounting Standards: A Relevance-Enforceability Tradeoff” (2021) Columbia Business School pp 4–7; Mark C Penno, “Rules and Accounting: Vagueness in Conceptual Frameworks” (2008) 22 Accounting Horizons 339; Louis Kaplow, “Rules versus Standards: An Economic Analysis” (1992) 42 Duke Law Journal 557; Pingyang Gao, Haresh Sapra and Hao Xue, “A Model of Principles-Based vs. Rules-Based Standards” (2018) Working Paper, University of Chicago and Duke University.

13 Supra, note 6.

14 See Frank Bold, Preparation for implementation of the EU Sustainability Reporting Standards: Key findings from an assessment of 100 companies’ reports, good practice examples and recommendations to businesses, auditors and policymakers, 2024, p 37.

15 See, for example, Rule 405 of the Securities Act, 17 CFR § 230.405; Section 911B of the Companies Act 2006; David A Katz and Laura A McIntosh, “Corporate Governance Update: ‘Materiality’ in America and Abroad” (2021) Harvard Law School Forum on Corporate Governance, p 1.

16 See Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) [2014] L 173/1, recitals 47, 51, 58, and Art 3(2)(b)(iv).

17 Ibid.

18 Directive (EU) 2022/2464 of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting [2022] L 322/15, recital 12.

19 Olivier Boiral and Jean-François Henri, “Is Sustainability Performance Comparable? A Study of GRI Reports of Mining Organizations” (2017) 56 Business & Society 283.

20 Ibid.

21 EFRAG, State of play as of Q2 2024, Implementation of ESRS: Initial observed practices from selected companies, July 2024, pp 13, 17.

22 PositionGreen, in their 2024 study on the implementation of ESG reporting post-CSRD, described over-disclosure as a serious issue, noting that many reports displayed “transparency bordering on incomprehensible”; Position Green, ESG 100, Aligning with the future: ESG reporting in the ESRS era, 2024, p 5.

23 Christof Falkenberg, Carina Schneeberger and Siegfried Pöchtrager, “Is Sustainability Reporting Promoting a Circular Economy? Analysis of Companies’ Sustainability Reports in the Agri-Food Sector in the Scope of Corporate Sustainability Reporting Directive and EU Taxonomy Regulation” (2023) 15 Sustainability 7498.

24 Supra, note 1, Mio, Agostini and Scarpa; Félix E Mezzanotte, “Corporate Sustainability Reporting: Double Materiality, Impacts, and Legal Risk” (2023) 23 Journal of Corporate Law Studies 633.

25 EFRAG, Implementation Guidance, EFRAG 1G: Materiality Assessment, p 26.

26 For example, based on an EFRAG case study conducted in July 2024, 90% of surveyed companies were still working on mapping their value chain and had yet to create a clear system for doing so, something which will require a costlier initial investment but will not need to be done in such extensive detail every year. Additionally, sector-specific best practices are yet to be established, which will provide additional possibilities for streamlining the materiality assessment process for companies. See Supra, note 21, p 6.

27 See for example the numerous explanatory documents released by EFRAG to assist in drafting sustainability reports in line with the CSRD, such as EFRAG, Implementation Guidance, EFRAG IG 1: Materiality Assessment, 2024, and EFRAG, Implementation Guidance, EFRAG IG 2: Value Chain, 2024.

28 See Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 Supplementing Directive 2013/34/EU of the European Parliament and of the Council as Regards Sustainability Reporting Standards.

29 Nicolas Garcia-Torea, Belen Fernandez-Feijoo and Marta De La Cuesta, “Board of Director’s Effectiveness and the Stakeholder Perspective of Corporate Governance: Do Effective Boards Promote the Interests of Shareholders and Stakeholders?” (2016) 19 BRQ Business Research Quarterly 246.

30 Supra, notes 7, 9.

31 Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits” (1970) The New York Times Magazine, New York City, United States.

32 Edward R. Freeman, “The Stakeholder Approach Revisited” (2004) 5 Zeitschrift für Wirtschafts- und Unternehmensethik 228.

33 Lucia Biondi, John Dumay and David Monciardini, “Using the International Integrated Reporting Framework to Comply with EU Directive 2014/95/EU: Can We Afford Another Reporting Façade?” (2020) 28 Meditari Accountancy Research 889.

34 EFRAG is the organisation responsible for promulgating reporting standards to supplement the CSRD, see Supra, note 18, recital 39 & Art 29c.

35 Supra, note 27, EFRAG, Implementation Guidance, EFRAG IG 1: Materiality Assessment, p 9.

36 As previously noted, there exist many reporting standards with varying definitions of materiality, see notes 7 and 9. For the sake of focusing the scope of this article on the CSRD, the definitions of financial, impact and double materiality promulgated by EFRAG will be the focal points of the discussion.

37 Ibid.

38 Ibid.

39 EFRAG, Implementation Guidance, EFRAG IG 2: Value Chain, 2024, p 5.

40 Supra, note 28.

41 Supra, note 27, EFRAG, Implementation Guidance, EFRAG IG 1: Materiality Assessment, p 14.

42 Monika Jedynak, Corporate Social Responsibility and the Supply Chain: CSR Collaboration with Suppliers (1st edn, Routledge 2024, Abingdon-on-Thames, United Kingdom).

43 Supra, note 28, Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 Supplementing Directive 2013/34/EU of the European Parliament and of the Council as Regards Sustainability Reporting Standards.

44 Supra, note 27, EFRAG, Implementation Guidance, EFRAG IG 1, para. 65.

45 Josef Baumüller and Karina Sopp, “Double Materiality and the Shift from Non-Financial to European Sustainability Reporting: Review, Outlook, and Implications‘ (2021) 23 Journal of Applied Accounting Research 8.

46 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups [2014] L 330/1.

47 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC and repealing Council Directives 78/660/EEC and 83/349/EEC [2013] OJ L182/19.

48 European Commission. Directorate General for Financial Stability, Financial Services and Capital Markets Union. and others, Study on the Non-Financial Reporting Directive: Final Report (Publications Office 2021).

49 European Parliament resolution of 17 December 2020 on sustainable corporate governance (2020/2137(INI)) [2021] C 445/94.

50 See Proposal for a Directive of The European Parliament and of The Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting [2021] COM(2021) 189 final p 3.

51 Ibid., recitals 4, 5, 36.

52 EFRAG, has a mandate to produce reporting standards in accordance with the CSRD, see Supra, note 34.

53 See Directive (EU) 2022/2464 of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting [2022] L 322/15, recital 55.

54 Supra, note 27, Implementation Guidance, EFRAG IG 1: Materiality Assessment, paras 63 and 64.

55 Ibid, pp 19–20.

56 Supra, note 35, pp 20–21.

57 Concerning the meaning of the term value chain and what separates it from the supply chain, see Andrew Fearne, Marian Garcia Martinez and Benjamin Dent, “Dimensions of Sustainable Value Chains: Implications for Value Chain Analysis” (2012) 17 Supply Chain Management: An International Journal 575.

58 Supra, note 27, EFRAG, Implementation Guidance, EFRAG IG 1: Materiality Assessment, pp 26–28.

59 Supra, note 57.

60 Supra, note 1, Mezzanotte.

61 Supra, note 27, Implementation Guidance, EFRAG IG 1: Materiality Assessment, para. 39.

62 Supra, note 28, Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 Supplementing Directive 2013/34/EU of the European Parliament and of the Council as Regards Sustainability Reporting Standards, Appendix B, QC10.

63 Ibid, Appendix A, AR6–AR8.

64 EFRAG, [Draft] European Sustainability Reporting Guidelines 1 Double materiality conceptual guidelines for standard-setting, 2022, para 20.

65 Ibid, para 19.

66 Supra, note 28, Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 Supplementing Directive 2013/34/EU of the European Parliament and of the Council as Regards Sustainability Reporting Standards, p 269.

67 Ibid, p 276.

68 See the term transition risks, Ibid, p 281.

69 Ibid, p 273.

70 Supra, note 27, Implementation Guidance, EFRAG IG 1: Materiality Assessment, p 28.

71 To set thresholds for financial and impact materiality EFRAG has provided advice, see EFRAG, Implementation Guidance, EFRAG IG 1: Materiality Assessment, 2024, pp 28–33.

72 In a recent study of sustainability reports by Frank Bold, only a small number of companies surveyed were able to provide a strong rationale for their thresholds, see Supra, note 14, p 16.

73 Position Green, ESG 100, Aligning with the future: ESG reporting in the ESRS era, 2024; Frank Bold, Preparation for implementation of the EU Sustainability Reporting Standards: Key findings from an assessment of 100 companies’ reports, good practice examples and recommendations to businesses, auditors and policymakers, 2024; EFRAG, State of play as of Q2 2024, Implementation of ESRS: Initial observed practices from selected companies, July 2024.

74 Supra, note 1, Mezzanotte, p 640.

75 Supra, note 21, p 17.

76 Ibid, p 22.

77 Supra, note 22.

78 Supra, note 14, pp 5, 11.

79 Ibid, p 47.

80 The GRI and ISSB standards are considered on-par with the ESRS, and the assessments made on the basis of GRI disclosures constitute “a good basis for the assessment of impacts under the ESRS,” see Supra, note 27, EFRAG, Implementation Guidance, EFRAG IG 1: Materiality Assessment, paras 11, 17, 25.

81 Supra, note 22, p 25.

82 Ibid, p 36.

83 Ibid, p 29.

84 Supra, note 21, p 19.

85 Ibid, pp 18–19.