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Sustainability reporting - A step-by-step guide

Part II – Selection of topics to be reported in the context of the materiality assessment

While in the first report in our multi-part series of articles we provided a basic overview of sustainability reporting in accordance with the EU’s so-called Corporate Sustainability Reporting Directive (CSRD) as well as of the European Sustainability Reporting Standards (ESRS), in the second part of this series we discuss the so-called materiality assessment, which is at the heart of sustainability reporting. A materiality assessment is used to define the individual topics that are to be reported within the scope of the sustainability reporting. Moreover, a materiality assessment provides the company with an overview of the sustainability-related topics that impact on the company’s long-term business success. The data that are compiled in this way can also be used strategically in order to ensure the sustainable development of the company.

Content and objectives of the materiality assessment

The aim of the materiality assessment is to identify topics that are most important for an organisation and its stakeholders in terms of environmental, social and governance (ESG) issues. In addition, the impacts, risks and opportunities of the respective individual topics are considered. From this a company can derive the topics that it actually has to report on. Yet, companies should also use the materiality assessment to define topics for which they would like to build a sustainability strategy. In doing so, objectives will be defined, measures derived and metrics determined that will allow a company’s sustainability performance to be evaluated and then about which there will have to be regular and detailed reports in the future. 

Double materiality – different perspectives for determining the material topics 

In order to determine whether or not an ESG topic constitutes a material issue it is necessary to carry out an analysis from two perspectives, namely,

  • the inside-out perspective (impact materiality) – the impact of the company on people and the environment;  
  • the outside-in perspective (financial materiality) – the (financial) opportunities and risks for the company due to external sustainability impacts, i.e., impact on the business, its financial returns and its (enduring) viability.

Impact of the company

For impact materiality, first of all, it is necessary to identify the actual or potential impacts of the company on people or the environment while taking account of interest groups and stakeholders and then to determine whether or not these impacts are material issues by, for example, defining thresholds. In doing so, the entire value chain within the company has to be examined. This includes both upstream and downstream value chains that are directly linked through business relationships to the company’s own business operations or to its own products and services. 

Example: For a company that produces batteries it would be necessary to check what elements are used inside the battery (e.g., rare earths) and if their extraction is potentially linked to human rights abuses and the use of child labour. 

Whether or not one of the examined topics needs to be classified as being a material issue will then be determined on the basis of 

  • the scale – how severe is the impact? 
  • the scope – how widespread is the impact (e.g., in which area can the impact be felt, or how many people are affected by it)? 
  • the (ir)remediability – can the negative impact be (fully or partially) eliminated?

Financial position of the company

In the context of financial materiality, data has to be collected on the risks and opportunities that could have an impact on the company’s financial position. In this connection, the company shall check to determine whether there are dependencies on natural or human resources that could give rise to a financial risk. Moreover, a company’s activities could, for example, have a negative impact on local communities that could result in stricter government controls or reputational damage. The materiality of existing risks and opportunities and their potential financial impacts shall be assessed on the basis of the following criteria:

  • probability to materialise;
  • scale of financial impacts, possibly taking into account thresholds.

Please note: The respective impacts shall be considered in the short-, medium- and long-term. 

The individual steps of a materiality assessment 

Analysis of the business activities and identification of the stakeholders 

The first step should be to create an overview of your own business activities and the entire value chain and link these to the relevant stakeholders. In addition, the individual business divisions, production processes as well as the business relationships are analysed and the stakeholders who might be affected are identified. Various parameters could play a role here, for example, the geographical and political situations, the specific environmental situation, regional shortcomings, etc. Besides the information available at the company, media reports should also be included whether about the company itself, about the industry or about the regional aspects. 

When allocating the affected stakeholders, a distinction has to be made between internal stakeholders (employees, management, shareholders) and external stakeholders (customers, investors, suppliers, NGOs, media, political actors, etc.). When allocating the stakeholders to the activities/processes, the groups of stakeholders should also be a ranked according to their importance since not all the groups will be equally important for the company and its sustainability-related decisions. 

Please note: Classifying the stakeholder groups in this way should be done not solely from the perspective of the company’s management, but rather the different business divisions should be involved in order to get as accurate a picture as possible of the most important external stakeholders. 

Compiling the topics 

In a second step, on the basis of the business processes and the stakeholders to be involved, a longlist of topics can be drawn up that will potentially include all the relevant topics with environmental, social and governance aspects. The definitions of the individual topics that have to be considered are set out in Appendix AR 16 to ESRS 1. 

Please note: In this step, it is frequently helpful also to consult internal and external experts in order to identify the relevant topics. Moreover, an initial prioritisation of the topics also already occurs.  

Identification of impacts, risks and opportunities 

Now the impacts, risks and opportunities have to be determined for the topics on the longlist. This is usually done within the scope of a workshop and discussions with mixed teams in order to be able to collect and take account of the different views and priorities in an interdisciplinary way. Here, it would be possible to proceed as follows: 

  • identify dependencies on natural, human and social resources;
  • identify the impacts on people and the environment;
  • identify the sustainability-related opportunities and risks that arise from the identified dependencies and impacts; 
  • categorise the impacts, risks and opportunities, e.g., according to time horizons (short-, medium- and long-term); 
  • draw up a shortlist with all the topics for which impacts, opportunities and risks have been collected and validate this shortlist together with the respective key affected stakeholders. 

Evaluation of the impacts, risks and opportunities

The topics on the shortlist will then be assessed on the basis of the criteria shown above in the section "Impact of the company", namely, scale, scope and irremediability for the impacts or the probability, and according to the influence on the financial opportunities and risks. Moreover, thresholds can be defined as to when a topic has to be categorised as a material issue. 

Please note: In order to be able to carry out detailed assessments it could be a sensible course of action to involve the (external) stakeholders once again in this step, too. 

Materiality matrix

In practice, the topics on the shortlist that have been assessed are frequently entered into a materiality matrix (cf. Fig.1). From this it is then possible to directly read off the topics that will be categorised as material issues. In a final step, these topics will also have to be validated once more by the management. After that, the company will have to report on the topics that have been categorised as material issues in its sustainability report while specifying strategies, objectives, measures and control parameters.


  • The materiality assessment is at the heart of the new sustainability reporting on the basis of ESRS. 
  • The materiality assessment is used to define and substantiate the topics that are categorised as being material issues and discussed in the sustainability reports. This course of action requires special attention. 
  • The starting point is determining the impacts, risks and opportunities of the sustainability aspects. 
  • This is followed by an assessment of the materiality of the identified aspects that involves the stakeholders.
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