Materiality Assessment, Explained: EFRAG’s Double Materiality Process and GRI’s Alternative
ESRS 1 requires assessing both impact and financial materiality. Here is EFRAG’s four-step process, GRI 3’s single-materiality model, and how they differ.
A materiality assessment is the process a company uses to decide which sustainability topics are significant enough to report on, and it is the step that precedes any sustainability report — including the report structures covered in WINSS’s Sustainability Report Best Practices. Two frameworks define materiality differently, and companies reporting under both face different tests. The European Sustainability Reporting Standards (ESRS), which underpin the EU’s Corporate Sustainability Reporting Directive (CSRD), require “double materiality,” combining impact materiality and financial materiality. The Global Reporting Initiative’s GRI 3: Material Topics 2021, effective since January 1, 2023, applies a single, impact-focused definition of materiality instead.
What double materiality means under ESRS
The European Financial Reporting Advisory Group (EFRAG), which develops the ESRS, defines double materiality as two interconnected dimensions. Impact materiality concerns “the undertaking’s material actual or potential, positive or negative impacts on people or the environment” arising from its own operations and its value chain. Financial materiality applies when a sustainability matter “triggers or could reasonably be expected to trigger material financial effects” on the company’s development, financial position, performance, cash flows, access to finance, or cost of capital. A topic can be material under either dimension independently, or both — EFRAG notes the two frequently overlap, since a material impact on people or the environment often also generates a financial risk or opportunity for the company causing or exposed to it.
EFRAG’s four-step assessment process
EFRAG’s implementation guidance sets out four steps, presented as an illustrative approach rather than the only permitted method. Step A, understanding context, maps the company’s business activities, relationships, geographic footprint, affected stakeholders, and regulatory environment. Step B, identifying impacts, risks, and opportunities (IROs), compiles a comprehensive list of actual and potential environmental, social, and governance matters across the company’s own operations and value chain. Step C, assessment and determination, applies materiality criteria to decide which identified IROs are significant enough to report. Step D, reporting, discloses the assessment methodology and its outcomes alongside the material IROs themselves.
For impact materiality, EFRAG’s criteria for severity are scale (how grave an impact is), scope (how widespread it is, measured by people affected or extent of environmental damage), and irremediability (how difficult the impact is to remedy or restore); for potential impacts, likelihood of occurrence is assessed alongside these. For financial materiality, the assessment combines likelihood of occurrence with the magnitude of financial effects across short-, medium-, and long-term horizons, using absolute or relative monetary thresholds — such as percentages of revenue, assets, or equity — or qualitative factors where effects cannot be measured in monetary terms. EFRAG’s guidance explicitly extends this beyond items already recognized in financial statements to include dependencies on natural and social resources.
How GRI 3’s approach differs
GRI 3 defines material topics as “topics that represent the organization’s most significant impacts on the economy, environment, and people, including impacts on their human rights” — an impact-focused definition that does not build in a separate financial-materiality test the way ESRS does. GRI 3 sets out its own four-step process: understanding the organization’s context; identifying actual and potential impacts through activities, business relationships, and stakeholder consultation; assessing the significance of those impacts using severity for actual impacts and likelihood for potential ones; and prioritizing the most significant impacts for reporting, including testing the selection against relevant GRI Sector Standards. A company reporting under both ESRS and GRI can generally use much of the same underlying impact-identification work, but must apply the additional financial-materiality lens separately to satisfy ESRS.
What remains unresolved
Neither EFRAG nor GRI prescribes a single mandatory methodology for scoring severity, likelihood, or financial magnitude — both frameworks describe the criteria to apply while leaving companies to set specific thresholds appropriate to their own circumstances, provided the assessment rests on what EFRAG’s guidance calls “supportable evidence and objective information where possible.” This means two companies of similar size and sector can reach different materiality conclusions using the same framework, depending on the thresholds and evidence each applies.
Sources: European Financial Reporting Advisory Group, GRI 3
Featured image: photo by Yan Krukau on Pexels (free Pexels license).
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I specialize in sustainability education, curriculum co-creation, and early-stage project strategy. At WINSS, I craft articles on sustainability, transformative AI, and related topics. When I’m not writing, you’ll find me chasing the perfect sushi roll, exploring cities around the globe, or unwinding with my dog Puffy — the world’s most loyal sidekick.
