Policy Brief: Double Materiality
What It Is — and What It Is Not

Sustainability reporting is no longer confined to disclosures aimed solely at investors. We are witnessing a paradigm shift that requires a holistic assessment of environmental and social impacts. At the heart of this transformation lies the principle of double materiality.

This principle has gained legal status with the adoption of the European Sustainability Reporting Standards (ESRS) within the EU. In contrast, Türkiye’s Türkiye Sustainability Reporting Standards (TSRS), effective from 2024, are based solely on financial materiality.

This policy brief explains the structure of double materiality, its practical implications, common misconceptions, and its strategic relevance for corporate reporting.

Conceptual Foundation: What Does It Mean?

Double materiality means that a sustainability issue must be assessed along two axes:

1. Impact Materiality

• Focuses on the company’s outward impacts on the environment and society:
• Environmental damage (e.g. water pollution, deforestation)
• Social injustice (e.g. labor exploitation, gender inequality)
• Human rights violations
• Community and ecosystem disruption
• Example: A textile company using subcontractors in Bangladesh that employ child labor—while it may not immediately affect the company’s financials, it is materially significant from an impact perspective.

2. Financial Materiality

• Focuses on how ESG issues affect the company’s value chain, financial position, or performance:
• Higher production costs due to carbon taxes
• Water shortages affecting raw material supply
• Transition costs for green technologies
• Example: A cement manufacturer facing substantial costs due to the EU Carbon Border Adjustment Mechanism (CBAM) illustrates financial materiality.

➡ Double materiality combines both perspectives: reporting on issues that a company affects and is affected by.

Which Standards Apply Which Approach?

Standard	Materiality Approach
GRI	Impact materiality
TSRS	Financial materiality
ESRS	Double materiality

• GRI: Oriented toward civil society and stakeholder engagement; emphasizes societal and environmental impacts.
• TSRS: Translated from IFRS S1–S2 and focused solely on providing decision-useful information to investors.
• ESRS: Brings together both GRI and IFRS perspectives in a legally binding framework.

What It Is Not: Common Misunderstandings

• ❌ “Double materiality covers everything.”
  ✅ In reality: Not all topics are material in both dimensions.
  Example: Voluntary CSR activities may be socially impactful but often lack financial materiality.
• ❌ “All impact-based issues must be disclosed.”
  ✅ Under TSRS, only issues with material financial effects must be reported. In contrast, GRI and ESRS require disclosure of all significant impacts.
• ❌ “Board-level decisions are sufficient.”
  ✅ Especially under ESRS, a systematic materiality assessment methodology must be applied, incorporating stakeholder input and data analysis.

Real-World Examples

Sector	Topic	Impact Materiality	Financial Materiality	Note
Agriculture	Water usage	High	Medium	Classic double materiality
Banking	Lending policies	High	High	ESG-related portfolio risk
Food	Animal welfare	High	Low	Pure impact materiality
Automotive	Supply chain emissions	Medium	High	Transitioning materiality

What Should Companies Do?

• Assess Impact and Financial Dimensions Separately: Analyze each issue from both angles. Example: Water use—how it affects local communities and how water scarcity affects operational costs.
• Engage Stakeholders: Especially for impact materiality, perspectives from employees, suppliers, NGOs, and local communities must be integrated.
• Develop a Materiality Map: Use a materiality matrix to align internal ESG topics with disclosure thresholds across dimensions.
• Plan Strategically for the Future: TSRS compliance may be mandatory in the short term, but embracing the ESRS double materiality model can offer a competitive edge, particularly for companies operating in or exporting to the EU.

Conclusion

Double materiality is at the core of next-generation transparency and accountability in sustainability reporting. While not (yet) a legal requirement under TSRS, adopting it strategically can enhance credibility with investors and improve impact management.

The question for companies is no longer:
“How are we affected?”
but
“How do we affect—and are we willing to take responsibility for it?”