Conducting a materiality assessment following GRI and ESRS guidances

July 26, 2023
Sustainability in Business
The determination of materiality is central to meeting the regulatory requirements of the Corporate Sustainability Reporting Directive (CSRD). It is also a required process when reporting in accordance with Global Reporting Initiative (GRI) standards.

The determination of materiality is central to meeting the regulatory requirements of the Corporate Sustainability Reporting Directive (CSRD). It is also a required activity when reporting in accordance with Global Reporting Initiative (GRI) standards. It is a critical step when establishing the scope of sustainability reporting required for both voluntary reporting and by regulation.

GRI’s process for determining material topics

Material topics are defined by GRI as “topics that represent the organization’s most significant impacts on the economy, environment, and people, including impacts on their human rights.” This broad interpretation of the concept of materiality goes beyond financial materiality usually applied to a business. By this definition, materiality is an organization’s outward effects (or impacts) on the socioeconomic constructs with which it comes into contact. While many material topics may eventually be important when reporting financial materiality, all topics determined through this process should be reported as material topics, regardless of their relevance to financial outcomes.

The GRI Universal Standards 3: Material Topics states that

“The material topics and impacts that have been determined through this process…provide crucial input for identifying financial risks and opportunities related to the organization’s impacts, and for financial valuation…While most, if not all, of the impacts that have been identified through this process, will eventually become financially material, sustainability reporting is also highly relevant in its own right as a public interest activity and is independent of the consideration of financial implications. It is therefore important for the organization to report on all the material topics that it has determined using the GRI Standards. These material topics cannot be deprioritized on the basis of not being considered financially material by the organization.”

To determine and prioritize material topics, GRI guidance proposes a process of broad consultation to reach stakeholder consensus on the topics. GRI Sector Standards, when they are available, can be used as a reference for material topics that could potentially be relevant for any company of that particular sector, and each organization should apply its specific context and arrive at the final list through iterative rounds of input from its relevant stakeholders.

In the first step of the materiality assessment process, the organization develops a thorough understanding of its specific context across four entities:

Activities encompass the business activities that the organization undertakes, starting with its purpose and value, and extending to its business model and approaches. It includes understanding the organization’s products and services, its activities across the product lifecycle, and the markets that it serves. It also includes a characterization of the organization’s workforce

Business relationships include relationships with business partners across the value chain, including supply chain, distribution, innovation partnership, and many other types of contractual relationships.

Sustainability context refers to the relevance of sustainability for the business. It should include economic, environmental, human rights, and other local, regional, and global challenges such as climate change and political instability. The organization should also consider its responsibilities outlined in “authoritative intergovernmental instruments” such as the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, OECD Guidelines for Multinational Enterprises, or the UN Guiding Principles on Business and Human Rights, along with jurisdictional regulations in the geographies where it operates.

Stakeholders are individuals and groups whose interests are affected or could be affected by the organization’s activities. They include business partners, civil society organizations, consumers and customers, employees and other workers, governments, local communities, nongovernmental organizations, shareholders and investors, suppliers, trade unions, and vulnerable groups.

The second step of the GRI materiality assessment process is the identification of “impacts” on the economy, environment and people across the organization’s activities and business relationships. The impacts can be actual (already occurred) or potential (could occur but have not yet occurred). They can also be positive or negative, short-term or long-term, intended or unintended, reversible or irreversible. Assessment of the significance of identified impacts is the third step of the process. The significance of actual impacts should be determined by the severity of the impact and that of potential impacts should be determined by the severity and likelihood of the impact. Impacts can be grouped into “topics” to facilitate cohesiveness and effectiveness when reporting multiple impacts that relate to the same topic. When available, the GRI Topic Standards and Sector Standards provide guidance on potential grouping topics. The last step of the process is a prioiritization step, in which the organization determines which “material topics” to report based on a ranking of the significance of the impacts with a set threshold. The criteria for the threshold should be transparent and it should be included in the reporting.

ESRS and the materiality assessment

Since the drafting of European Sustainability Reporting Standards (ESRS) was informed by GRI standards, it incorporates many similar concepts. The ESRS places central importance on the idea of “double materiality” and stresses the materiality assessment process used to determine impacts, risks and opportunities. These standards, incorporated as Annex I of the delegated regulation on the Corporate Sustainability Reporting Directive, further clarify the meaning of double materiality and how it can be applied.

According to ESRS,

“Impact materiality and financial materiality assessments are inter-related and the interdependencies between these two dimensions shall be considered. In general, the starting point is the assessment of impacts, although there may also be material risks and opportunities that are not related to the undertaking’s impacts. A sustainability impact may be financially material from inception or become financially material, when it could reasonably be expected to affect the undertaking’s financial position, financial performance, cash flows, its access to finance or cost of capital over the short-, medium- or long-term. Impacts are captured by the impact materiality perspective irrespective of whether or not they are financially material…. An undertaking’s principal impacts, risks and opportunities are understood to be the same as the material impacts, risks and opportunities identified under the double materiality principle and therefore reported on in its sustainability statement.”

While the ESRS does not prescribe a step-by-step process for materiality assessment, it provides some guidance on the determination of impact materiality and financial materiality. It distinguishes between negative and positive impacts on impact materiality. Similar to the GRI guidance, it also describes actual and potential negative impacts and states that the severity of a negative impact should be determined by its scale, scope, and irremediable character of the impact.

ESRS describes financial materiality assessment as “…includes, but is not limited to, the identification of information that is considered material for primary users of general purpose financial reporting in making decisions relating to providing resources to the entity. In particular, information is considered material for primary users of general-purpose financial reporting if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that they make on the basis of the undertaking’s sustainability statement.” Thus, a sustainability topic is financially material if “…it triggers or could reasonably be expected to trigger material financial effects on the undertaking…” which links these topics closely with actual or potential risks and opportunities of business activities and relationships.

The ESRS describes a due diligence process that informs the materiality assessment of impacts, risks and opportunities. This is the process “…by which undertakings identify, prevent, mitigate and account for how they address the actual and potential negative impacts on the environment and people connected with their business.” It mentions two international instruments which describe this due diligence process: the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises


  1. GRI Universal Standards 3: Material Topics
  2. CSRD delegated act - draft ESRS
  3. UN Guiding Principles on Business and Human Rights
  4. OECD Guidelines for Multinational Enterprises


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