Before you collect a single data point for your ESG report, you need to know which sustainability topics actually matter to your business. Double materiality is the concept that determines this: it evaluates each topic from two angles, how your company affects the world, and how the world affects your company, so your reporting stays focused, relevant, and compliant with current standards such as the CSRD.

Historically, corporate reporting only looked at how external events affected a company's bottom line. Double materiality asks you to look both ways.
To determine whether a sustainability topic (such as water use, climate change, or workplace safety) is material, meaning significant enough to report on, you evaluate it from two distinct perspectives.

This perspective looks at how your business affects the external world, specifically people and the environment.
It covers the actual or potential harm, or benefit, caused by your direct operations or your value chain. For example, a manufacturing plant discharging untreated wastewater into a local river has a severe negative impact on the local ecosystem and community. Even if the resulting fines are too small to affect the company's profits, the impact itself is highly material.

This perspective looks at how external sustainability factors create financial risks or opportunities that could affect your company's development, cash flow, or access to capital.
It covers how a changing world threatens or benefits your financial health. For example, a new national carbon tax sharply increases the cost of the raw materials your company relies on. Or a shift in consumer preference toward sustainable goods creates a major new revenue opportunity for your eco-friendly product line. Both are financially material.

The most important part of a double materiality assessment is how these two pillars interact. Modern ESG frameworks such as the European CSRD apply a strict OR rule: if a topic is material from an impact perspective, a financial perspective, or both, it must be included in your ESG report.
You can't exclude a topic just because it doesn't currently affect your profits. If your company causes severe environmental harm, you must disclose it, even if that harm has no financial consequence yet. If climate change threatens to disrupt your supply chain, you must disclose that too, even if your own footprint is small.

Once you know a topic is material, you break it down into specific Impacts, Risks, or Opportunities, or IROs. This is the unit your entire Double Materiality Assessment (DMA) is built around.

Running a Double Materiality Assessment isn't a theoretical exercise. It's the scoping tool for your entire ESG project.

Do I need a topic to be material on both dimensions to report it?

No. Under the OR rule, a topic is reportable if it's material on impact, financial materiality, or both.

An impact is an effect your company has on people or the environment. A risk is a potential negative financial consequence to your company. They're evaluated on different dimensions because they measure different things.

Yes. Most topics contain a mix of IRO types: impacts (positive or negative) and financial risks or opportunities.

You do, based on the scores you and your team assign to each IRO and the materiality thresholds you set. See Reviewing your results for how thresholds work.

The concept is used across several frameworks, but the CSRD is the one that made it a mandatory, formal requirement for reporting companies in Europe.