A Tale of Two Materialities
Sustainability reporting has long been shaped by debates over what "materiality" truly means. GRI Standards focus on an organization's impacts on the economy, environment, and society, while financial regulators concern themselves with how sustainability topics affect business performance. CSRD has ushered in a new era by bringing these two perspectives together under the concept of "double materiality."
GRI 3: Material Topics 2021 explicitly defines materiality as "an organization's most significant impacts on the economy, environment, and people" (GRI, 2021). This approach looks outward: how does the business affect the world?
ESRS 1, on the other hand, defines double materiality as a topic that may be material from the impact perspective, the financial perspective, or both (EFRAG, 2023a).
Key Differences Between GRI and CSRD Materiality
Impact Materiality: Common Ground
GRI's impact materiality and CSRD's impact materiality dimension are broadly aligned. Both approaches ask the same question: "What are the actual or potential impacts of this organization on the environment, people, and the economy through its activities, business relationships, and value chain?"
The GRI-EFRAG joint statement confirms that the two standards' impact materiality definitions are "highly aligned" (GRI and EFRAG, 2024). However, some nuances exist:
- Scope: GRI covers all stakeholders; ESRS focuses on affected stakeholders and users of reporting
- Threshold: GRI does not define a precise threshold; ESRS 1 requires materiality to be assessed against criteria of "scale, scope, and irremediability"
- Human rights: GRI explicitly adopts a human rights due diligence approach, which ESRS mirrors
Adding Financial Materiality
The real innovation of CSRD is the addition of financial materiality. A sustainability topic is financially material if it affects the company's cash flows, access to finance, or cost of capital. ESRS 1 defines this as "risks and opportunities that affect or could reasonably be expected to affect the undertaking's development, performance, or position over the short, medium, or long term" (EFRAG, 2023a).
GRI does not cover this dimension. An organization that reports under GRI and falls within CSRD scope needs to expand its existing GRI materiality assessment.
Designing an Integrated Assessment Process
Step 1: Build the Long List
Create a comprehensive long list that will satisfy both frameworks. The sub-topics in ESRS topical standards and the topics in GRI sector standards form the foundation of this list.
Practical tip: EFRAG Implementation Guidance 1 (IG 1) provides a step-by-step process for ESRS materiality assessment that is designed to be compatible with GRI's approach (EFRAG, 2023b).
Step 2: Conduct the Impact Assessment
Start with GRI 3's requirements at this stage. The impact assessment will satisfy both GRI and CSRD's impact dimension:
- Identify actual and potential impacts
- Rate each impact on scale (severity), scope, and irremediability
- Add the likelihood dimension for potential impacts
- Gather stakeholder input
Step 3: Assess Financial Materiality
This step, absent from the GRI assessment, is critical for CSRD compliance:
- Evaluate the short-term (0-1 year), medium-term (1-5 years), and long-term (5+ years) financial implications of each sustainability topic
- Identify risks and opportunities: regulatory risks, market opportunities, reputational effects, operational costs
- Score on magnitude and likelihood
Step 4: Combine the Results
The logic of double materiality is an "or" operator: if a topic is material from an impact perspective OR a financial perspective, it is material under CSRD. For GRI, only the impact dimension is required.
This reveals the greatest advantage of an integrated process: a single assessment cycle can meet both frameworks' requirements.
Practical Challenges and Solutions
Setting Thresholds
While GRI leaves the determination of materiality thresholds to the organization, ESRS expects a more structured approach. In an integrated process, adopt ESRS's structured threshold approach; it will satisfy both GRI and CSRD requirements.
Value Chain Scope
Both frameworks expect assessment across the value chain. However, ESRS's specific value chain requirements are more detailed. EFRAG IG 1 offers practical guidance on value chain mapping (EFRAG, 2023b).
Stakeholder Engagement
GRI emphasizes direct engagement with affected stakeholders. ESRS also requires stakeholder engagement but distinguishes between "affected stakeholders" and "users of sustainability statements." In an integrated process, include both stakeholder groups.
Benefits of Integration
Designing a single materiality assessment process delivers several tangible benefits:
- Efficiency: One integrated process instead of separate GRI and CSRD materiality exercises
- Consistency: Reduces the risk of the same topic receiving different materiality ratings across frameworks
- Stakeholder fatigue: A single comprehensive process rather than inviting stakeholders to multiple assessments
- Strategic alignment: Seeing impact and financial perspectives together strengthens sustainability strategy
Implementation Recommendations
- Use your GRI 3 process as the foundation: GRI's impact materiality approach is a solid starting point; adding the financial dimension expands the process but does not require a redesign
- Leverage EFRAG IG 1: This guidance is designed to implement ESRS materiality in a GRI-compatible manner (EFRAG, 2023b)
- Involve financial teams: Assessing financial materiality requires participation from finance, risk management, and strategy teams beyond the sustainability function
- Strengthen documentation: Both frameworks expect the materiality determination process to be transparently documented
Action Item: Expanding your existing GRI materiality assessment with CSRD's financial materiality is the lowest-cost, most efficient integration path. Plan a pilot in your next materiality cycle that combines both perspectives.
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