Impact materiality asks how a company affects people and the environment: a sustainability matter is material if the company has significant actual or potential, positive or negative impacts on them (the inside-out perspective). Financial materiality asks how sustainability matters affect the company: a matter is material if it creates risks or opportunities that significantly affect, or could reasonably be expected to affect, its cash flows, financial position, performance, access to finance or cost of capital (the outside-in perspective).
In short: Impact materiality is assessed on severity (scale, scope, irremediable character) and, for potential impacts, likelihood; financial materiality on the magnitude and likelihood of financial effects. GRI 3 uses impact materiality, the ISSB standards (IFRS S1) use financial materiality, and the ESRS combine both into double materiality: a topic is material if it passes either or both tests. The two perspectives are linked, because a severe impact today often becomes a financial risk tomorrow, but they must be scored separately, with their own criteria and justified thresholds.
This article puts the two concepts side by side, shows how they interact under the revised ESRS, explains how to score each and walks through six worked mini-examples. If you are looking for the bigger picture first, start with our overview of the materiality assessment or the CSRD double materiality assessment guide.
Impact materiality vs financial materiality at a glance
| Impact materiality | Financial materiality | |
|---|---|---|
| Perspective | Inside-out: company → people and environment | Outside-in: sustainability matters → company |
| Question asked | How significantly do we affect people and the environment? | How significantly could this affect our cash flows, financial position, performance, access to finance or cost of capital? |
| What is assessed | Actual and potential, negative and positive impacts | Risks and opportunities |
| Criteria | Severity = scale, scope, irremediable character (negative impacts only); plus likelihood for potential impacts. For potential human rights impacts, severity takes precedence | Magnitude of financial effects plus likelihood of occurrence |
| Time horizons (ESRS) | Short (reporting period), medium (up to 5 years), long (more than 5 years) | Same horizons; financial effects often materialise in the medium or long term |
| Who cares most | Affected stakeholders: workers, communities, consumers, nature as a "silent" stakeholder | Investors, lenders and other creditors |
| Framework | GRI 3: Material Topics 2021 | ISSB standards (IFRS S1) |
| ESRS | One half of double materiality | The other half of double materiality |
| Typical output | List of material impacts and topics, with severity rationale | List of material risks and opportunities, with expected financial effects |
Under the ESRS both columns apply at once. That is what double materiality means: a sustainability matter is material if it meets the criteria for impact materiality, financial materiality or both. A purely financial view, such as the ISSB approach, can miss topics that matter mainly to people and nature; a purely impact-based view, such as GRI, can miss topics that matter mainly to the balance sheet. We compare those frameworks in detail in ISSB vs ESRS materiality and GRI vs ESRS materiality.
What is impact materiality?
Impact materiality covers the company's impacts on people and the environment across its own operations and its upstream and downstream value chain, whether those impacts are caused by the company, contributed to by it or directly linked to it through business relationships. Impacts can be:
- actual or potential: something that is happening, or something that could happen;
- negative or positive: harm to workers, communities or ecosystems, or a genuine benefit such as products that cut customers' energy use.
The revised ESRS (Delegated Regulation (EU) 2026/1563) add three rules that matter in practice:
- Severity first for human rights (ESRS 1 §40). For potential negative human rights impacts, severity takes precedence over likelihood. A low-probability but severe risk of forced labour is not scored away.
- Gross vs net (§43). Actual impacts are assessed as they actually manifested. Potential impacts may only be reduced by prevention and mitigation measures that are already implemented and can reasonably be assumed to be effective; planned measures do not count.
- Positive impacts on their own (§44). Positive impacts are not netted against negative ones. Remediating your own negative impacts or simply complying with the law does not count as a positive impact.
Impacts are the "I" in IROs. If the distinction between impacts, risks and opportunities is new to you, read our explainer on IROs under the CSRD.
What is financial materiality?
Financial materiality looks at the same sustainability matters from the company's perspective. Under the ESRS, a matter is financially material if it triggers or could reasonably be expected to trigger significant effects on cash flows, financial position, financial performance, access to finance or cost of capital over the short, medium or long term. It is assessed on the likelihood and potential magnitude of those financial effects (ESRS 1 §50). Dependencies matter here too: a company that relies on water, skilled labour or stable raw material supply carries risks even if its own impacts are small.
The ISSB's concept in IFRS S1 is very close: information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of the primary users of general purpose financial reports, i.e. investors, lenders and other creditors. The main difference is not the definition but the scope: the ISSB stops at financial materiality, the ESRS add the impact perspective on top.
Neither the ESRS nor the ISSB prescribe quantitative thresholds. You define your own scales and cut-offs and justify them.
How the two perspectives interact
Impact and financial materiality are separate tests, but they are not independent. Many financial risks start as impacts:
- Supplier labour issues → legal and reputational risk. Excessive overtime at a castings supplier is first an impact on workers. Once customers audit their supply chains, NGOs publish reports or due diligence obligations tighten, it becomes a risk of lost contracts, fines or costly supplier switches.
- Emissions → carbon costs. Greenhouse gas emissions from purchased steel are an impact on the climate. Carbon pricing on inputs turns the same emissions into a cost risk.
- Water use in a water-stressed region → operational risk. Heavy withdrawals affect local communities and ecosystems first; drought restrictions can later halt production.
- Positive impacts → opportunities. Energy-efficient products reduce customers' electricity consumption (a positive impact) and drive demand (an opportunity).
This is why the ESRS ask you to assess both perspectives for every relevant matter, rather than deriving one from the other. A topic that is "impact only" this year may become "both" in two years, which is one reason to revisit the assessment when significant changes occur (ESRS 1 §34).
How to assess impact and financial materiality
The process is the same for both perspectives; the criteria differ. The scales below are the ones used in our worked double materiality assessment example.
Step 1: Describe concrete IROs, not topics
"Climate change" cannot be scored. "GHG emissions from purchased steel" (impact) and "rising carbon costs on steel inputs" (risk) can. One topic usually carries several IROs of different types.
Step 2: Score impacts on a 1–5 scale
- Scale: how grave the impact is (or how beneficial, for positive impacts)
- Scope: how widespread it is (people affected, area, volume)
- Irremediable character: how hard it is to reverse (negative impacts only)
- Likelihood: for potential impacts only
Severity is the average of scale, scope and irremediable character. For actual impacts the score equals severity; for potential impacts it is the average of severity and likelihood, except for potential human rights impacts, where severity prevails.
Step 3: Score risks and opportunities on a 1–5 scale
- Magnitude: potential effect on cash flows, financial position, cost of capital or access to finance, ideally calibrated in euros of EBIT effect from your enterprise risk management (for example 1 = below €0.5m, 5 = above €15m for a mid-sized company)
- Likelihood: from 1 = remote to 5 = virtually certain, within the relevant time horizon
The financial score is the average of magnitude and likelihood.
Step 4: Apply thresholds per perspective
Set a threshold for each perspective before scoring, for example 3.0 in both, and decide that a topic is material if at least one of its IROs passes either threshold. How to choose and justify the cut-off is covered in our article on materiality thresholds; how to visualise the result in our article on the materiality matrix under the revised ESRS.
Worked examples: impact-only, financial-only or both
Threshold 3.0 on a 1–5 scale in both perspectives. All scores are illustrative.
| Topic / IRO | Impact materiality | Financial materiality | Result |
|---|---|---|---|
| E1 GHG emissions from purchased steel (machinery maker) | 4.0: large volumes, global effect, hard to reverse (actual) | 4.0: rising carbon costs on inputs, likely in the medium term | Both |
| S2 Excessive overtime at an Asian castings supplier | 4.7: potential human rights impact; severity prevails over low likelihood (§40) | 2.5: supplier is replaceable, limited cost exposure today | Impact only |
| S1 Shortage of skilled machinists | 1.5: no significant negative impact on people identified | 3.5: delayed deliveries and wage pressure, likely | Financial only |
| G1 Bribery in public tenders via distributors | 2.2: limited scale and scope, low likelihood | 3.0: fines and exclusion from tenders would hit revenue | Financial only |
| E1 Energy-efficient pumps cut customers' electricity use | 3.5: positive impact, assessed on its own without netting (§44) | 3.5: demand opportunity driven by efficiency rules | Both |
| E3 Water use at a software company | 1.5: low withdrawals, no water-stressed sites | 1.5: no dependency of note | Not material |
Two lessons from the table. First, the S2 row is the classic case that a financial-only (ISSB-style) assessment misses. Second, the G1 row shows the reverse: an impact that is not severe in itself can still be material because of its financial consequences.
Score both perspectives side by side, with an audit trail
Materiality Master separates impact and financial scoring for every IRO, applies your own thresholds per perspective and documents every rationale for your auditor. Try it with your own topics.
Common mistakes
- Mixing the perspectives. Scoring an impact by asking "how much would this cost us?" turns impact materiality into a second financial test. Ask how severe the effect is for the people or the environment affected.
- Using financial thresholds for impacts. A euro amount has no meaning for the severity of a human rights impact. Use descriptive severity scales for impacts and financial scales for risks.
- Netting. Positive impacts are not offset against negative ones (§44), and potential impacts are not reduced by planned measures (§43).
- Scoring away human rights impacts with low likelihood. For potential human rights impacts, severity takes precedence (§40).
- Treating stakeholder interest as impact materiality. A popular topic in a survey is not automatically a severe impact. Stakeholder input informs the assessment; it does not replace it.
- Deriving one perspective from the other. "Not financially relevant, so not material" ignores the impact test entirely, which is exactly the gap double materiality is meant to close.
- Adjusting thresholds after scoring. Define and approve them first; otherwise the result is hard to defend in the audit.
Key takeaways
- Impact materiality = inside-out, the company's impacts on people and the environment, assessed on severity and likelihood.
- Financial materiality = outside-in, effects of sustainability matters on the company, assessed on magnitude and likelihood of financial effects.
- GRI 3 uses impact materiality, the ISSB financial materiality, the ESRS both: a topic is material if either or both tests are met.
- Score the two perspectives separately, with their own criteria and thresholds you define and justify; the ESRS prescribe none.
- Watch the revised ESRS rules on human rights severity (§40), gross vs net (§43) and positive impacts (§44).
Want to run both assessments in one place, with scales, thresholds, matrix and audit trail ready to go? Try Materiality Master for free or see our plans and pricing.
