Double Materiality for SMEs: A Practical Approach

Double materiality is where many SMEs get intimidated — the term sounds academic and the ESRS methodology for large companies is genuinely complex. But VSME Comprehensive uses a lighter version that most SMEs can complete in a half-day workshop.

If you are still on Module Basic, you do not need this guide yet. See our VSME Basic walkthrough instead. If you are considering the move to Comprehensive, read on.

For background on the VSME framework overall, see our VSME reporting guide.

What double materiality means

Double materiality is an assessment that looks at sustainability from two directions simultaneously:

Impact materiality (inside-out)

Does your business cause significant positive or negative impacts on people or the environment?

Examples:

• A food manufacturer discharges wastewater that affects local water quality → material environmental impact
• A logistics company’s fleet emits significant CO₂ → material climate impact
• A staffing agency employs temporary workers in precarious conditions → material social impact

Financial materiality (outside-in)

Do sustainability issues create material financial risks or opportunities for your business?

Examples:

• Rising carbon prices could increase your fuel costs significantly → material financial risk
• Flood risk at your primary warehouse could disrupt operations → material physical risk
• Growing demand for sustainable products creates new revenue opportunity → material financial opportunity

Double = both at once

A topic is material if it is significant from either direction. Climate change might be material because your fleet causes emissions (impact) and because carbon pricing affects your costs (financial). You do not need it to be material on both sides — one is enough.

The SME-proportionate process

Here is a five-step approach that works for most SMEs moving to Comprehensive.

Step 1 — List the sustainability topics

Start with the ESRS topic list as a prompt. You do not need to assess every sub-sub-topic — work at the topic level:

Environmental: Climate change, pollution, water and marine resources, biodiversity, resource use and circular economy

Social: Own workforce, workers in the value chain, affected communities, consumers and end-users

Governance: Business conduct (anti-corruption, lobbying, payment practices)

Step 2 — Score impact materiality

For each topic, ask: does our business cause a significant positive or negative impact?

Use a simple three-level scale:

• High: clear, direct, significant impact (e.g., a manufacturer’s emissions, a recruitment firm’s labour practices)
• Medium: indirect or moderate impact (e.g., an office company’s electricity use, a retailer’s supply chain conditions)
• Low/None: negligible or no discernible impact

Score based on what you know. You do not need to commission studies for a first-cycle assessment.

Step 3 — Score financial materiality

For each topic, ask: does this sustainability issue create a material financial risk or opportunity for our business over the short, medium, or long term?

Use the same three-level scale. Consider:

• Transition risks: regulatory changes, carbon pricing, shifting customer preferences
• Physical risks: extreme weather, water scarcity, supply chain disruption
• Opportunities: new markets, efficiency gains, access to green finance

Step 4 — Determine material topics

A topic is material if it scores High on either dimension, or Medium on both. Topics that score Low/None on both are not material — document them as assessed-and-excluded.

Plot the results on a simple matrix with impact materiality on one axis and financial materiality on the other. This visual is useful for internal alignment and for including in your report.

Step 5 — Document and disclose

For each material topic:

• State that it is material
• Briefly explain why (one to two sentences per topic)
• Reference the disclosures you will provide under Comprehensive

For excluded topics:

• State that the topic was assessed and found not material
• Briefly explain why

Common SME materiality outcomes

Based on the assessments we see across SME sectors:

Almost always material for every SME:

• Climate change (energy use and emissions are universal)
• Own workforce (every employer has workforce impacts)
• Business conduct (governance is always relevant)

Often material depending on sector:

• Pollution (manufacturing, food, chemicals)
• Water (agriculture, food, beverages, textiles)
• Workers in the value chain (companies with significant outsourcing or supply chains in high-risk geographies)

Rarely material for typical SMEs:

• Biodiversity (unless land use is core to operations)
• Affected communities (unless operating in sensitive locations)
• Consumers and end-users (unless product safety is a factor)

Mistakes to avoid

• Assessing at too granular a level. Work at the topic level, not the sub-sub-topic level. VSME does not require the same granularity as full ESRS.
• Skipping financial materiality. Many SMEs only think about impact and miss the financial dimension. Climate-related financial risk is becoming a standard question from banks and insurers.
• Making everything material. If everything is material, nothing is prioritised. Be honest about what genuinely matters for your specific business.
• Treating it as a one-time exercise. Review annually, even if the answer is “no change from last year.” Document the review.

From materiality to Comprehensive disclosures

Your materiality assessment determines which Comprehensive disclosures you need to provide beyond Basic. If climate change is material, you report targets and transition elements. If value chain workers are material, you disclose your due diligence approach.

The logical sequence: complete VSME Basic first, then add Comprehensive disclosures for your material topics. For emissions-specific depth, see our guides on carbon accounting and Scope 3 for SMEs.