Double Materiality for SMEs: A Practical Guide

Double materiality is one of those terms that sounds like it belongs in a regulatory textbook. But the concept behind it is something every business owner already understands intuitively. It comes down to two questions: How do environmental and social issues affect your business? And how does your business affect the environment and people around it?

If you can answer those two questions, you already understand double materiality. This guide explains how the concept works, why your customers care about it, and how to apply it in practice without overcomplicating things.

What Double Materiality Actually Means

Double materiality asks you to look at sustainability from two directions at the same time.

Impact materiality asks: How has your business positively or negatively impacted people or the environment, in the short, medium, and long term? This includes things like your carbon emissions contributing to climate change, your waste ending up in landfill, or your hiring practices affecting local employment. It's about the mark your business leaves on the world.

Financial materiality asks: How have environmental and social issues affected, or how are they likely to affect, your business's financial position, performance, and cash flows? This includes things like rising energy costs due to climate policy, supply chain disruptions from extreme weather, regulatory fines, or reputational damage from poor labor practices. It's about how the world affects your bottom line.

The "double" in double materiality means you consider both directions. A topic is material if it matters in either direction, and it's doubly material if it matters in both.

This is where the EU's approach diverges from other frameworks. The IFRS Sustainability Standards (S1 and S2), used in many countries outside Europe, take a single materiality approach. They only ask the financial question: how do sustainability issues affect the company's enterprise value? That's useful for investors, but it ignores the other half of the picture.

The EU's European Sustainability Reporting Standards (ESRS), and the simplified VSME standard designed for smaller companies, require both. If you supply European customers reporting under CSRD, double materiality is the lens they're using, and it shapes the data they'll request from you.

Why This Matters for SMEs

You might be wondering why double materiality is relevant if your business isn't directly subject to CSRD. The answer is straightforward: your large customers are.

Companies reporting under CSRD must conduct a double materiality assessment across their entire value chain, including suppliers. When a customer sends you an ESG questionnaire asking about your carbon emissions, water use, or worker safety metrics, they're not just being thorough. They're fulfilling specific obligations under their own double materiality assessment. Your emissions are part of their impact materiality. Your operational risks are part of their financial materiality.

Understanding this context changes how you approach questionnaires. Instead of treating them as a compliance checkbox, you can recognize what your customer actually needs: data that demonstrates you've thought about sustainability from both directions. Answers that address both impact and financial relevance are more useful to your customers and more credible to anyone reading them.

Practical Examples for Small Businesses

Double materiality becomes clearer with concrete scenarios.

A small manufacturer and climate change. Climate change is financially material to your business because energy costs are rising, carbon pricing mechanisms are expanding, and extreme weather can disrupt your supply chain. At the same time, climate change is impact material because your manufacturing operations produce greenhouse gas emissions that contribute to the problem. Both directions are relevant. You should track and report your energy consumption, Scope 1 and 2 emissions, and any reduction targets you've set.

A tech startup and data privacy. Data privacy is financially material because a data breach can result in regulatory fines, legal costs, customer churn, and reputational damage. It's also impact material because your handling of personal data directly affects your users' privacy and security. Both directions matter. You should report on your data protection policies, breach history, security certifications, and governance structures around data handling.

A logistics company and worker safety. Worker safety is financially material because workplace injuries drive up insurance premiums, cause lost productivity, and create legal exposure. It's impact material because your operations directly affect the physical wellbeing of your workers. Both directions are clear. You should track and report health and safety metrics: injury frequency rates, lost-time incidents, safety training hours, and any corrective actions taken.

In each case, the topic is material from both the financial and impact perspective. These are the topics to prioritize in your reporting.

How to Do a Simple Materiality Assessment

You don't need a consultant or a complex matrix to assess materiality. A straightforward process works for most SMEs.

List your main activities and their environmental and social effects. Think about what your business does day to day. Do you burn fuel? Use electricity? Generate waste? Handle personal data? Employ people in physically demanding roles? Source materials from regions with labor risks? Write these down.

For each activity, ask two questions. First: does this create a financial risk or opportunity for our business? Rising costs, regulatory exposure, customer expectations, insurance implications. Second: does our activity meaningfully affect the environment or people? Emissions, pollution, waste, worker health, community impact.

If the answer is yes to either question, the topic is material. You should be aware of it and prepared to discuss it if asked. Track relevant data where practical.

If the answer is yes to both questions, the topic is doubly material. These are your highest priorities. Focus your tracking, reporting, and improvement efforts here first.

For most SMEs, the doubly material topics tend to cluster around a handful of areas: energy and emissions, waste management, worker health and safety, and business ethics. You don't need to report on everything. Focus on what genuinely matters for your specific operations.

The VSME Makes It Manageable

If the idea of conducting a materiality assessment from scratch feels overwhelming, there's good news. The VSME basic module has already done most of the thinking for you.

The VSME basic module contains 11 disclosures (B1 through B11) that cover the sustainability topics considered material for the majority of SMEs. These span energy, emissions, pollution, water, biodiversity, resource use, workforce characteristics, health and safety, remuneration, and business conduct. The disclosures were designed by regulators who analyzed which topics are most commonly material for smaller companies.

For most SMEs, following B1 through B11 is a practical substitute for a full materiality assessment. You're not starting from a blank page. Instead, you're working through a structured list of topics that are already validated as relevant for businesses your size.

This doesn't mean every one of the 11 disclosures will be equally relevant. A software company will have less to say about water use than a food processor. But the framework gives you a starting point and a structure, which is far more practical than building your own materiality matrix.

You can check how prepared you are for VSME reporting with our VSME readiness assessment. It walks through the basic module requirements and identifies where you have gaps.

Start Tracking Now

The hardest part of double materiality isn't understanding the concept. It's having the data to back it up when someone asks. The difference between a company that handles ESG questionnaires efficiently and one that scrambles every time is almost always about ongoing data collection rather than last-minute effort.

If you know your material topics, start tracking the relevant metrics now. Energy consumption, emissions, injury rates, waste volumes, policy documents, training records. Collect this data consistently throughout the year rather than trying to reconstruct it when a questionnaire arrives.

ESG Passport helps suppliers track ESG data year-round and respond to questionnaires faster. Having your material topics documented and your metrics current means you can answer customer requests in hours instead of weeks.

If you're a startup facing investor ESG requests, see our guide on what investors actually ask for at each funding stage. Ready to start collecting data? Follow our 20-minute tracking setup guide to build a system that covers your material topics. And visit the startup ESG page for a complete view of tools and resources.

Double materiality isn't a theoretical exercise. It's a practical framework for understanding which sustainability topics deserve your attention. For SMEs, the approach is simpler than it sounds: identify what matters from both directions, track the data, and be ready to report it. Your customers are already thinking in these terms. Meeting them there makes every interaction smoother.