Europe – Ahead of the SRB meeting on August 23, EFRAG has published the draft Materiality Assessment Implementation Guidance under the European Sustainability Reporting Standards (ESRS).
These are the 10 key insights:
- Materiality assessment is crucial for sustainability reporting, involving identifying significant matters and relevant information related to impacts, risks, and opportunities (IROs) in ESG areas. These can be based on the impact or financial materiality perspectives.
- The assessment considers not only the company's operations but also its entire value chain, including upstream and downstream activities.
- Once material IROs are identified, the company refers to ESRS requirements for disclosure. If not covered adequately, entity-specific disclosures must be designed, focusing on relevance, significance, and decision-usefulness.
- Disclosure of information depends on whether it's about policies, targets, or metrics. Policies, actions, and targets follow Disclosure Requirements, while non-material metrics can be omitted, signaling sustainability-related information. Cross-cutting matters (ESRS 2) must be reported regardless of materiality outcome.
- A comprehensive materiality assessment involves understanding stakeholder engagement, listing potential IROs, and evaluating their materiality for final selection.
- The company should disclose its process for identifying and assessing material IROs, their interaction with strategy and business model, and covered ESRS Disclosure Requirements.
- Stakeholder engagement helps grasp actual and potential impacts on people and the environment, validating importance from stakeholders' perspectives.
- Material impacts are assessed using severity thresholds for negative impacts (actual or potential). Severity depends on impact scale, scope, and irreversibility.
- Material risks and opportunities stem from impacts or dependencies. Quantitative and qualitative thresholds, considering financial effects on performance, financial situation, cash flows, etc., are used for assessment.
- A GRI assessment provides a foundation for ESRS impact assessment. The equivalence between ISSB and ESRS scope enables ESRS-compliant companies to align with IFRS risk and opportunity identification. International due diligence aids impact assessment and materiality determination using severity and likelihood criteria.
NEXT STEPS: The draft is a valuable source of long-awaited insights, but there is room for more clarity. Feedback on the draft is expected in the SRB meeting on August 23.