ESRS Implementation Guidance IG1 - Materiality Assessment IG2 - Value Chain IG3 - List of ESRS Datapoints IG1 - Materiality Assessment

To avoid duplication and reduce the length of this document, there is significant reference to the Value Chain Implementation Guidance (IG 2) developed by EFRAG. In-depth analysis and further examples of due diligence aspects related to the materiality assessment (as well as some VC aspects) are covered in that guidance more so than here.

Please note that references to IG 2 are made in this blue colour, whereas references in green refer to this document.

The acronyms in this document are used as follows:

ESRS 1 Chapter 3.4 requires that undertakings apply objective criteria, using appropriate quantitative and/or qualitative thresholds to assess the materiality of actual and potential impacts. This is based on severity and, for potential impacts, also likelihood (see Chapter 3.6 Deep dive into impact materiality – Setting thresholds).

Therefore, the undertaking has to apply the criteria for severity to the list of impacts defined in step B above. The criteria are scale, scope and irremediable character of the impact for actual negative impacts. For potential negative impacts, the undertaking estimates also the likelihood of the impact occurring and maps it onto the relevant time horizon. For actual positive impacts, the criteria are scale and scope, and for potential positive impacts, the undertaking shall also estimate the likelihood of occurrence and map it onto the relevant time horizon.

Depending on the kind of impact, it may not always be necessary to assess in depth each of the criteria of severity, based on the undertaking’s specific facts and circumstances, to determine whether the impact is material or not. For example, when there is an established scientific consensus about the severity of a particular kind of global or localised environmental impact, the undertaking can conclude that it is indeed material without having conducted an in-depth analysis of its scale, scope and irremediability. Therefore, the undertaking shall exercise judgement, informed by the available evidence, to determine what the appropriate level of the assessment of the severity criteria is.

The purpose of engagement with key affected stakeholders (including workers and their representatives) is to help the undertaking understand how they may be impacted, and therefore, it may help the undertaking assess the severity and likelihood of impacts(*). Internal engagement with the undertaking’s business functions and employees on the one hand and external engagement with users of sustainability reporting and other experts on the other may also help to assess, validate and ensure the completeness of the outcome of the materiality assessment (see ESRS 1 paragraph AR 8).

Chapter 3.5 Role and approach to stakeholders in the materiality assessment process and Chapter 3.6 Deep dive into impact materiality – Setting thresholds provide detailed guidance on the application of impact materiality criteria and thresholds. The responses to the FAQs on impact materiality in Chapter 5.1 provide further guidance on this matter. See also Chapter 4.3 Leveraging international instruments of due diligence.

Material risks and opportunities for the undertaking generally derive from impacts, dependencies or other factors, such as exposure to climate hazards or changes in regulation that address systemic risks. To assess their materiality, appropriate quantitative and/or qualitative thresholds based upon financial effects in terms of performance, financial position, cash flows and access to and cost of capital are used.

Sustainability risks and opportunities are assessed based on their likelihood of occurrence and the potential magnitude of their financial effects in the short-, medium- and long-term. Therefore, the undertaking is required to go through the list of potential material risks and opportunities in step B above and apply a set of objective thresholds for likelihood and magnitude as well as consider the nature of the effects of the identified risks and opportunities.

As most impacts give rise to financial risks and opportunities, the undertaking generally will assess whether material financial effects derive from the identified impacts (including the outcome of step B).

When applicable, the undertaking may compare the material risks and opportunities per the list prepared in step B to the ones used in its risk management process (for example, ERM(*) processes). However, this is only when the latter also covers sustainability risks. In such a case, the likelihood of the risks and opportunities, or their related financial effects, could be estimated accordingly.

It may be appropriate to engage with the undertaking’s business functions as well as with investors of the undertaking and other financial counterparties (e.g., banks) to assess, validate and ensure the completeness of the list of material risks and opportunities.

Once a matter has been assessed to be material from a financial perspective, the undertaking determines the information to be reported based on its materiality (see Chapter 2.3 Criteria to determine the materiality of information). Information is considered financially material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general-purpose financial reports take on the basis of the undertaking’s sustainability statement relating to providing resources to the undertaking.

While the terms ‘risks’ and ‘opportunities’ are combined in the ESRS, depending on the specific circumstances there are matters that trigger exposure to risks only, others that trigger exposure to opportunities only and others that trigger exposure to both.

Responses to FAQs on financial materiality in Chapter 5.2 and Chapter 3.7 Deep dive on financial materiality – Setting thresholds provide further guidance on financial materiality.

This step consolidates the results of the previous steps and obtains the list of material IROs, which forms the basis for the preparation of the sustainability statement. Analysis performed at material topic/subtopic or sub-subtopic level is to be converted to IROs if this has not been done yet.

Once the undertaking has assessed individual IROs based on appropriate thresholds and methodologies, it may aggregate the resulting IROs for reporting purposes (refer to ESRS 1 paragraph 56). Those in charge of this activity may also validate the aggregated double materiality results with management to assess and validate the completeness of the list of material IROs.

Besides the abovementioned activities on impact materiality, engagement with users may also corroborate the evidence that supports financial materiality of sustainability matters and help companies assess financial materiality. The conclusions of the ESRS financial materiality assessment should be based on supportable evidence; this may include the views and interests of users. This is aligned with current practice for the financial reporting materiality processes, where notes to the financial statements and presentations to investors are adjusted regularly to reflect emerging issues and other matters of interest to investors. To this extent, the undertaking may leverage existing mechanisms of dialogue with shareholders, other investors and, in some cases, lenders to support its financial materiality assessment process.

In its approach to dialogue with users of sustainability information, the undertaking may consider stakeholders other than investors who may also be interested in general-purpose sustainability-related financial information; as such, information may be useful to assess how the undertaking manages its material impacts.

In the application of the concepts described above, by way of illustration an undertaking could map its actual impacts onto the three characteristics of severity in columns (figure 4) and could follow the criteria below, which is aligned with paragraph 116 above.

For potential impacts, likelihood is to be considered together with the severity of the impacts. However, in the case of human rights impacts, as specified in ESRS 1 paragraph 45, severity takes precedence over likelihood when identifying material matters.

By following the illustration above, the methodology would be the same and the likelihood dimension would be added. To this extent, and to simplify its representation, the three factors within severity would be combined along the severity axis, and likelihood of occurrence would be represented along the horizontal axis.

In terms of likelihood, the likelihood of a potential negative impact refers to the probability of the impact happening. The likelihood of an impact can be measured or determined qualitatively or quantitatively depending on the available information. It could be described by using general terms (e.g., ‘unlikely’, ‘highly likely’), mathematically by using statistics terms (e.g., ‘10 in 100’, ‘10 per cent’) or by using frequency over a given time-period (e.g., ‘once every 10 years’).

A similar approach to the actual impacts could be applied whereby the threshold for reporting material impacts is defined as the red area in the illustrative graph below. In this illustrative example, the undertaking has assessed that high severity (scale 5) and low likelihood (scale 1) of negative impacts are material for environmental matters; such a decision is based on the undertaking’s judgement. Impacts with very low probability may or may not be material depending on their severity if they occur. In the illustration provided in Figure 5, it is assumed that an impact with the lowest level of likelihood could be assessed to pertain to the highest level of materiality, as it would have catastrophic environmental consequences related to environmental hazards.

ESRS 1 Chapter 7.6 Consolidated reporting and subsidiary exemptions states that the ‘undertakings reporting at consolidated level shall ensure that all subsidiaries are covered in a way that allows for unbiased identification of material impacts, risks and opportunities’ (ESRS 1 paragraph 102).

When performing the materiality assessment at a group level, paragraph 103 does not require the adoption for a given sustainability matter of a common threshold that is the same for the group in its entirety but rather to adopt an approach that is at the same time consistent across the whole group and unbiased, i.e., able to capture the specificities that may exist in a specific subsidiary. The response to FAQ 13 describes the top-down and bottom-up group materiality approaches. However, there is also a hybrid option whereby the starting point is to identify those impacts that are common across the group (for example, those related to ESRS E1 Climate change and ESRS S1 Own workforce), and then the bottom-up approach for impacts that are specific to one or more subsidiaries are assessed using the thresholds for the materiality assessment at group level (for more on this, refer to the disaggregation concept referenced in ESRS 1 paragraph 104 and described in section 3.7 Level of disaggregation).

The example on pollution above illustrates the interplay between materiality at a group level and the impacts that are specific to one subsidiary and not widespread across the group. The severity of a given impact will not change regardless of whether there is a bottom-up or a top-down approach.

In a group, a matter may be assessed as material as a result of the aggregation of several impacts derived from different subsidiaries that, if assessed in isolation by each subsidiary, would not be considered material. This is the case where aggregation of the impacts of the same nature across sites or subsidiaries is feasible and meaningful (for example, for environmental matters such as GHG emissions, emissions of pollutants or raw materials for circular economy). In other cases, when negative human rights impacts are occurring in the operations of just one subsidiary within a large corporate group, because the impacts are linked to the country’s context, the impacts may still be so severe that they meet the group materiality threshold. This is consistent with ESRS 1 paragraph 55, which states that disaggregation by subsidiary may be necessary (refer to FAQ 13 Performing the impact materiality assessment when the undertaking operates in different sectors).

Conversely, in addition to disclosing information about matters that are material for the group in its entirety, there may be situations where a matter is assessed to be material for some subsidiaries in isolation but, despite the aggregation of data of such subsidiaries, the matter is assessed as not material for the group in its entirety. In this case following ESRS 1 paragraph 103, the undertaking would provide information about this material matter, in order to provide an adequate understanding of the specific impacts, risks and opportunities of the subsidiaries concerned. In this way, despite the absence of a reporting at subsidiary level due to the application of the subsidiary exemption, an appropriate level of transparency is preserved where the reporting undertaking identifies significant differences between the IROs of the group and the IROs of one or more of its subsidiary undertakings (refer to CSRD article 29 a, 4). This could include, next to other relevant narrative information, metrics covering the amounts of those subsidiaries only. In this case contextual information would be helpful, to support the understanding that despite being material for one or more subsidiaries, the matter is not material for the group in its entirety and of which the entities are included in the disclosures, including in the metrics.

Therefore, there is no one single solution to assess the various impacts that arise from one or more subsidiaries across the group when defining the group thresholds and weighing the relevance of a particular subsidiary or group of subsidiaries, as we have illustrated for environmental and social matters above. Different methodologies and, where appropriate, aggregation methods may be used depending on the nature of the impacts.

In relation to ESRS 1 paragraph 103, the significant differences between the subsidiaries and the group are linked to the business models and the aspects covered in ESRS 2 IRO-1 paragraph 53 (b)(i)(ii), which are activities, business relationships, geographies and other factors. Similarly, ESRS 1 paragraph 104 clarifies that significant differences have to be assessed considering circumstances such as different sectors and others relevant to the level of disaggregation (ESRS 1 paragraphs 54-57), which include differences among countries or among significant assets/sites. Hence, an undertaking that is a conglomerate operating in different sectors with different subsidiaries in them may not be able to identify material widespread impacts spanning across the group but rather subsidiary-related material impacts that cannot be aggregated at a group level. Therefore, the thresholds used in the materiality assessment at group level are to be impartially designed to avoid excluding these material impacts at the subsidiary level. For an investment holding company, this would mean looking at the impacts that relate to the investments in different sectors.

Impact materiality is based on its impact on people or the environment, which are in turn affected stakeholders for the undertaking.

The scope of impact materiality includes impacts on people and/or the environment connected to the undertaking’s own operations and upstream and downstream value chain, including through its products and services as well as through its business relationships. For actual or potential impacts, the materiality is assessed by reference to the severity of such impacts on people and/or the environment. To assess impacts, stakeholder engagement is central as described in FAQ 16 Do ESRS mandate to actively engage with stakeholders?

In contrast, financial materiality focusses on the effects of sustainability matters on the undertaking’s cash flows, financial performance and position, access to finance or cost of capital in the short-, medium- or long term, as such effects are material to the undertaking’s investors.

When material impacts are also associated with material risks and opportunities, they are also material for the undertaking. However, impact materiality is assessed based on severity on people and the environment and not on the basis of the effects it has on the undertaking and its financial prospects.

As explained above, impact materiality covers impacts connected to the undertaking’s own operations and value chain, including through its products and services as well as through its business relationships. An undertaking can be connected to impacts in several ways as described below, according to the international due diligence instruments.

The undertaking may be single-handedly responsible for impacts to people or the environment if the impacts are directly caused by its operations, products or services. Examples of such cases include:

Impacts to which the undertaking has contributed are those not caused directly and solely by the undertaking’s operations, products, or services but in conjunction with a third party. Therefore, any one action or omission from the undertaking does not single-handedly cause the impact but nevertheless does so with a third party’s actions or omissions. For example, several factories locally release harmful emissions that are individually below harmful limits. However, together they affect the quality of the air in the local community, leading to a negative impact on the people and the environment.

Another example of contributing to an impact is when an undertaking facilitates or incentivises another party to cause or contribute to the impact, such as by changing requirements to suppliers repeatedly without adjusting production deadlines and prices, thus pushing suppliers to breach labour standards in order to deliver.

Impacts directly linked to the undertaking’s operations, products and services caused by a business relationship are those in which the entity causing or contributing to the impact is linked to the undertaking through a business relationship. Business relationships are not limited to contractual relationships and partners with whom the undertaking directly interacts. They also include actors across the entire upstream/downstream value chain, including beyond the first tier – for example, a supplier subcontracting embroidery on clothing to child labourers, contrary to the contractual obligations.

The type of involvement (i.e., caused, contribute or directly linked) is important given that it could lead to a different approach when addressing the negative impacts. However, this does not imply that impacts that are directly linked are necessarily less material than those caused or contributed to, as the basis of the materiality assessment is severity.

See IG 2 FAQ 3: How should the materiality assessment process be organised to properly capture material IROs that arise in the value chain?

No – impacts are to be assessed on their own, i.e., without taking into account other impacts. This means that positive impacts on the environment and people cannot be netted against negative impacts.

This is based on the following non-exhaustive list of principles:

Although netting and compensation/offsetting are different concepts, these are not allowed to be considered in the assessment of impact materiality. Specific requirements on topical standards for compensation/offsetting are included. ESRS E1 Climate change and ESRS E4 Biodiversity and ecosystems include specific requirements on how to report on carbon credits and biodiversity credits for material matters.

No, it is not the same. However, the objective remains the same.

The financial materiality assessment of information depends on whether the information is considered to be material for the decision-making of those who provide, or may provide in the future, resources to the undertaking. The scope of financial materiality for the sustainability statement is an expansion of the scope of materiality used to determine the information to be included in the undertaking’s financial statements (ESRS 1 paragraph 47). Whilst the concept of materiality does not differ between ESRS and financial reporting standards, the information that is likely to be material following the two sets of standards does. The principles applied for the preparation of the financial statements (under IFRS or local Generally Accepted Accounting Principles (GAAPs)), as illustrated by the financial reporting conceptual framework of IFRS, clearly delineate what should be accounted for on the basis of criteria for recognition of assets and liabilities as well income and expenses. As a result, when defining the thresholds for financial materiality used in the preparation of the sustainability statement, inspiration could be drawn from criteria and thresholds used in the preparation of the financial statements.

The differences between information that is likely to be financially material for the financial statements and information that is likely to be financially material for the sustainability statements relate to the following aspects.

The CSRD defines the frequency of sustainability reporting under the ESRS as annual given that the sustainability statement is part of the undertaking’s management report. Accordingly, the undertaking is required to determine at each reporting date its material impacts, risks and opportunities as well as the material information to be included in the sustainability statement.

However, if the undertaking concludes based on appropriate evidence that the outcome of the prior reporting period’s materiality assessment is still relevant at the reporting date, the preparation of the sustainability statement may use the conclusions previously reached. This may be true if the undertaking assesses that there have been no material changes in its organisational and operational structure of the undertaking and that there have been no material changes in the external factors that could generate new or modify existing IROs or that could impact the relevance of a specific disclosure. Examples of changed material facts and circumstances (i.e., triggers) could be:

The analysis performed for the preparation of the sustainability statement for each reporting period should be sufficiently robust and proportionate to capture possible changes from the previous period(s), including in the value chain. The undertaking may do an annual update of its previous assessments, focusing on the impacts, risks and opportunities that are affected by the identified changes (e.g., as a result of the changes, some of them may cease to be material and other material impacts risks and opportunities may arise).

While it is possible to perform an annual update focused on the consequences of the identified changes, the materiality assessment is a dynamic process subject to the inherent evolution of the undertaking and needs to be considered for an update on an ongoing basis.

No – ESRS 1 paragraph AR 16 states: ‘Using this list is not a substitute for the process of determining material matters. This list is a tool to support the undertaking’s materiality assessment. The undertaking still needs to consider its own specific circumstances when determining its material matters.’ Some undertakings may have a list of material topics from previous impact materiality assessments (for instance, GRI Universal Standards reporting) and use the list from ESRS 1 paragraph AR 16, as described in step B of the Materiality assessment process, Chapter 3.2.

The list in ESRS paragraph AR 16 is a good starting point for the identification of sustainability matters, but it should not be used as a checklist substituting a materiality assessment. It is an inventory of the sustainability matters covered in the sector-agnostic topical ESRS. Sector-specific(*) and entity-specific sustainability matters (see ESRS 1 paragraph 11) should also be considered on top of this list.

Given that sector-specific ESRS have not been finalised yet, sector-specific sustainability matters shall be identified and assessed on an entity-specific basis until the sector standards are released (see ESRS 1 paragraph 131 (b)).

A sustainability matter might be material from an impact or financial perspective over the short-, medium- or long-term. As such, time horizon is an essential component of the materiality assessment to be factored into the process. ESRS 1 paragraphs 77 to 81 define the standardised terms for time horizon, and they provide the option to select entity-specific horizons for the medium- and long-term.

In the double materiality analysis, the short-, medium- and long-term time horizons may be considered when assessing impacts, risks and opportunities:

Where possible, yes, as quantitative measures of IROs are objective evidence of their materiality. However, it is recognised that qualitative information is often valuable in informing the materiality assessment in its own right, including information from affected stakeholders. Qualitative information may provide relevant context for understanding quantitative measures.

The level of comfort sought by the undertaking from quantitative information depends on whether there is scientifically validated data and on consensus reached on the given impact. For example, global reports or industry information on a given topic, such as negative impacts on biodiversity loss, could provide the quantitative information needed without the need for the undertaking to incur in additional research or data collection costs.

Quantitative information is not always available or may result in additional costs. Whenever a qualitative analysis is sufficient for the undertaking to reasonably conclude that a matter is ‘not material’ or ‘material’, additional quantitative information would add no value to the materiality assessment. As the materiality assessment process evolves over time, the undertaking may redefine the balance between qualitative and quantitative information.

Quantitative information would, however, be of interest where a topic is in between being material and non-material based on qualitative information and/or where there are diverse views on it. In that case, quantification could corroborate the conclusion.

In this context, the undertaking may adopt measures of impacts inspired by the indicators in the Metrics and Targets section of the topical ESRS.

No – even if impact and financial materiality are interrelated and the interconnections among the two dimensions shall be considered (see ESRS 1 Chapter 3.3. Double materiality), a sustainability matter does not have to be material from both dimensions to be regarded as material for reporting purposes.

For example, an undertaking in the extractive industry has assessed health and safety as a material negative impact due to the frequency and severity of work-related accidents in its location. However, the current financial effects are not considered financially material. Therefore, the impacts, risks and opportunities on this matter are not aggregated, and the matter is regarded as material from an impact materiality dimension only.

The ESRS do not prescribe specific documentation as this is outside its remit, but it is reasonable to expect a certain level of documentation to be needed for internal purposes.

Such documentation could inform those in charge of the governance of the process of sustainability reporting (see ESRS 2 GOV- 2) so as to best prepare the ESRS 2 IRO-1 disclosures and help assurance providers to perform their work.

The CSRD modifies the Accounting Directive with respect to the definition of the content of the management report in relation to sustainability information and its digitisation (namely Art 19a and Art 29a) and has introduced mandatory assurance of the sustainability statement (in particular, Art 34). The documentation requirements and level of evidence to support the materiality assessment (i.e., ESRS 2 IRO-1 and 2 as well as ESRS SBM-3) are not described in the ESRS.

The ESRS do not prescribe a specific process for the materiality assessment as no one process fits all undertakings, including diversified global undertakings.

The parent undertaking (as defined in ESRS 1 Chapter 7.6) performs its materiality assessment for the consolidated group for the group’s material impacts, risks and opportunities (according to CSRD Art. 29a) irrespective of its group legal structure and of the aggregation used to prepare the disclosures in the consolidated sustainability statement. Refer to section 3.6.3 of this implementation guidance to understand the conceptual framework and the example offered on pollution for a subsidiary.

The parent undertaking may perform its materiality assessment using different approaches or a combination of two. These two are:

An undertaking may have a variety of sustainability matters from different subsidiaries where different levels of severity have been identified in performing its materiality assessment at the group level. For example, it may have a high severity impact from a small revenue stream and a medium severity impact from its main revenue stream. Therefore, in defining thresholds (see step C in chapter 3.3) the parent undertaking of a group operating in different sectors has to consider an appropriate level of consistency in methodologies when setting the appropriate thresholds across the entire group, keeping at the same time in consideration potential differences that exist in the exposure to impacts, risks and opportunities at the level of single subsidiaries where appropriate. For example, in a conglomerate that operates in different sectors, the materiality assessment conducted for each sector will have its own peculiarities. (refer to Chapter 3.7 Deep dive into impact materiality - Setting thresholds). Furthermore, the undertaking cannot simply aggregate different impacts across the various subsidiaries or sectors it operates in and apply a group threshold across all of them, as it risks obscuring the information. In some cases, the negative impacts cannot be aggregated, such as when they relate to high severity impacts like the violation of human rights, which are to be considered on an individual basis, i.e., at a subsidiary or country level (refer to ESRS 1 paragraph 103 and levels of disaggregation).

The undertaking should consider IROs or matters commonly associated with its sectors, geographic locations or a specific subsidiary (see Step A in Chapter 3.1). Here, the sector standards will help in identifying the impacts, risks and opportunities and in assessing them.

Yes, it may. The sector-specific standards will add another layer to the sector-agnostic standards and complement them in depth for a given subtopic/sub-subtopic or may increase the number of subtopics/sub-subtopics.

Both sets of standards will have a consistent architecture. The sector-specific standards will provide a list and description of sustainability matters common to the sector and build on ESRS 1 paragraph AR 16.

As a temporary measure before the adoption of the sector-specific standards, the undertaking may use the transitional provision related to entity-specific disclosures (see ESRS 1 chapter 10.1). This allows undertakings to carry forward their previous sustainability disclosures or to design additional disclosures using best practices or other frameworks (e.g., IFRS industry-based guidance or GRI’s) for entity-specific disclosure (per ESRS 1 paragraph 11) as long as this information meets the qualitative characteristics of information laid out in ESRS 1 Appendix B. The transitional provision is applicable for the first three sustainability statements of the undertaking.

The ESRS require disclosure on the materiality assessment and its outcomes but do not mandate specific behaviour on stakeholder engagement or the due diligence process.

However, ESRS 1 paragraph 45 states that the impact materiality assessment is informed by the undertaking’s due diligence process. In addition, ESRS 1 paragraph 24 points to affected stakeholders’ engagement as central to the materiality assessment. Engagement with affected stakeholders is a tool that supports the undertaking’s business processes (for example, due diligence) as well as the management of sustainability matters. The undertaking, when preparing its sustainability statement, can leverage its engagement with affected stakeholders per its due diligence process, if applicable.

Stakeholder engagement informs the identification and assessment of material impacts. This can help the assessment of severity, likelihood and time horizons and also ensure the completeness of the material impacts identified. Refer to Chapter 3.5 Role and approach to stakeholders in the materiality assessment.

Engagement with affected stakeholders helps the undertaking to understand which sustainability matters are sources of concern for the respective stakeholders and how they are affected. This information may be useful input for the assessment. For further information, see Chapter 3.5 Role and approach to stakeholders in the materiality assessment.

ESRS 1 paragraph 22(a) states: ‘affected stakeholders: the individuals or groups whose interests are affected or could be affected – positively or negatively – by the undertaking’s activities and its direct and indirect business relationships across its value chain’. The concept of ‘key stakeholders’ (or ‘relevant stakeholders’, per international instruments) rests on the idea that not all stakeholders will be equally affected by the undertaking’s activities. Furthermore, the undertaking is to identify which stakeholders’ views are to be taken into account in connection with a specific activity. It also builds upon the idea that the degree of impact on stakeholders may inform the degree of engagement specifically for prioritisation.

The undertaking may consider engaging stakeholders or their representatives to determine whether they are affected or not if not obvious.

The undertaking may not engage with all the stakeholders for all sustainability matters. Engagement with stakeholders who are not affected by the specific sustainability matter is not meaningful. Therefore, the undertaking may engage with different groups of affected stakeholders for different matters.

There may be stakeholders who cannot voice their concerns, and in the ESRS nature has been identified as a silent stakeholder (ESRS 1 paragraph AR 7). Nature is an essential part of the sustainability context of the undertaking and the value chain it operates in. Nature, unlike other stakeholders, cannot voice its concerns on its own, neither verbally nor in writing. Data from scientific sources (e.g., scientific studies on the planetary boundaries or scientifically validated data) may give nature a voice as it may explain the state of nature, such as the health of bird populations, the state of water bodies or the condition of a forest.

Channels monitoring the concerns of silent stakeholders can provide valuable input to the materiality assessment for impacts, dependencies and, where applicable, the subsequent risks and opportunities for the undertaking.

Examples on considering silent stakeholders could include:

No – the disaggregation for materiality purposes of the material impacts should fairly reflect the severity of actual impacts or the severity and likelihood of potential impacts and it may be different across the various material impacts. For risks and opportunities, it should reflect the magnitude of current financial effects, while for anticipated financial effects it should reflect the magnitude and likelihood. The principle is to avoid obscuring the specificity and context necessary to interpret the information and to avoid the aggregation of material items of a different nature. This is set out in ESRS 1 paragraph 54: ‘When needed for a proper understanding of its material impacts, risks and opportunities, the undertaking shall disaggregate the reported information:

ESRS 1 paragraph 55 clarifies that in defining the approach to disaggregation of reported information the undertaking shall, for consistency reasons, consider the approach adopted for materiality assessment.

Where the severity of impacts could be obscured by aggregating data, the undertaking should disaggregate per country, site, asset or subsidiary to meet the qualitative characteristics of information, namely relevance and faithful representation. In this way, the undertaking would provide an accurate and truthful representation when disclosing the severity of the related impact. Disaggregation of data should focus on the specific facts and circumstances of the reporting undertaking. Hence, the undertaking could adopt a different level of disaggregation for two separate sustainability matters within the same topic (e.g., own workforce: adequate wages and training and development), and this would be appropriate depending on the circumstances.

For risks and opportunities, the focus is whether aggregation could obscure information that could influence the investor’s decisions to provide funds to the undertaking.

As described in ESRS 1 paragraph 55, the disclosures in the sustainability statement shall consider the level of disaggregation adopted in the corresponding materiality assessment.

In general, no – the goals of the disaggregation objectives for financial reporting and sustainability reporting are different (also refer to FAQ 5: Is the material information for financial statements the same as for the sustainability statement? and FAQ 6: Is financial materiality for sustainability reporting limited to effects presented in financial statements?). In general, the sector classification of the undertaking’s activities is more appropriate as a starting point (refer to ESRS 2 IRO-1 paragraph 53(b)(i)).

Segment reporting under IFRS is based on a ‘management approach’ (as explained in the Basis for Conclusions for ESRS 2). Local GAAP may be based on the same or a different approach for segment reporting. The core principle of IFRS 8 Segment Reporting is to require disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business activities of the undertaking as well as the economic environments in which it operates (IFRS 8 paragraph 1). The level of disaggregation or reportable segments in IFRS 8 are consistently applied in financial reporting without variation in the reported items.

The disaggregation for financial reporting segments is designed for a different purpose and, in general, it is not expected to be the starting point to reflect material IROs across the components of the undertaking’s operations. The appropriate disaggregation unit for IROs in the sustainability statement may be a country, site or significant asset when material impacts, risks and opportunities arise in a specific country, location or asset, respectively. In addition, the level of disaggregation should reflect the nature of the different subtopics and, as such, should be adjusted from one subtopic to another when this is necessary to properly portray the material IROs (see ESRS 1 paragraph 54). For more on this, refer to FAQ 18: Does the undertaking use the same criteria when defining the level of disaggregation across all IROs?

Therefore, a disaggregation following the segments used for financial reporting may not be granular enough or relevant enough for sustainability reporting purposes(*).

The ESRS do not require disclosure of the detailed outcome per each criterion; however, an appropriate explanation of criteria and thresholds used shall be included. The undertaking shall report on the processes to identify and assess material IROs, as required by ESRS 2 IRO-1, and on the outcome, as required by ESRS 2 SBM-3 and IRO-2. ESRS 2 SBM-3 paragraph 48(g) requires disclosure on changes to the material IROs since the prior year. For instance, on impact materiality the scale and irremediable character of a particular negative impact could have been assessed as high in the current period versus medium in the prior year and thus become material and in need of disclosure.

As explained in FAQ 12 Should the materiality assessment be documented/evidenced? the ESRS do not prescribe specific documentation; however, it is reasonable to expect that a certain level of documentation will be produced. This could be used for internal purposes and for the assurance providers of the undertaking’s sustainability statement.

Such documentation can also include a description of severity (including scale, scope and irremediable character) and likelihood of material impacts as well as likelihood of occurrence and potential magnitude of material risks and opportunities. This documentation can help the undertaking’s management and the assurance provider (i.e., as audit evidence) to better understand the materiality assessment process and the related results.

The determination of information to be reported for metrics is informed by the assessment of the materiality of information (refer to Chapter 2.3 Criteria for the determination of the materiality of information). Hence, if a matter is material due to its impacts and there are no material risks and opportunities arising from the same matter, information disclosed on metrics shall be limited to metrics that are relevant under the impact materiality perspective, and the datapoints related to the risks and opportunities or financial effects are to be omitted(*) (ESRS 1 paragraphs 31 and 34).

When a matter is assessed to be material from a financial (or impact) perspective only, the information about policies, actions and targets shall cover all the datapoints in the minimum disclosure requirements(*) and the topical standards (ESRS 1 paragraph 33). The level of detail of such information will reflect the general approach to information materiality (ESRS 1 paragraph 31) The undertaking will describe the content of policies, actions and targets in place connected to the sustainability matters that are material from the impact or financial perspectives or both, according to the materiality assessment.

It is also important to note that disclosure that informs about actual or potential impacts is of interest for investors when a matter is financially material. Similarly, financial information is also relevant for stakeholders other than investors when a matter is material from the impact perspective as it supports accountability.

Once metrics have been assessed for materiality and determined to be material, the data for the entire group shall be included in the metrics. This is not the case where specified differently in sector-agnostic topical or sector-specific standards (refer to the example below).

ESRS 1 stipulates that the sustainability statement shall be for the same reporting undertaking as the financial statements (ESRS 1 paragraph 62). If the undertaking prepares consolidated financial statements, the reporting entity is the entire group (i.e., the parent and its subsidiaries). For the assessment of material IROs, ESRS 1 clarifies that it is performed ‘for the entire consolidated group, regardless of the group’s legal structure’ (ESRS 1 paragraph 102). The group’s legal structure is also irrelevant for reporting on metrics, as the reporting should be the same whether an undertaking is conducting its business activities through multiple legal entities or does the same business activities using only one legal entity.

ESRS 1 paragraph 57 also stipulates that, ‘When a topical or sector-specific ESRS requires that a specific level of disaggregation is adopted in preparing a specific item of information, the requirements in the topical or sector-specific ESRS shall prevail.’ Therefore, undertakings can disaggregate the metric information further than providing it at a group level only when this is required by a topical standard or deemed relevant at the entity-specific level.

Disclosure regarding IRO management related to policies, actions and targets will reflect the extent of the activities within the group that are covered by those policies, actions and targets. As such, they may only cover the ‘problem area’ of the material IRO when appropriate. Likewise, for entity-specific metrics the metric could be focussed on the parts of the group where such material IROs arise.

Finally, the ESRS stipulate for the level of disaggregation that, ‘when needed for a proper understanding of its material IROs, the undertaking shall disaggregate the reported information …’ (ESRS 1 paragraph 54).

In addition to disclosing information about matters that are material for the group in its entirety, there may be situations where a matter is assessed to be material for some subsidiaries in isolation but, despite the aggregation of data of such subsidiaries, the matter is assessed as not material for the group in its entirety. In this case following paragraph 103 of ESRS 1, the undertaking would provide information about this material matter, in order to provide an adequate understanding of the specific impacts, risks and opportunities of the subsidiaries concerned. In this way, despite the absence of a reporting at subsidiary level due to the application of the subsidiary exemption, an appropriate level of transparency is preserved where the reporting undertaking identifies significant differences between the IROs of the group and the IROs of one or more of its subsidiary undertakings (refer to CSRD article 29 a, 4). This could include, next to other relevant narrative information, metrics covering the amounts of those subsidiaries only. In this case contextual information would be helpful, to support the understanding that despite being material for one or more subsidiaries, the matter is not material for the group in its entirety and the undertaking, as well as to disclose which entities are included in the disclosures, including in the metrics.

As a general principle, environmental impacts are considered before any mitigating actions in the materiality assessment. This is linked to the objective of providing information on the management of impacts by the undertaking over time, and it is mirrored in the ESRS architecture as follows for the potential impacts.

Differentiating between actual impacts (i.e., those that have happened or are ongoing in the reporting period) and potential impacts (i.e., those that have a likelihood of occurrence in the short-, medium- or long-term) is relevant, and the illustrations below develop these concepts.

Yes – the materiality assessment is performed by the undertaking to identify the material IROs to be reported.

ESRS 1 paragraph 33 establishes that, for the material matter to be identified, the undertaking shall disclose its policies, actions and targets to manage IROs related to the matter. It also specifies that, if the undertaking has not implemented a policy, action or target, this fact is to be disclosed. The requirements of information to be disclosed for policies, actions and targets are detailed in ESRS 2 Chapter 4.2 and Chapter 5.

The EU Taxonomy Regulation and its Delegated Acts define criteria for a number of economic activities (eligible activities) that need to be fulfilled in order to substantially contribute to one of six environmental objectives. In addition, these activities must do no significant harm (DNSH) to the other environmental objectives and fulfil minimum social safeguards to be considered taxonomy aligned. The environmental objectives of the Taxonomy Regulation are fully reflected in the environmental topics covered by the ESRS. If an undertaking engages in activities that are eligible for the EU Taxonomy, this indicates that it impacts the environmental objective for which the Taxonomy defines substantial contribution (SC). To this extent, the following information can be an input to the materiality assessment when identifying IROs (i.e., refer to Chapter 3.2 Step B of this Guidance):

Despite the relationship between the Art. 8 Taxonomy and ESRS, taxonomy-eligibility is no precedent for the ESRS materiality assessment. Reporting taxonomy-eligible activities by an undertaking neither oblige companies to assess those as material nor to explain that they are not. The Art. 8 Taxonomy is a process that can inform the materiality assessment; other processes that can also inform it are due diligence and the enterprise risk management.