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Good to know Selection of appropriate double materiality assessment criteria

Selection of appropriate double materiality assessment criteria

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​​​​​​​​​​​​​by Edyta Maciorowska

15 January 2025


The assessment of impacts, risks and opportunities related to sustainability issues is key to analysing double materiality. In order for such analyses to be effective and deliver tangible benefits, it is important to apply appropriate criteria for assessing impact materiality and financial materiality. ​



TABLE OF CONTENTS
  1. Why the need to specify the criteria?
  2. What are the criteria?
  3. How to identify the thresholds?
  4. Why the difficulty in assessing the severity of impacts?
  5. What are the benefits of adequate quantification of thresholds?
  6. Conclusions​​



Why the need to specify the criteria?


ESRS 1 and ESRS 2 (European Sustainability Reporting Standards) emphasise the need to set appropriate qualitative or quantitative thresholds to assess the materiality of IROs (Impact, Risk, Opportunity) and related disclosures. In particular, paragraphs 53 and 59 of ESRS 2 require disclosure of how these thresholds were set or applied.

ESRS 1 requires entities to 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, in the case of potential impacts, also on likelihood.

What are the criteria?


The criteria are the scale, scope and irremediable character of the impact for actual negative and positive impacts. For potential negative and positive impacts, the undertaking also estimates the likelihood of their occurrence and maps them onto a relevant time horizon. 

As most impacts are related to risk and financial opportunities, the undertaking generally assesses whether material financial effects flow from the identified impacts. 

How to identify the thresholds?


The severity of an actual or potential negative impact is assessed from the perspective of the affected persons or environment and is determined on the basis of the following characteristics (factors), which form the basis for determining thresholds:

  1. scale – how grave the negative impact is (i.e. the extent to which access to basic necessities of life or freedoms, such as education, means of support, etc., is affected); 
  2. scope – how extensive the impact is (i.e. the number of people affected or the extent of environmental damage); 
  3. irremediable character – the extent to which the impact can be remediated (e.g. through compensation or restitution, whether the possibility to exercise the right in question may be restored to those affected, etc.). The fundamental issue is whether there are any limitations on the possibility to restore the environment or affected people to a state at least equal or equivalent to their prior state.
severity of actual impacts
graphical representation of the severity of actual impacts


* Example taken from EFRAG IG 1. Please note that that the graphical representation in this figure serves only as illustration of a possible approach to visualisation of the conclusions of assessment of impact materiality criteria. ESRS 2 IRO-1 also requires the undertaking to explain how it determined the materiality of the impact, including the qualitative and quantitative thresholds used.

Why the difficulty in assessing the severity of impacts?


It would seem that, using the list of potential impacts provided paragraph AR 16 of ESRS 1, it is not too complicated to assess these matters as shown above. In reality, however, it is quite a challenge for companies, both in terms of establishing a complete list of impacts (remember that ESRS 1 AR16 is only a starting point for assessment) and in terms of properly documenting and clarifying the quantitative and qualitative thresholds to be used for the assessment. 

This is mainly caused by:

  • the variety of activities carried out by companies that operate in a complex social, economic and ecological environment;
  • the lack of objective guidelines in the legislation for setting quantitative and qualitative thresholds;
  • lack of sectoral guidance.

In order for companies to be able to effectively establish objective criteria for assessing the materiality of actual and potential impacts, first and foremost the purpose of reporting should be kept in mind, and academic and industry studies as well as the company's own observations should be used, not forgetting dialogue with stakeholders.

What are the benefits of adequate quantification of thresholds?


The assessment scale allows the results of the analysis to be structured and quantified. It allows, among others, to compare different aspects of impact and risk, sort out priorities and monitor progress. 

The choice of the criteria and scale also affects the credibility of the whole process. An objective and measurable approach helps avoid subjective assessments – clearly defined criteria eliminate the risk that the analysis will depend on personal opinions – and increase transparency – organisations that openly communicate their assessment criteria and methodology build trust among stakeholders such as investors, partners or local communities.

The ultimate goal of any assessment is to provide the organisation with the data necessary for decision making. Well-chosen criteria and scales help identify opportunities – e.g. whether the implementation of new technologies can reduce emissions and save money at the same time – and minimise risks – they allow identifying areas that may negatively impact an organisation's operations, such as regulatory or reputational risks.

Clearly defined criteria and scales significantly facilitate reporting of the results and provide a basis for comparing reports and data between periods and between companies.

Conclusions

​
Selecting the right criteria and defining the scale is the basis for an effective assessment of impacts, risks and opportunities in the context of sustainable development. This makes the assessment process comprehensive, objective and strategically useful. Organisations that pay attention to these elements not only increase their efficiency, but also build a sustainable foundation for responsible and sustainable development.

Are you unsure whether you have applied the correct criteria for assessing double materiality? Contact us​ – our experts will review the selection of the double materiality assessment criteria for you.
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