Significant changes to the materiality analysis guidelines
What is the materiality analysis guideline (IG 1)?
EFRAG provides organizations with valuable guidance on the implementation of the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS). One of these CSRD aids is the Implementation Guidance: Materiality Assessment.
The guide provides organizations with step-by-step instructions on how to conduct a materiality analysis, as well as information on stakeholder involvement and answers to frequently asked questions.
What you need to know about the changes
In May 2024, EFRAG published the final version of the Implementation Guidance (IG 1) on conducting the double materiality analysis. Following extensive public consultation and numerous responses, significant changes were made to the draft (from December 2023). In this blog post, we present the most significant changes to the materiality analysis guidance and explain why they are so important.
The most important changes to the materiality analysis guidelines
1. new section on materiality at group and subsidiary level
One of the most significant changes is the introduction of the new section 3.6.3 “Considerations for groups and subsidiaries”. This section provides clear guidance on how material topics identified at subsidiary level should be incorporated into the materiality analysis at group level. This ensures that the assessments at Group level are comprehensive and consistent.
The parent company may perform its materiality assessment using different approaches or a hybrid combination of the following two approaches:
- Top-down approach where a valuation is carried out at group level, involving or consulting the subsidiaries, also in order to obtain the necessary information; and/or
- Bottom-up approach, in which a valuation is carried out at subsidiary level and the results are consolidated at Group level.
There is also a hybrid option. Here, the starting point is to identify the impacts that are common across the group (top-down),and then the bottom-up approach for impacts that are common across the group (bottom-up ). are specific to one or more subsidiaries. These are determined on the basis of the thresholds Group level.
Details can be found in the IG 1 page 32 (Section 3.6.3) and page 46 (FAQ 13).
2. clarification on objective and supportable evidence
Another important aspect of EFRAG’s materiality analysis guidance is the clarification of what constitutes objective and supportable evidence. This clarification was made to ensure that the materiality analyses are based on reliable and verifiable data. This increases the credibility and reliability of the materiality analyses and helps to ensure that decisions are based on solid evidence. This improves the overall quality of sustainability reporting.
Scientific evidence and quantitative measurements of IROs are objective proof of their materiality. However, it is recognized that qualitative information are often valuable to underpin the materiality assessment, including information from affected stakeholders. Qualitative information can provide relevant context for understanding quantitative measures.
Details can be found in the IG 1 page 9 (paragraph 28) and page 44 (FAQ 10).
3. clarification of the architecture of the ESRS
The final version contains important clarifications to the architecture of the ESRS, particularly with regard to the inclusion of non-ESRS sustainability information in the sustainability statement. These clarifications eliminate potential inconsistencies and allow companies to include additional, relevant information (e.g. from the SASB and GRI Standards) in their reports. This helps to make reports more complete and contextual and gives companies the flexibility to publish more comprehensive sustainability information.
Details can be found in the IG 1 page 9 (paragraph 25).
4. consideration of mitigation, restitution and preventive measures
In principle, environmental impacts are considered in the materiality assessment before any mitigation measures.
To this end, the terminology and scope of mitigation, compensation and preventive measures were revised in the final version. The terms “gross” and “net impacts” have been replaced by “before mitigation”, “compensation” or “preventive measures”.
Details can be found in the IG 1 page 54 (FAQ 23).
5. special reference to governance considerations
The company’s administrative, management and supervisory bodies (AMBs) must be informed about the material impacts, risks and opportunities (IROs) (ESRS 2 paragraph 26a). This means that the material IROs should be taken into account when monitoring the company’s strategy and risk management process.
There are no changes to the IG 1 draft in the final version, but a direct reference to the ESRS 2 GOV has beenmade on page 24 (section 3.3) and page 26 (paragraph 100) .
6. inclusion of additional sources for the materiality analysis
The final materiality analysis guidelines have been supplemented with additional sources and tools that can be used in the materiality analysis. These include, for example, the GRI Standards and the ISSB Standards, which enable a more comprehensive and well-founded analysis. This addition enables companies to benefit from proven frameworks and best practices, which ultimately leads to higher quality and better aligned sustainability reports.
Details can be found in IG 1 page 35 (section 4.1) and page 38 (section 4.4).
Other relevant additions to the materiality analysis guide
There is no minimum (or maximum) number of material sustainability aspects prescribed by the ESRS, as materiality depends on the specific facts and circumstances of the company.
The materiality analysis should be based as far as possible on objective data and evidence. When assessing the materiality of a sustainability aspect, there is no conflict between
taking into account the opinions of affected stakeholders and objective evidence. The purpose of both is to gain an understanding of the severity (and likelihood) of the impacts in order to present them in the sustainability statement. Depending on the circumstances, the involvement of affected stakeholders may or may not be necessary.
Conclusion on the changes to the materiality analysis guidelines
The changes made to the Materiality Analysis Guidance (IG1) reflect the extensive feedback from the public consultation and aim to improve the comprehensibility, applicability and quality of the guidance. These adjustments help companies to carry out their materiality analyses in a more precise and well-founded manner, thereby achieving higher quality and consistency in sustainability reporting.
Not only is it at the heart of the CSRD, the dual materiality analysis is an important strategic tool for the future viability of companies.
