4 Steps of Materiality Assessment According to EFRAG Guidelines

Materiality assessment is a critical tool for corporate sustainability reporting, as it allows you to identify significant impacts, risks, and opportunities (IROs) for an organization. Following the framework proposed by the European Financial Reporting Advisory Group (EFRAG) in the ESRS guidelines, the process is divided into four main phases: Step A: Understanding the context, Step B: Identification of IROs, Step C: Assessment of material IROs and Step D: Reporting.

 

Step A: Understanding the context

The first phase consists of analyzing the operational and strategic context of the organization. This includes:

1. Business activities and relationships analysis: Review the business plan, strategy, financial statements, and partner relationships in the value chain, both upstream and downstream.

2. Exploration of the regulatory and industry environment: Assess the legal and regulatory landscape, as well as industry benchmarks and sustainability trends.

3. Identify key stakeholders: Understand who the most relevant stakeholders are, both internal and external, and how they may be influenced by business activities.

This phase provides the necessary overview to guide the next steps, ensuring that the assessment process is complete and relevant.

 

Step B: Identification of impacts, risks and opportunities

The second step involves compiling a list of potential IROs, considering:

– The current and potential impacts from business operations.

– Interactions with the value chain.

– Emerging environmental, social and governance risks and opportunities.

This analysis is based on the list of sustainability issues defined in the ESRS and the possible integration of company-specific issues stemming from standards such as GRI or ISSB. The goal is to create a comprehensive inventory that will serve as the basis for the materiality assessment.

 

Step C: Evaluation and determination of material IROs

The third step is to apply quantitative and qualitative criteria to assess the relevance of the identified IROs:

1. Materiality of impacts: Impacts are assessed on the basis of severity, extent and irreversible character. For potential impacts, the criterion of the probability of occurrence is added.

2. Financial materiality: Risks and opportunities are analysed in terms of economic effects, such as financial performance, cash flows and access to capital.

The result is a consolidated list of material IROs, derived from the synthesis of the two materiality perspectives (double materiality).

 

Step D: Reporting

The last phase involves the transparent communication of the process and the results of the materiality assessment. Key obligations include:

– Describe the process of identification and evaluation of material IROs.

– Demonstrate the alignment of IROs with the business strategy.

– Provide the information requested by the ESRS in relation to the identified IROs.

Reporting must be supported by verifiable data and a clear statement of the criteria used to assess materiality. In addition, any gaps or omissions must be accounted for and adequately justified.

The materiality assessment is not only a regulatory requirement, but represents a strategic tool for integrating sustainability into corporate governance. By following the four steps outlined in the EFRAG guidelines, companies can ensure consistent, transparent reporting that is in line with stakeholder expectations, while contributing to their long-term resilience and competitiveness.