Double Materiality - Extract from EFRAR's ESRS

3.3. Double materiality

39. Double materiality has two dimensions: impact materiality and financial materiality.

40. Impact materiality and financial materiality assessments are inter-related and the interdependencies between the two dimensions shall be considered. In general, the starting point is the assessment of impacts. A sustainability impact may be financially material from inception or become financially material when it translates or is likely to translate into financial effects in the short-, medium-, or long-term. Irrespective of them being financially material, impacts are captured by the impact materiality perspective.

41. In determining the materiality of impacts, risks and opportunities in the undertaking’s value chain, the undertaking shall focus its identification and assessment of impacts, risks and opportunities on areas where they are deemed likely to arise, based on the nature of the activities, business relationships, geographies or other risk factors concerned, consistent with its materiality assessment.

42. The undertaking shall consider how it is affected by its dependence on the availability of natural and social resources at appropriate prices and quality, independently of its potential impacts on those resources.

43. To identify its principal impacts, risks and opportunities, the undertaking shall determine which ones are material, and therefore reported upon in its sustainability statements, applying the double materiality principle.

44. The undertaking shall explain how it applies the criteria set under chapters

3.4 Impact materiality and 3.5 Financial materiality below, using appropriate thresholds. Appropriate thresholds are necessary to determine which impacts, risks and opportunities are identified and addressed by the undertaking as material (also referred to in respect of impacts as “most significant” in the international instruments UN Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises mentioned in chapter 4 Sustainability due diligence) and to determine which sustainability matters are material for reporting purposes.

3.4 Impact materiality

45. A sustainability matter is material from an impact perspective when it pertains to the undertaking’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium- or long term. A material sustainability matter from an impact perspective includes impacts caused or contributed to by the undertaking and impacts which are directly linked to the undertaking’s own operations, its products, and services through its business relationships. Business relationships include the undertaking’s upstream and downstream value chain and are not limited to direct contractual relationships.

46. In this context, impacts on people or the environment include impacts in relation to environmental, social and governance matters.

47. The materiality assessment of a negative impact is informed by the sustainability due diligence process defined in the international instruments of the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. For actual negative impacts, materiality is based on the severity of the impact, while for potential negative impacts it is based on the severity and likelihood of the impact. Severity is based on

(a) the scale;

(b) scope; and

(c) irremediable character of the impact.

In the case of a potential negative human rights impact, the severity of the impact takes precedence over its likelihood.

Materiality is based on:

(a) the scale and scope of the impact for actual positive impacts;

(b) while for potential positive impacts, it is based on the scale, scope and likelihood of the impact.

3.5 Financial materiality

48. The scope of financial materiality for sustainability reporting is an expansion of the scope of materiality used in the process of determining which information should be included in the undertaking’s financial statements.

49. The materiality assessment process described in paragraph

43 includes, but is not limited to, the identification of information that is useful to investors, lenders and other creditors when they, as primary users of general-purpose financial reporting, assess the effects of sustainability matters on the undertaking’s cash flows, financial position and financial performance. In particular, information is considered material for primary users of generalpurpose financial reporting if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that they make on the basis of the undertaking’s sustainability statements.

50. A sustainability matter is material from a financial perspective if it triggers or may trigger material financial effects on the undertaking’s development, including cash flows, financial position and financial performance, in the short-, medium- or long-term. This is the case, in particular, when it generates or may generate risks or opportunities that significantly influence or are likely to significantly influence its future cash flows. Future cash flows, together with other critical factors such as business model, strategy, access to finance and cost of capital, are likely to influence the financial position and financial performance of the undertaking in the short-, medium- or long-term. Risks and opportunities may derive from past events or future events and may have effects in relation to:

(a) assets and liabilities already recognised in financial reporting or that may be recognised as a result of future events; or

(b) factors of value creation that do not meet the financial accounting definition of assets and liabilities and/or the related recognition criteria but contribute to the generation of cash flows and more generally to the development of the undertaking. The latter factors are generally referred to as “capitals” in frameworks promoting a multi-capital approach.

51. Financial materiality of a sustainability matter is not constrained to matters that are within the control of the undertaking but includes material risks and opportunities attributable to business relationships with other undertakings/stakeholders beyond the scope of financial reporting.

52. Dependencies from natural and social resources are sources of financial risks or opportunities. Dependencies may trigger effects in two possible ways:

(a) they may influence the undertaking’s ability to continue to use or obtain the resources needed in its business process, as well as the quality and pricing of those resources; and

(b) they may affect the undertaking’s ability to rely on relationships needed in its business processes in acceptable terms.

53. The materiality of risks and opportunities is assessed based on a combination of a likelihood of occurrence and potential size of financial effects.