Materiality Analysis according to CSRD

No, according to the EFRAG Implementation Guidance for the materiality assessment (MAIG), there is no obligation for a direct dialogue with stakeholders in the materiality analysis according to CSRD.

However, ESRS 1 paragraph 24 points out that the involvement of affected stakeholders is a central element of due diligence processes and the materiality assessment and is a tool that supports the company's business processes (e. g. due diligence) and the management of sustainability matters.

The ESRS define stakeholders as persons or groups who are influenced by the company or who can influence it. ESRS 1 paragraph 22 distinguishes between two main groups:

1. Affected stakeholders: Individuals or groups whose interests are or could be affected by the company's activities and its direct and indirect business relationships throughout its value chain, either in a positive or negative way.

2. Users of sustainability statements: Main users of general financial reporting (existing and potential investors, lenders and other creditors, including asset managers, credit institutions, insurance companies) and other users of sustainability statements, including the company's business partners, trade unions and social partners, civil society, non-governmental organizations, governments, analysts and academics.

According to ESRS 1 paragraph 63, companies must report not only internal information in their sustainability statement, but also impacts, risks and opportunities arising from direct and indirect business relationships along the entire value chain.

Therefore, the materiality analysis must identify impacts, risks and opportunities in the value chain, focusing on where (activities, suppliers, customers, geographically, etc.) they are likely to occur. However, it is not necessary to report on every participant in the value chain, but only to provide information on material information from the upstream and downstream value chain.

If, after reasonable efforts, a company cannot obtain the necessary information about its value chain directly, it must estimate the missing information. It can do so using credible and reliable data, such as sector average data and other approximations.

EFRAG has summarized more information on the value chain in the Implementation guidance for value chain (VCIG), which can help in understanding and implementing the CSRD requirements.

The identification of potential and actual impacts, opportunities and risks results from various sources of potential topics from the company context, the value chain and identified stakeholders. These include, for example

• The topic-related ESRS and their (sub)subtopics
• The company's taxonomy-eligible activities
• Existing company's reporting
• Sector-specific aspects from relevant markets
• Topics that users of sustainability statements may consider relevant

The resulting collection of all potentially relevant sustainability matters is supplemented by company-specific impacts, risks and opportunities that arise from the business activities, the value chain and existing risk management processes.

According to Annex II of Delegated Regulation EU 2023/2772, sustainability-related impacts are actual or potential, negative or positive impacts that the company has or could have on the environment and people in the short, medium or long term. These include impacts from its own activities as well as from the upstream and downstream value chain, including those from products and services or business relationships.

Sustainability-related risks / opportunities are uncertain events or conditions that, if they occur, could potentially have a significant negative / positive impact on the company's business success. Risks and opportunities are determined as a combination of the magnitude of the impact and the likelihood of occurrence.

For the impacts on people and the environment (impact materiality), according to ESRS 1 paragraph 43, a distinction is made between the following dimensions:

• Positive or negative impact
• Actual impact or potential impact
• Short, medium or long term

For actual positive impacts, materiality is based on their scale and scope. For actual negative impacts, materiality is determined by the severity of the impacts.
According to ESRS 1 AR 10, severity is determined based on the following factors:

1. Scale: how serious the impacts or how useful positive impacts are for people or the environment
2. Scope: how widespread the negative or positive impacts are, e. g. the geographical area of the environmental damage or the number of people affected
3. Irremediability: whether and to what extent the negative impacts could be remedied by restoring the environment or the people affected to their original state.

In the case of potential (positive or negative) impacts, the probability of occurrence of the impact is also taken into account to assess materiality. For an actual impact the likelihood is 100%. An exception is potential impacts on human rights, where the severity takes precedence over the likelihood of occurrence.

According to ESRS 1 paragraph 51, the magnitude of these risks and opportunities and their time horizons must be determined for the effects of sustainability-related matters on business success (financial materiality). It is important to note that many sustainability-related opportunities and risks may not be relevant today but may become so in the long term. The materiality of risks and opportunities is assessed based on a combination of the (potential) magnitude of the financial impact and their likelihood of occurrence.

A sustainability matter is considered financially material if the associated risks or opportunities have or could have a significant impact on various areas of the company, such as development, financial status, performance, cash flows, access to finance or capital costs. Important: This also applies to factors that are outside the company's control, e. g. external business relationships.

For the assessment of financial materiality, information is used that is important for investors or lenders to decide on the provision of funding. In order to better estimate the financial impact on business success, it also makes sense to link opportunities and risks with concrete business figures – such as EBIT. This makes it easier to place the magnitude of financial effects and the likelihood of occurrence in the company context.

The CSRD instructs that the materiality analysis must be carried out annually. However, if it is determined that the results of the previous analysis are still relevant and there have been no significant changes in the company structure or external factors, previous conclusions can be used (see EFRAG IG1 - Materiality Assessment Implementation Guidance).

Yes. On the one hand, ESRS 1 contains clear disclosure requirements for the materiality analysis in the sustainability statement. For example, according to the IRO-1 disclosure requirement, the procedures for determining and assessing the main climate-related impacts, risks and opportunities must always be described in the sustainability statement, regardless of identified materialities.

On the other hand, application requirements from ESRS 2 must be complied with when conducting the materiality analysis. Compliance with these and other CSRD requirements and reporting standards as well as the process carried out by the company to determine the reported information are checked by the auditor. Therefore, detailed and comprehensible documentation of the entire analysis process is necessary.

According to Article 8 of the Taxonomy Regulation (Regulation (EU) 2020/852), companies are required to disclose what proportion of their economic activities can be classified as "environmentally sustainable". The EU taxonomy, together with the CSRD and the Sustainable Finance Disclosure Regulation (SFDR), are the three regulatory pillars of the EU Sustainable Finance Framework and thus important components of the EU Green Deal and are mutually dependent. Companies affected by the CSRD or the SFDR are also affected by the EU taxonomy. Such companies are required to include the taxonomy-aligned proportion of their turnover, CapEx and OpEx in the environmental section of their CSRD reports.

A harmonization of the definitions and instruments of both regulatory frameworks is being sought in order to facilitate the use of synergies in reporting. For example, there are overlaps in the requirements for climate risk analysis, which must be carried out to meet taxonomy compliance with one of the two climate targets of the EU taxonomy and is required as a climate-related scenario analysis according to the CSRD.