Thresholds

Quantitative and qualitative thresholds play a critical role in assessing the impacts, risks, and opportunities (IROs) associated with sustainability matters. The evaluation of these elements is essential for organizations to determine the materiality of various sustainability matters, which in turn influences reporting and strategic business decisions. This comprehensive analysis synthesizes information from a draft of the EFRAG Implementation Guidance (IG) on materiality assessment, aiming to clarify the approach to setting these thresholds and their application in sustainability reporting.

Time Horizon and Context Setting

The determination of materiality thresholds requires organizations to set an appropriate time horizon, reflecting the short, medium, and long-term outlook. This is crucial for identifying sustainability matters and understanding their potential to become material in different time frames. The time horizon affects how organizations perceive the occurrence of IROs and their potential financial effects, underscoring the dynamic nature of materiality assessments.

Quantitative and Qualitative Information

Quantitative measures provide objective evidence of IROs’ materiality. They are based on scientific data, global reports, and industry information, offering a level of comfort and objectivity in the assessment process. However, when quantitative information is not available or its acquisition is cost-prohibitive, qualitative analysis becomes essential. Qualitative information allows organizations to make reasoned conclusions about the materiality of certain matters without the need for additional quantitative data. Over time, the balance between quantitative and qualitative information may evolve, reflecting changes in the availability of data, scientific consensus, and the organization’s understanding of its sustainability impacts.

Aggregation of IROs

The guidance advises against the aggregation of IROs in the materiality assessment. This is because sustainability matters do not need to be material from both impact and financial dimensions to be considered material for reporting purposes. Each dimension should be assessed independently to ensure comprehensive coverage of material concerns.

Setting Thresholds for Impact and Financial Materiality

For impact materiality, the assessment uses objective criteria based on severity and, for potential impacts, likelihood. These criteria include the scale, scope, and irremediable character of the impact. The financial materiality assessment, conversely, relies on both quantitative and qualitative thresholds based on the anticipated financial effects on performance, position, cash flows, and access to capital.

Organizations need to disclose how these thresholds are set or applied, fostering transparency in the materiality assessment process. This involves a detailed understanding of the nature of impacts, the likelihood of risks and opportunities, and their potential magnitude.

Integration of Materiality Outcomes

It is essential to consider the interrelations between impact and financial materiality. Although distinct, these two dimensions are interconnected, and their outcomes should be consolidated to form a comprehensive view of the organization’s material IROs. This integrated perspective helps organizations in preparing their sustainability statements, ensuring that they reflect all material aspects concerning sustainability matters.

Conclusion

Setting quantitative and qualitative thresholds for impacts, risks, and opportunities is a nuanced process that requires organizations to consider a wide array of factors. These include the severity and likelihood of impacts, the availability and reliability of quantitative data, and the insights gained from qualitative analysis. By carefully determining these thresholds, organizations can enhance the relevance, reliability, and comparability of their sustainability reporting, ultimately supporting better decision-making for both internal and external stakeholders.