Impact materiality

What is impact materiality?

Under the ESRS, a sustainability matter is material from the impact perspective when it relates to the company's material actual or potential, positive or negative impacts on people or the environment over the short, medium or long term. Impacts are connected with the company's own operations and its upstream and downstream value chain, including through its products, services and business relationships. GRI uses the same concept to decide a company's material topics, through the four steps in GRI 3; see the GRI universal standards. See also double materiality explained and the GRI Standards.

How is severity assessed in impact materiality?

• Scale: how grave the impact is, for example a fatality compared with a minor injury, or toxic compared with nuisance pollution.
• Scope: how widespread it is, such as the number of people affected or the area of land or water.
• Irremediable character: whether and how far the harm can be put right, such as restoring a river compared with an extinct species.

Any one of the three can make an impact severe. For potential negative impacts, likelihood also counts, but for potential human rights impacts severity takes precedence over likelihood, so a severe but unlikely abuse can still be material. Companies set thresholds and explain them; see materiality thresholds and scoring. Evidence from affected people is central; see stakeholder engagement for materiality.

Impact materiality in practice: an apparel brand

An apparel brand that sources from factories in several countries assesses four impacts.

Forced labour in cotton farming is a potential human rights impact the brand is directly linked to through its supply chain; it is judged unlikely for its current suppliers, but its severity, grave, widespread in the regions concerned and irremediable for the victims, makes it material. Wastewater from dyeing mills is an actual impact, assessed on severity alone. Low wages in garment factories are an actual impact affecting many workers. Microfibre shedding from garments in use is a downstream environmental impact of uncertain scale; the brand finds it below its threshold today and records the evidence it will monitor. See running a double materiality assessment.

Why do most material impacts sit in the value chain?

A company's responsibility extends to impacts it causes directly, those it contributes to, for example by setting purchasing prices and lead times that push suppliers to cut wages or safety corners, and those directly linked to its products through business relationships, even several tiers away. For brands, retailers and food companies, the most severe impacts are usually upstream; for manufacturers of products such as vehicles or chemicals, they may be downstream in use or disposal. See impacts, risks and opportunities.

How does impact materiality relate to due diligence?

The UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises describe due diligence: identifying, preventing, mitigating and accounting for adverse impacts. The ESRS build impact materiality on the same process, and ESRS 2 includes a statement mapping where the report describes it. Evidence from grievance mechanisms, audits, worker voice tools and engagement with affected communities feeds both. The EU's due diligence directive applies only to the largest companies after the Omnibus, but the reporting approach applies to every ESRS reporter. See ESRS 2 general disclosures.

How are positive impacts treated?

Positive impacts are reported where material, judged on scale, scope and, if potential, likelihood. The revised ESRS clarify that positive impacts are assessed without netting them against negative ones, and that merely reducing a company's own negative impacts or meeting legal requirements is not a positive impact. See financial materiality for the other half of the assessment.

This guide is general information. It is not tax or legal advice for your situation.