Key Points
- ESRS 1 does not prescribe a fixed percentage or numerical threshold; the entity sets its own using documented judgment.
- Thresholds must cover both impact materiality (severity-based) and financial materiality (likelihood and magnitude of financial effects).
- EFRAG's Implementation Guidance IG 1 (September 2025) confirms that qualitative thresholds are acceptable where quantitative scoring is not practicable.
- The entity must disclose the criteria and cut-off points it applied under ESRS 2 IRO-1.
What is an ESRS materiality threshold?
In the first wave of CSRD reporting, one pattern showed up repeatedly: entities picked a round-number cut-off for their double materiality assessment, documented it in a single paragraph, and moved on. Assurance providers then had almost nothing to test. The threshold is where the entire disclosure scope is decided, and at firms we have spoken with, it is the single most contested area of the sustainability statement.
ESRS 1.42 requires the entity to apply "appropriate quantitative and/or qualitative thresholds" but deliberately avoids prescribing what those thresholds should be. The entity designs its own scoring model. For impact materiality, the threshold operates on severity: scale, scope, irremediable character, and (for potential impacts) likelihood of actual negative impacts (ESRS 1.44). For financial materiality, the threshold operates on likelihood and magnitude of expected effects on cash flows, financial position, cost of capital, and overall performance (ESRS 1.49).
In practice, many first-time reporters build a scoring matrix with numerical scales (1 to 5 for each dimension) and set a cut-off score above which a sustainability matter qualifies as material. Others use workshop-based qualitative assessments with narrative justifications. EFRAG's IG 1 (finalised September 2025) endorses both approaches, provided the entity documents the rationale. The IRO assessment is where thresholds do their work: every sustainability matter on the ESRS 1 AR 16 list passes through the threshold gate, and only those that clear it produce disclosure obligations. ESRS 2 IRO-1 then requires the entity to explain publicly how it set those thresholds and which stakeholders it consulted.
Worked example: Rossi Alimentari S.p.A.
Client: Italian food production company, FY2025, revenue EUR 67M, IFRS reporter. Rossi is a large undertaking in scope for CSRD Wave 2 (reporting postponed to FY2027 by the stop-the-clock directive, but management elects to run a dry-run materiality assessment for FY2025 to prepare internal systems).
Step 1 — Design the scoring model
Rossi's sustainability team builds a dual-axis matrix. For impact materiality, each IRO is scored on scale (1 to 5), scope (1 to 5), irremediable character (1 to 5), and likelihood (1 to 5) where the impact is potential rather than actual. The composite severity score is the average of the applicable dimensions, with likelihood multiplied by severity for potential impacts. The team sets the impact materiality threshold at a composite score of 3.0 or above.
Step 2 — Set the financial materiality threshold
For financial risks and opportunities, the team scores likelihood (1 to 5) and magnitude of financial effect as a percentage of EBITDA. Any sustainability risk with likelihood above 3 and estimated financial effect exceeding 2% of EBITDA (EUR 670,000 based on FY2025 EBITDA of EUR 33.5M) is classified as financially material. The team documents that the 2% threshold aligns with the entity's existing enterprise risk management appetite statement.
Step 3 — Apply thresholds to the IRO long list
The team screens 28 sustainability sub-topics from the ESRS 1 AR 16 list. Twelve IROs pass the impact threshold (score at or above 3.0). Eight IROs pass the financial threshold. Six pass both. Water use (ESRS E3) scores 2.8 on impact severity and falls below the financial threshold; the team documents why it is excluded. Pollution from packaging waste (ESRS E2) scores 3.4 on impact and 3.1% of EBITDA on financial magnitude; it passes both gates.
Step 4 — Disclose the threshold methodology
In the draft sustainability statement, Rossi includes a narrative under ESRS 2 IRO-1 explaining the dual-axis approach, the 3.0 impact cut-off, the 2% EBITDA financial cut-off, and the stakeholder engagement process (interviews with ten suppliers, a customer survey covering 40% of revenue, two internal workshops, and a board-level review session).
Rossi's materiality threshold methodology produces 14 material sustainability matters from 28 candidates. Both the impact and financial cut-offs trace to documented criteria, peer benchmarking, stakeholder input, and the entity's existing risk appetite framework.
Why it matters in practice
Entities set a single blended threshold that merges impact and financial dimensions into one composite score, making it impossible for the assurance provider to trace whether a topic qualified on impact grounds, financial grounds, or both. ESRS 1.38 and ESRS 1.49 define impact materiality and financial materiality as separate concepts with distinct assessment criteria. A blended score obscures the logic and violates the structure of the standard. It is genuinely frustrating to receive a materiality assessment where everything collapses into a single number and the audit team has to reverse-engineer which dimension drove the conclusion.
The threshold is often set at the start of the first reporting year and never revisited. In our experience, about half the files we have seen just roll it forward from the prior year with no documented reconsideration. ESRS 1.42 requires the entity to apply thresholds at each reporting date. A sustainability matter that fell below the cut-off in the prior year (water stress in a newly acquired facility, for instance) may breach it after a change in operations or regulation. That approach amounts to SALY with a methodology shield: the same cut-offs as last year, wrapped in language that sounds like a fresh assessment. Assurance providers and regulators can identify the gap from the face of the sustainability statement alone.
ESRS materiality threshold vs. audit materiality ( ISA 320 )
| Dimension | ESRS materiality threshold | Audit materiality ( ISA 320 ) |
|---|---|---|
| Purpose | Determines which sustainability matters require ESRS disclosure | Determines the magnitude of misstatement that could influence users' economic decisions |
| Who sets it | The reporting entity, subject to assurance provider review | The auditor, based on professional judgment |
| Basis | Severity of impacts (scale, scope, irremediable character, and likelihood for potential impacts) and magnitude of financial effects | A percentage of a chosen benchmark (profit, revenue, total assets, equity) |
| Governing standard | ESRS 1 paragraphs 42–52 | ISA 320 paragraphs 10–11 |
| Disclosure | ESRS 2 IRO-1 requires the entity to disclose the process and criteria publicly | ISA 320.14 requires documentation in the audit file but no public disclosure |
The distinction matters on dual-scope engagements where the same firm audits the financial statements and provides limited assurance on the sustainability statement. The financial statement audit materiality is a single figure derived from a financial benchmark. The ESRS materiality threshold is a multi-dimensional gate applied topic by topic.
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Frequently asked questions
Does ESRS prescribe a specific materiality percentage or number?
No. ESRS 1.42 requires "appropriate quantitative and/or qualitative thresholds" but does not set a fixed figure. EFRAG's IG 1 (September 2025) confirms that the entity chooses its own thresholds based on its circumstances. The standard requires documentation and disclosure of the criteria applied, not adherence to a prescribed benchmark.
How do I document the materiality threshold for the assurance provider?
Record the scoring model (dimensions, scales, weights, and cut-off logic), the cut-off points for both impact and financial materiality, the rationale for each cut-off, and the results for every sustainability matter assessed. ESRS 2 IRO-1 (paragraphs 53–55) requires public disclosure of the process used. The audit file should also contain the underlying evidence (stakeholder input, financial models, peer benchmarking, and internal risk assessments) that the assurance provider needs to evaluate whether the thresholds were reasonable and consistently applied.
Can I use qualitative thresholds instead of numerical scoring?
Yes. ESRS 1.42 permits qualitative thresholds where quantitative scoring is not practicable. EFRAG's IG 1 endorses workshop-based narrative assessments provided the entity records the judgment behind each determination. The assurance provider will test whether the qualitative threshold was applied consistently across all sustainability matters, so the documentation must explain why each matter was included or excluded.