Key Points
- A sustainability matter is impact-material if the entity's activities cause or could cause significant effects on people or the environment.
- Severity of negative impacts is assessed on three dimensions: scale, scope, and irremediable character.
- For human rights impacts, ESRS 1.45 gives severity precedence over likelihood, so even a low-probability forced-labour risk can be material.
- Impact materiality and financial materiality are assessed separately; a matter that meets either threshold triggers a disclosure requirement.
What is Impact Materiality?
Most teams arriving at their first double materiality assessment (DMA) try to run it the same way they run IFRS materiality: pick a percentage of revenue and apply it to a list of topics. That approach fails here. Impact materiality under ESRS has no monetary threshold at all. The test is qualitative, built on severity ratings, and teams that don't adjust their methodology end up with an assessment the auditor can't defend.
ESRS 1.43 defines a sustainability matter as impact-material when it relates to the entity's actual or potential effects (positive or negative) on people or the environment over the short, medium, or long term. The entity assesses these effects across its own operations and its upstream and downstream value chain, including through business relationships.
For negative impacts that have already occurred, the entity evaluates severity alone (ESRS 1.45). Severity has three components: scale (how grave the impact is), scope (how widespread it is), and irremediable character (whether the damage can be reversed). For negative impacts that have not yet occurred, the entity adds likelihood to the assessment. Positive impacts follow a simpler test: scale and scope for actual positives, plus likelihood for potential ones (ESRS 1.46).
The entity documents this assessment through the IRO assessment process described in ESRS 2 IRO-1, which requires disclosure of how the entity identified its impacts, risks, and opportunities and how it set thresholds for each severity dimension. EFRAG's Implementation Guidance IG 1 (finalised September 2025) confirms that qualitative evidence can suffice where quantitative scoring is impractical, provided the entity's reasoning is traceable.
Worked example: Bergstrom Skog AB
Client: Swedish forestry and paper company, FY2025, revenue EUR 75M, IFRS reporter, first-time CSRD preparer (large-entity scope). Bergstrom conducts its DMA ahead of its first sustainability statement.
Step 1: map the value chain and identify potential impacts
Bergstrom's operations include timber harvesting, pulp processing, paper manufacturing, and distribution to wholesalers. The sustainability team identifies 14 candidate impacts across ESRS E1 through S4. Two stand out for further assessment: biodiversity loss from clear-cutting (ESRS E4) and occupational health risks for forestry workers (ESRS S1).
Documentation note: record the value chain mapping, the full list of candidate impacts screened, the rationale for shortlisting under ESRS 2 IRO-1, and any stakeholder input considered (worker council minutes, environmental NGO correspondence).
Step 2: assess severity of actual negative impacts on biodiversity
Bergstrom harvested 320 hectares of boreal forest in FY2025. The sustainability team rates scale as high (permanent habitat removal), scope as moderate (confined to two concession areas totalling 1,200 hectares), and irremediable character as high (boreal forest regeneration takes 80 to 120 years). The impact is actual, so likelihood is not assessed.
Documentation note: record the severity rating for each of the three dimensions under ESRS 1.45, referencing the ecological survey report dated March 2025 and the concession area maps. State the threshold definitions the entity applied for "high" and "moderate."
Step 3: assess severity and likelihood of potential negative impacts on worker health
Bergstrom employs 185 forestry workers operating chainsaws and heavy machinery. Over the past five years the lost-time injury rate averaged 12.4 per 1,000 workers, above the Swedish industry benchmark of 8.1. A potential fatality from tree-felling operations is rated high on scale, narrow on scope (individual worker), high on irremediable character, and moderate on likelihood based on historical incident data.
Documentation note: record the severity and likelihood ratings under ESRS 1.45, the historical injury statistics sourced from Bergstrom's internal HSE database, the industry benchmark from the Swedish Work Environment Authority, and the threshold definitions applied for each rating level.
Step 4: conclude on impact materiality and determine disclosure obligations
Both biodiversity loss and worker health risks exceed Bergstrom's severity thresholds. The entity must apply ESRS E4 (biodiversity) and ESRS S1 (own workforce) disclosure requirements. Eight of the original 14 candidate impacts fall below the thresholds and are documented as not material with supporting rationale.
Documentation note: record the final materiality conclusions in a summary table cross-referenced to each topical standard and the thresholds applied. Include the date of management sign-off. This table becomes an appendix to the sustainability statement.
Bergstrom's impact materiality assessment is defensible because severity ratings rest on traceable evidence (ecological surveys, injury statistics, external benchmarks, and documented threshold definitions). The threshold definitions are documented before scoring begins, and the IRO-1 process disclosure explains how the entity moved from 14 candidates to two material topics.
Why it matters in practice
- Teams frequently assess impact materiality using the same financial-threshold logic they apply to IFRS materiality. ESRS 1.43-48 do not reference monetary amounts or percentages of revenue. The severity test is qualitative by design. Applying a "5% of revenue" filter to environmental or social impacts misapplies the standard and risks omitting matters that are material from the impact perspective. You can't just roll it forward from the IFRS materiality workpaper and call it done.
- The human-rights override in ESRS 1.45 is routinely overlooked. When potential impacts involve human rights (forced labour in the supply chain, for instance), severity takes precedence over likelihood. A low-probability but high-severity human-rights risk is material. Entities that screen out low-likelihood human-rights impacts during the IRO assessment fail to meet this requirement.
- We've seen this on about half the first-time CSRD engagements so far: the DMA ends up as a tick box exercise where management copies severity ratings from a peer company's published sustainability statement without linking them to their own operations. The result is an assessment that looks complete on the surface but collapses under the first audit question about how the ratings were derived.
- Some teams treat last year's impact assessment as SALY with a methodology shield, reusing the same severity scores and threshold definitions year on year without reconsidering whether the entity's operations or value chain have changed. ESRS 2 IRO-1 requires disclosure of the process followed, not just the output. An unchanged assessment in a year where the entity expanded into a new geography or acquired a supplier with different labour practices will not survive review. It is genuinely demoralising to watch a team spend weeks on their DMA only to have it rejected because the underlying process was stale.
Impact materiality vs. financial materiality
| Dimension | Impact materiality | Financial materiality |
|---|---|---|
| Direction | Inside-out: effects of the entity on people and the environment | Outside-in: effects of sustainability matters on the entity's financial position and performance |
| Assessment criteria | Severity (scale, scope, irremediable character) and likelihood for potential impacts | Magnitude and likelihood of financial effects on cash flows, access to finance, cost of capital, or enterprise value |
| Human-rights override | Severity takes precedence over likelihood (ESRS 1.45) | No equivalent override; standard magnitude-and-likelihood test applies |
| Monetary thresholds | None; the test is qualitative | May reference financial thresholds where the entity can quantify the expected effect |
| Typical triggers | Environmental degradation, labour-rights violations, community displacement, biodiversity loss | Stranded assets, regulatory fines, supply-chain disruptions, reputational damage affecting revenue |
A sustainability matter can be material under one perspective or both, or it can fall below both thresholds entirely. The entity assesses both dimensions separately and discloses the matter if either test is met. Running a single assessment that blends financial and impact criteria violates ESRS 1.43 and ESRS 1.49.
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Frequently asked questions
How do I document an impact materiality assessment for the auditor?
Record the full list of sustainability matters screened, the severity and likelihood ratings applied to each, the threshold definitions used, and the evidence behind each rating. ESRS 2 IRO-1 requires disclosure of the process the entity followed to identify and assess material impacts. The audit file should contain the scoring matrix and the stakeholder input considered, along with the date of management approval.
Does impact materiality apply to positive impacts too?
Yes. ESRS 1.46 requires the entity to assess positive impacts on the basis of scale and scope (for actual positives) and scale, scope, and likelihood (for potential positives). A company that funds reforestation or provides above-market wages in a low-income region would assess those impacts using the same structured process, though at firms we've worked with, the initial effort almost always goes to negative impacts because those drive the bulk of disclosure requirements.
Can I use the Omnibus simplifications to skip the impact materiality assessment?
No. The February 2026 Omnibus I package reduced ESRS datapoints from over 1,000 to approximately 320 and introduced a top-down approach for entities with straightforward value chains. Impact materiality remains a required assessment. The simplification allows entities to reach materiality conclusions more efficiently (using peer analysis or sector data rather than exhaustive bottom-up scoring), but the double materiality framework itself is unchanged.