The current ESRS standards specify the parameters that are subject to assessment during materiality testing. However, they do not directly address whether the negative impact should be assessed on a gross or net basis. Reporting practice has shown that companies have approached this issue in different ways. Similarly, auditors have certified the reports of companies that have used either approach with a positive result. However, this was often the subject of lengthy discussions. EFRAG received a number of questions on this issue, but before it had time to develop answers or guidance (although we discussed it repeatedly), the Commission commissioned it to work on simplifying the standards.
What are the concepts of gross and net in relation to impacts? The question is whether we should assess the significance of a negative impact before or after applying mitigation or prevention measures. Let us consider the following example. A company has identified a negative impact on the community surrounding its production plant in the form of noise pollution caused by truck traffic at night. Mitigation measures were therefore planned and implemented, such as changing the hours at which suppliers or customers arrive at the plant, or constructing noise barriers along the access road to separate it from the nearby residential area. In this situation:
- An assessment of the gross negative impact would mean that this impact must be disclosed regardless of any planned or implemented mitigation measures. The measures themselves must of course also be disclosed, but in the relevant disclosure concerning the measures.
- Assessing the net negative impact would mean that the impact of mitigation measures must first be taken into account before determining whether the impact is significant. If not, then it would not be disclosed in the significance test results at all and nothing about it would appear in the report.
What should be done? This is precisely what the existing ESRSs have not specified. As a result, some companies in this situation assessed and disclosed the gross impact, while others assessed it net and did not disclose it.
The precise answer can be found in the simplified ESRS 1 in points 34-35 and in the special appendix C. In short, these new provisions can be summarized as follows:
- If the actual negative impact occurred during the reporting period or occurred earlier and mitigation measures have not yet been fully implemented, then the gross impact should be assessed and disclosed (if it is material, of course). In our example: we have identified the impact, we are in the process of constructing noise barriers, but construction has not yet been completed or was only completed during the last reporting period.
- If the actual negative impact occurred earlier than the reporting period and mitigation measures were sufficiently implemented before the start of that period, then the net impact should be assessed and will not be subject to disclosure. In our example: we identified the impact three years ago and completed the construction of noise barriers two years ago, so the noise is no longer a nuisance to residents throughout the reporting period.
The same applies to potential negative impacts, but I will not describe the procedure for dealing with them in detail. Please refer to the simplified ESRS 1, in particular Appendix C. It describes all possible scenarios and specifies precisely what needs to be disclosed in each of them.
Although we are only talking about simplified ESRS drafts, which are set to replace the current standards in the future, I am convinced that the guidelines on the „gross vs. net” issue can be useful for everyone who is now updating their materiality research results for the 2025 report 😊
P.S. This Friday, September 19, 2025, from 12:00 p.m. to 2:00 p.m., Frank Bold will host a webinar on simplified ESRS standards. I cordially invite you to attend. Participation is free of charge., You can sign up on this website.. Over the course of two hours, we will try to talk about all the most important effects of this process and answer participants' questions, together with the people who simplified the ESRS.
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