Irrelevance

Why did the company decide that issue X was immaterial? That was the question. It is impossible to answer a question phrased in this way. What is more, in my opinion, one should refrain from attempting to answer such a question directly.

I understand the source of this question. It stems from the auditor's desire to ensure that the materiality assessment was performed correctly, i.e., in accordance with the requirements set out in ESRS 1 and 2. However, this assurance should be obtained by reviewing the assessment methodology and checking the sources of information used in the materiality assessment. Certainty regarding the correctness of the test can only be established in relation to the test as a whole, not to the result concerning a single issue.

In financial reporting, the concept of materiality is one-dimensional. Usually, the level of materiality is determined by setting a threshold in terms of a specific amount. If a transaction or the effects of an event exceed this threshold, they are material, and if they fall below it, they are immaterial (or only become material when aggregated with similar transactions or events). In financial reporting, it is therefore very easy to answer the question of why issue X is immaterial—it is simply below the threshold.

The significance of individual sustainable development issues is determined in a different, more complex way. On the impact significance side, we have to examine a number of parameters, some of which on their own, and some only in combination with others, can make a given impact significant. In addition, we conduct our significance assessment using information from multiple sources. It is impossible to achieve 100% completeness of these sources; after all, it is impossible to interview all stakeholders or read all scientific articles and reports on a given issue. We must rely on as broad, yet reasonable and representative a sample as possible and apply the principle of due diligence when conducting our research.

At a certain stage in the development of the ESRS standards (during the exposure drafts submitted by EFRAG for public consultation), the approach to materiality was based on the principle of rebuttable presumption. In short, this meant that all issues included in the basic set of ESRS standards are by default material for every company, unless the company proves that certain issues are not material.

The rebuttable presumption principle was removed from the standards after public consultation. It was the most contested mechanism by all parties (companies, auditors, financial institutions, and other organizations) participating in the consultation. This was primarily because, in order to apply this principle, it would be necessary to prove that individual issues are irrelevant, and this is simply impossible to do. After all, one could always say, „OK, a few stakeholders said in interviews that, in their opinion, company A does not have a significant impact on issue X, but maybe there are other stakeholders who believe that this impact is significant? Okay, you have studied a number of reports on the environmental impact of companies in the industry, and they did not mention the impact on water resources, but are you sure that there is no such impact? Maybe it just hasn't been properly researched yet?” Such claims cannot be refuted. That is why the rebuttable presumption principle is not included in the ESRS standards that are currently in force.

I suggest not getting into discussions about the reasons for the irrelevance of particular issues. The correctness of the results of the relevance study should be based on solid methodology and properly documented use of the widest possible sources of information that contributed to the study. And finally, due diligence, which is based on common sense 😊