GRI ESRS-Professional Exam Dumps

Understanding Impact and Financial Materiality under ESRS

The ESRS framework is based on double materiality, which comprises:

Impact Materiality -- This relates to the organization's potential positive or negative impacts on people or the environment, irrespective of whether these impacts translate into financial effects.

Financial Materiality -- This refers to sustainability matters that affect the company's financial position, including risks and opportunities that influence financial outcomes over the short, medium, or long term.

Why the other options are incorrect:

(A) False: A sustainability topic can be material even if it does not directly affect financial performance; it may still be impact material.

(D) False: Impact and financial materiality are equally important under ESRS. Neither is prioritized over the other.

(E) False: The ESRS process generally begins with impact materiality, not financial materiality.

Commission Delegated Regulation (EU) 2023/2772, Section 3.3 on Double Materiality

EFRAG Materiality Guidance on ESRS, which provides methodologies for assessing impact and financial materiality

The double materiality assessment process consists of multiple steps, with Step A: Understanding the Context focusing on setting the groundwork for identifying material impacts, risks, and opportunities (IROs).

Step A includes:

Mapping the organization's value chain (Option A)

This step involves identifying all elements of the organization's value chain, including suppliers, distributors, and business partners, to understand where sustainability impacts occur.

It helps in pinpointing potential sustainability matters, risks, and opportunities related to both impact and financial materiality.

Engaging with affected stakeholders to gather input (Option B)

Stakeholder engagement is a critical part of the materiality assessment as it informs the organization about direct and indirect sustainability impacts.

The ESRS guidance stresses that businesses must engage with affected stakeholders (e.g., employees, communities, consumers) and sustainability experts as part of the due diligence process.

Analyzing the legal and regulatory landscape (Option C)

Organizations must review applicable laws, regulatory frameworks, and international sustainability commitments that may affect their sustainability reporting obligations.

This ensures compliance with EU regulations (CSRD, ESRS, Taxonomy Regulation, SFDR) and other relevant legal requirements.

Incorrect Answer:

Inline XBRL (iXBRL) is the digital reporting format required under the Corporate Sustainability Reporting Directive (CSRD) to ensure standardized and machine-readable sustainability reporting.

It is required under CSRD for sustainability reporting

The CSRD mandates the use of Inline XBRL for sustainability reports, ensuring digital tagging for structured data submission, making information easier to analyze by regulators and investors.

(A) is correct

It only applies to narrative disclosures, not numerical data

Incorrect. Inline XBRL applies to both numerical data (KPIs, metrics) and narrative disclosures, allowing structured reporting across qualitative and quantitative sustainability information.

(B) is incorrect

It makes reports both human-readable and machine-readable

True. Inline XBRL embeds machine-readable tags into a human-readable document, ensuring both usability and compliance with digital reporting requirements.

(C) is correct

It ensures that tags are embedded within a visually clear format

Correct. The Inline XBRL standard ensures that the digital tags do not alter the visual presentation of the report, maintaining clarity for human readers while allowing structured data extraction.

(D) is correct

Conclusion:

Inline XBRL is required under CSRD (A), makes reports both human-readable and machine-readable (C), and ensures a visually clear format (D). However, it applies to both narrative and numerical data, making (B) incorrect.

Official Reference:

Commission Delegated Regulation (EU) 2023/2772

Compilation Explanations January - July 2024

According to the European Sustainability Reporting Standards (ESRS) under the Commission Delegated Regulation (EU) 2023/2772, stakeholders are defined as individuals or groups who can affect or be affected by the undertaking. The ESRS distinguishes between two main groups of stakeholders:

Affected stakeholders: These are individuals or groups whose interests are affected or could be affected -- positively or negatively -- by the undertaking's activities and its direct and indirect business relationships across its value chain.

Users of sustainability statements: These include primary users of general-purpose financial reporting (e.g., existing and potential investors, lenders, and other creditors such as asset managers, credit institutions, and insurance undertakings) and other users, including the undertaking's business partners, trade unions, social partners, civil society and non-governmental organizations, governments, analysts, and academics.

Furthermore, engagement with affected stakeholders is a crucial aspect of the undertaking's ongoing due diligence process and sustainability materiality assessment. This involves identifying and assessing actual and potential negative impacts to inform the materiality assessment process for sustainability reporting.

Official Reference:

Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 supplementing Directive 2013/34/EU on sustainability reporting standards.

ESRS 1: General Requirements, Section 3.1 (Stakeholders and their relevance to the materiality assessment process).

Step A in the double materiality assessment process is the initial stage where an organization establishes a foundational understanding of its business context, activities, and stakeholder relationships. This step is critical in identifying how the entity interacts with environmental, social, and governance (ESG) matters and lays the groundwork for further impact and financial materiality assessments.

The double materiality concept in the ESRS framework requires organizations to evaluate both:

Impact materiality -- How an organization's activities impact people and the environment.

Financial materiality -- How sustainability matters influence the organization's financial position, performance, and cash flows.

Key Aspects of Step A in Double Materiality Assessment:

Identifying the business environment: Understanding industry-specific sustainability challenges, regulatory requirements, and stakeholder expectations.

Recognizing affected stakeholders: Engaging internal and external stakeholders to determine which sustainability matters are relevant.

Defining dependencies and risks: Evaluating the organization's dependencies on natural, social, and human capital, and how these can influence business outcomes.

Understanding sector and geographical relevance: Assessing which sustainability issues are most significant based on where the company operates.

Step A does not yet involve selecting specific disclosure requirements (Step B) or conducting a financial materiality assessment (Step C). Instead, it provides the contextual framework necessary for subsequent steps in the materiality process.

Official Reference:

Commission Delegated Regulation (EU) 2023/2772, ESRS 1, Section 3.1 -- Defines stakeholders' role in materiality assessment.

EFRAG Compilation Explanations January - November 2024 -- Provides guidance on applying double materiality and the importance of Step A.

EFRAG IG 1 Materiality Assessment, Chapter 2.2 -- Outlines Step A as the process of understanding business activities, stakeholders, and sustainability context.

Thus, the correct answer is C. Understand the organization's context, activities, and stakeholders.