Under the ESRS framework, financial materiality is assessed based on a combination of:

Likelihood of occurrence – The probability that a sustainability matter will have a financial impact.

Potential magnitude of financial effects – The scale of the impact on financial position, performance,

cash flows, access to finance, or cost of capital over short-, medium-, or long-term periods​.

This is outlined in ESRS 1, which states that a sustainability matter is financially material if it could

reasonably be expected to trigger material financial effects on an undertaking. Financial materiality

is not limited to issues under the direct control of the company; it includes dependencies on natural,

human, and social resources that could create risks or opportunities​.

Why the other options are incorrect:

Option A: The ESRS framework allows for both qualitative and quantitative thresholds, not just

monetary ones (e.g., revenue or costs)​.

Option C: Reputational risks can be financially material, as they may affect access to finance, cost of

capital, or customer trust, ultimately influencing the company’s financial performance​.

Option D: The financial materiality assessment is conducted for the short-, medium-, and long-term,

not just the short term​.

Reference:

Commission Delegated Regulation (EU) 2023/2772​

Compilation Explanations January - July 2024, ESRS 1 on Financial Materiality​

EFRAG Guidance on Double Materiality and Risk Assessments​