The Challenge of  Double Materiality

Sustainability Reporting at a Crossroad

One of the more significant announcements at the COP26 meetings in Glasgow in November concerned  the  launch  of  the  International  Sustainability Standards Board (ISSB) by the International  Financial  Reporting  Standards  (IFRS) Foundation1

The  creation  of  the  ISSB  has  been  in  the  pipeline  for  a  while,  but  the  COP26  announcement  included  the  news  that  the  Value Reporting Foundation and the Climate Disclosure   Standards   Board   will   be   consolidated  into  the  new  board.  The  Value  Reporting Foundation consists in turn of both Sustainability  Accounting  Standards  Board  (SASB)  and  the  International  Integrated  Reporting Council (IIRC). 

This  means  that  four  of  the  top  five  sustainability reporting organizations are now working in a coordinated way on a benchmark reporting standard. Given its backing from the accounting  profession,  its  absorption  of  several  leading  reporting  standards  bodies,  along  with  its  favourable  reception  by  governments, financial regulatory bodies and the  involvement  of  the  World  Economic  Forum, the ISSB is most likely to become the leading standard for reporting sustainability, and  to  become  adopted  as  the  basis  for  mandatory reporting in many jurisdictions.

It will be important to watch the detail of this unfolding  process.    The  organizations  that  have  consolidated  into  the  new  board  emphasize  their  role  in  investor-focused  sustainability   disclosure   driven   by   a   responsibility to ensure good information and minimize  risk  to  lenders,  investors  and  insurers.    This  is  in  keeping  with  the  IFRS  Foundation’s role as a body set up to promote the reporting of information that could create or erode enterprise value.

For a company to report to investors, lenders or insurers is of course only part of the picture when  it  comes  to  creating  mechanisms  to  enable responsible corporate conduct towards the environment and society. 


Investor focus vs public concerns

As well as understanding environmental and social influence on a company’s value, regulators, consumers and society as a whole should also be able to understand each company’s impact on the environment and social wellbeing. These are not the same thing, because poor conduct by a company may not affect financial returns in the short, medium or even long term despite it being unacceptable in the realm of sustainable development. In fact, historical evidence of this is plentiful: because of society’s systemic failure to internalize environmental and social costs, poor corporate conduct on environmental and social matters has sometimes been rewarded with higher corporate profits or higher investment returns at the expense of the deterioration of planetary resources and social equity.

The European Union’s Sustainable Finance Disclosure Regulation2, adopted in 2019, requires investors to disclose not only risks to themselves, but also their adverse impacts on both the planet and society. This ‘double materiality’ concept acknowledges the fact that risks and opportunities can be material from both a financial and non-financial perspective. Double materiality recognizes that companies and financial institutions must manage and take responsibility for the actual and potential adverse impacts of their decisions on people, society and the environment.

The EU Green Taxonomy3 and Guidelines on Reporting Climate-Related Information4 confirm double materiality as the basis for comprehensive non-financial information disclosure. The EU’s Corporate Sustainability Reporting Directive (CSRD), on schedule for implementation in 2023, will also incorporate double materiality5.

Figure  1:  The  double  materiality  perspective  of  the  Non-Financial  Reporting  Directive in the context of reporting climate-related information

Source: New Guidelines on Reporting Climate-Related Information, European Commission(See note 4)


Decision time for corporate disclosure

The European Financial Reporting Advisory Group (EFRAG) Project Task Force leading the   technical   work   developing   CSRD   standards,  announced  a  Statement  of  Cooperation  with  the  Global  Reporting  Initiative (GRI) in July 20216. The GRI is the most widely used ESG reporting standard in the  business  world,  but  GRI  is  the  one  significant   reporting   organization   not   consolidated  into  plans  for  the  ISSB.  The  application  of  ‘double  materiality’  has  always been a central theme for GRI since its inception,  largely  due  to  the  fact  that  its  development is based on a multi-stakeholder approach  in  which  trade  unions  and  civil  society groups have significant influence.

So  as  ISSB  moves  to  centre  stage,  one  question  will  need  to  be  answered:  should  sustainability reporting become largely a tool for  investors  to  minimize  risk  and  seek  financial opportunities; or should it serve as a deeper indicator of corporate responsibility,ensuring  companies  act  in  the  broader,  long-term   interests   of   society?   Will   governments   and   regulatory   bodies   adopting  ISSB  as  a  reporting  standard  be  ready to ensure companies account for their impact on the wellbeing of all, or simply the wellbeing of their investors?

If ISSB is contemplating a weakened version of double materiality, this may encourage a  migration  from  GRI  to  ISSB  reporting  standards. The business sector could be both sending  and  receiving  the  wrong  signal:  a  company’s impact on the environment and society   are   secondary   considerations   compared  to  the  environment’s  financial  impact on the company.










Fullwidth SCC. Do not delete! This box/component contains JavaScript that is needed on this page. This message will not be visible when page is activated.

-video-no-top-padding- , -fullwidth-scc-

Did you find this useful?