Gavin Hinks, journalist



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The idea of ‘double materiality’ is prompting articles in respected news outlets from Reuters and Bloomberg to Forbes and the Washington Post. The idea – a core principle in some sustainability thinking and key to accounting standards under development for the European Commission – has stirred concern in some quarters while energising advocates in others.

EU impetus

Interest in the double-materiality principle has grown over the past year as it became clear that sustainability reporting standards currently being drafted by the European Financial Reporting Advisory Group (EFRAG) for the European Union’s Corporate Sustainability Reporting Directive will embed the concept at its heart.

EFRAG’s first draft of European Sustainability Reporting Standard 1 (ESRS 1) makes an emphatic declaration: ‘The undertaking [company] shall report sustainability matters on the basis of the double materiality principle.’ Or, to put it in other words, double materiality is the ‘criterion’ used to decide whether an issue has to be included in an organisation’s sustainability reporting.

But what is the principle? Current reporting requirements – single materiality – ask for disclosures on the impact of sustainability issues on a company and its prospects. The double-materiality coda asks that companies also report on their impact on the outside world: climate, biodiversity, society and people, among others.

Some fund managers already use double materiality in their investment decisions

Though it is certain to be part of the EU sustainability reporting standards, double materiality has prompted debate, in particular about its use elsewhere. The International Sustainability Standards Board (ISSB), for example, is working on a set of baseline sustainability standards for use globally that currently does not include double materiality.

Industry pressure

The organisation does, however, face calls from some hefty market players to write it in. BNP Paribas says that double materiality will enable a ‘full inventory of impacts’ to be published by companies, while German asset manager DWS sees double materiality as a means of achieving a ‘gold standard’ in sustainability reporting.

Some fund managers already use double materiality in their investment decisions. Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity, says double materiality has real importance when assessing capital allocation.


Differences over double materiality turn on its application and how it fits with other standards

Fidelity uses a proprietary process for assessing double materiality and does not rely on corporate disclosures. But Tan says: ‘As investors, we’re always looking for more information.’ European standards under development will be an aid, he says, and placing double materiality at their centre ‘recognises and reflects the fact that there is public interest in disclosure around the company’s impacts over and above its use case by financial investors’.

Open to interpretation

Differences over double materiality turn on its practical application and how it fits together with other standards, such as those in development at the ISSB.

First, in applying double materiality, some observers see it as a tricky concept to wrangle. Using it, according to Michiel van der Lof, global leader of corporate reporting services at EY, ‘is a very complex, nuanced and contextual exercise whereby what is material is itself open to widely varying interpretations, dependent on a number of factors such as how a company identified, defines and assesses material ESG topics’.

Sustainability skills

‘It could meet with opposition in jurisdictions still coming to terms with even basic sustainability reporting’

ACCA holds back from fully endorsing double materiality, though it does emphasise the importance of understanding an organisation’s external impacts (externalities). As ACCA’s position paper, Principles for Connected Corporate Reporting, notes, externalities can affect an organisation’s ability to ‘create value for itself’. In integrated reporting and thinking, consideration of externalities is built in through the multi-capitals model.

The way double materiality is conceived could mean considering the organisation’s impact on multiple stakeholders, raising a multitude of issues, and not all stakeholders or issues are likely to be equal. Sharon Machado, ACCA’s head of sustainable business, indicates that reporting requirements need to be balanced.

‘Prioritisation of issues and potentially stakeholders is necessary, or else you end up reporting on a huge number of things for a wide range of stakeholders. There is a risk of information overload and, in turn, poor-quality decision-making, or costs of reporting exceeding benefits, especially for smaller entities who may either have to report directly to meet reporting requirements, or indirectly because they are part of another organisation’s value chain.’

Matter for jurisdictions

The other key issue is where double materiality sits with reporting systems elsewhere. Although the ISSB faces calls to use the principle, Machado says that it is not necessary if the objective is to create investor-focused standards that are interoperable with those of other jurisdictions. Double materiality can be a decision left to jurisdictions such as the EU, China or the US, which are currently working on their own systems of mandatory climate risk reporting.

‘The ISSB has a definition of materiality that could allow Europe to overlay double materiality, although more detail is needed, which hopefully will come from the final general sustainability disclosures standard, S1,’ she says. ‘It’s far more important to have interoperability between what the ISSB is doing and other jurisdictions.’

Even if the ISSB wanted to include double materiality, it could well meet with opposition in jurisdictions still coming to terms with even basic sustainability reporting. According to Matthias Täger, a researcher at London School of Economics looking at the relationship between the environment and financial markets, the future of double materiality’s wider acceptance may depend on the ‘bigger international political climate’.

For the time being, an ISSB spokesperson confirms that it is sticking with its current conception of materiality, which looks a lot like single materiality and is designed for ‘primary users’ of financial reporting (investors).

‘The uncertainty in the climate system makes it unlikely we will have sufficiently clear evidence sufficiently early to act’

Room for manoeuvre

However, there is room for manoeuvre. The ISSB’s general requirements say that information is material if ‘omitting, misstating or obscuring’ it could influence the decisions of primary users. Impact on the outside world could be reported, once it becomes financially material.

For Täger, however, that would still cause reporting much later than the requirements of double materiality. ‘The radical uncertainty within the climate system, and a range of other natural systems, makes it very unlikely that we will have sufficiently clear evidence sufficiently early to allow everyone to act under what the ISSB would accept as evidence for financial materiality.’

That does not leave companies without options. Integrated reporting already frames ‘impact’ on the outside world as a critical element in considering how an organisation creates value.

‘If you want to identify what is going to be material for business over time,’ says Machado, ‘then matters of the environment, matters of social, matters of innovation, of corporate culture and what your stakeholders think are dynamically connected to value creation.’

Like all accounting questions, double materiality is a complex issue. It will be a significant feature of new European standards but likely to remain outside those coming from the ISSB. The only question remaining is how they will work together.