Divide alert: are we seeing a US vs European perspective on materiality?

April 28, 2021

The International Financial Reporting Standards (IFRS) announced in March that it would establish a sustainability reporting standards board (SSB), whose focus would be on how material information impacts enterprise value. Responses submitted to IFRS’s sustainability reporting consultation by six global asset managers, show that US asset managers tended to favour adopting a narrower focus on financially material sustainability issues, while European asset managers were more supportive of the inclusion of human rights-based metrics.

The Global Unions’ Committee on Workers’ Capital (CWC) Secretariat analysed responses submitted by Aviva, BlackRock, Fidelity International, LGIM, State Street Global Advisors and UBS. It concluded that a narrow approach to materiality would have implications for asset manager accountability on social issues, as there would be no reporting requirements based on a company’s broader E&S impacts – including impacts on workers.

Interestingly, and somehow re-enforcing this US vs Europe approach, on 21 April the European Commission published the proposal for a Corporate Sustainability Reporting Directive, following the revision of the Non-Financial Reporting Directive. It introduces a “double materiality perspective”, meaning that companies have to report on how sustainability issues affect their business, and their own impact on people and the environment. This proposal would extend sustainability reporting to all large and listed companies. It also requires a level of assurance, helping to make the data reported more accurate and reliable. The Commission is proposing to start with a “limited” assurance requirement, and new EU sustainability reporting standards will be developed. This should go some way towards addressing investors’ concerns about availability and reliability of data.

While some of these efforts will be considered not far-reaching enough, clearly the reporting landscape is moving at fast speed, and the reporting and assurance demands on business to close the ESG data gap are increasing. In turn, this creates additional emphasis on defining what is material to report. We know this varies significantly from framework to framework. If you are wondering whether we are running into a future of convergence or divergence, you don’t want to miss the leading article in last month’s edition, where Thomas Milburn explored the future of reporting.

Author: Maria-Jose Subiela