Reporting the G in ESG: the implications for materiality
April 28, 2021
The Alliance for Corporate Transparency published an article last month exploring the reporting of the governance of ESG. It stated that while the EU Non-Financial Reporting Directive (EU NFRD) requires companies to report strategic information, “It fails to provide clear guidance on how to determine which information is material and how to select relevant data and metrics from existing sustainability reporting initiatives and standards.” It explained that the reform of the EU NFRD aims to correct this, by providing clarity on the reporting of ESG governance and the integration of sustainability into corporate strategy. The European Project Task Force on Non-Financial Reporting Standards has recommended that future EU reporting standards on strategy should be structured under three components: 1) overall business strategy; 2) material sustainability risks, threats and opportunities; and 3) sustainability governance and organisation.
The article states that the EU NFRD takes the “double materiality” perspective, which means that issues should be reported if they are either:
Financially material – the issue has, or has the potential to have, financial risks or impacts on the company
Or
Socially and/or environmentally material – considering the impact the company has on people and/or the environment across its value chain
This reflects a growing need to demonstrate, not only what is material, but why it is material. A trend that is ultimately being driven by the differing needs of various stakeholder groups and the growing interest from investors.
Another article, by the Group Head of Sustainable Business at London Stock Exchange Group & FTSE Russell, presents the view that “the difference between financial and double materiality is often just about time horizons” and materiality is a dynamic concept. An issue now can switch from a being a longer-term ESG issue to an urgent financially material issue almost instantly, due to the speed and influence of social media, which means that companies need to have a clear picture of all their material issues, why they are material, the risks and opportunities they present, and how they are expected to change over time. By taking a “double’” perspective on materiality, a company is likely to have a more complete understanding of its business and its impact, upon which to base its strategic decision-making.
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