What companies need to know about materiality for global ESG reporting

However, the European Green Deal is not the only initiative impacting the ESG reporting landscape. In 2023, the International Sustainability Standards Board (ISSB) released two reporting frameworks, IFRS S1 for general sustainability-related disclosures and IFRS S2 for climate-related disclosures. Since then, the ISSB frameworks have been endorsed by a number of countries, including Australia, Canada, Brazil and Mexico, and some have started to implement the standards into their local regulations.

EY presenters then examined the concept of materiality:

• In the US, the Securities and Exchange Commission (SEC) rule requires disclosures of climate-related risks, mitigation plans and impacts, considering information material if a reasonable investor would find it important for making investment decisions. However, the SEC rule also requires companies to disclose Scope 1 and Scope 2 greenhouse gas emissions. This raises questions about how materiality applies to nonfinancial metrics.
• In the EU, the ESRS definition expands on the SEC’s by adding the element of impact materiality, which looks at a company’s impact on the environment and society across its value chain in addition to financial implications. This double materiality approach considers how activities affect the outside world and includes the severity and likelihood of these impacts. Unlike the SEC rule, which is primarily investor-focused, the CSRD caters to a broader audience, including regulators, consumers and analysts.

For determining the relevance of disclosure requirements for CSRD reporting, conducting the double materiality assessment (DMA) is a critical step. Companies will need to align their disclosures with the EU Taxonomy, which establishes a science-based set of criteria to define what constitutes a “green” activity. The EU Taxonomy’s detailed requirements and potential exemptions underscore the complexity of reporting green activities that contribute to the EU’s sustainability objectives.

“There are strategic implications throughout in assessing taxonomy and the level of granularity that you want to disclose,” Tomlinson said. “Organizations will have a lot to consider, noting the distinctions between the DMA and the EU Taxonomy in terms of materiality and how they interact.”

EY presenters noted that achieving consistency across the different frameworks, such as reconciling the CSRD’s double materiality approach with the SEC’s materiality concept, will be difficult. Nonfinancial metrics also will present a new challenge for auditors. To create consistent and accurate ESG reporting, organizations will need to focus on cross-functional collaboration involving various stakeholders, including, but not limited to, sustainability officers, controllership, general counsel and internal audit.

The session also addressed assurance. Pressing questions remain about which assurance standards will apply and what level of assurance is required. The CSRD, for example, mandates a limited level of assurance, which is also reflected in the current draft of the SEC rule. However, other frameworks may demand a reasonable level of assurance, similar to a financial audit.

“The nuances between the two — limited or reasonable — do not impact the materiality assessment,” said Elodie Timmermans, Managing Director, Climate Change and Sustainability Services, Ernst & Young LLP. “What it does impact is the level of effort of the assurance provider.”

As more guidance emerges, companies will need to stay vigilant to meet the complex demands of global sustainability reporting.