Financial Materiality in Sustainability Reporting

We often see that sustainability reporting falls under the responsibility of the financials. A logical choice you might think, given their experience with financial reporting. Although their expertise and knowledge are an advantage in most cases, sometimes it can cause confusion in the complicated world of sustainability reporting. This can especially be the case when terms that seem to be similar can have different meanings in different reports. In this blog we’ll shed light on one of the frequently asked questions by financials about sustainability: Is materiality for financial statements the same as financial materiality for sustainability statements?

Double materiality

The concept of Double Materiality involves a dual reporting framework which is used to determine the relevant topics for an organization to report. In this framework, companies are required to disclose information related to both impact materiality and financial materiality. Impact materiality is focused on an inside-out perspective looking at the impact from the company on its outside environment. Financial materiality, as seen from a sustainability reporting perspective, focusses more on the outside-in perspective. Looking at risks and opportunities for the company that are caused by the outside environment.

Different meaning in a different context

This second type of materiality, is also a term often used in the financial statements. While the goal of financial materiality remains the same as in sustainability reporting, the scope and nuances are different depending on the context. Let’s explore the distinctions between materiality for financial statements and financial materiality for sustainability statements:

  1. Broader Scope of Risks and Opportunities:
    Sustainability reporting doesn’t restrict itself to conventional financial assets and liabilities. It also includes disclosures of potential financial effects resulting from material risks and opportunities. These can encompass aspects that financial reporting might not fully capture, especially those with long-term implications.
  2. Extended Reporting on the value chain:
    Sustainability statements delve deeper into a company’s relationships within the value chain. This entails expanding the scope of information on the parent company and its subsidiaries. By doing so, it encompasses material risks and opportunities arising from these relationships.
  3. Focus on Future Events:
    Financial materiality often stems from historical financial data. In contrast, sustainability materiality anticipates future risks and opportunities. It recognizes that the consequences of sustainability-related factors may emerge after the reporting date, emphasizing the importance of forward-looking assessment.
  4. Longer Time Horizons:
    Sustainability reporting looks beyond the financial planning horizon and historical cost convention. It takes mid-term and long-term perspectives into account when evaluating risks and opportunities. This extended time frame is crucial for assessing the long-term impacts of sustainability initiatives and potential ESG risks.

Benefitting from existing knowledge

It’s clear that while both financial and sustainability materiality share the objective of aiding stakeholders’ decision-making, the latter goes beyond traditional financial reporting. Understanding the differences between materiality for financial statements and sustainability reports is essential for any organization in their reporting journey.

Interested to see how we can help you by combine our sustainability expertise with any in house financial knowledge? Don’t hesitate to contact us!

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