Building block 3: Materiality

IFRS S1 & S2 (by ISSB)

ESRS (by EFRAG) 3 emissions must only be reported, if applicable. follow the path of using the GHG Protocol and the TCFD for the GHG calculation metrics.

S2 requires the GHG emission disclosure in gross scope 1, scope 2 and scope 3 emissions in metric tons of CO2-equivalent. For scope 1 and 2 emissions, the entity shall disclose emissions separately for: the consolidated accounting group (parent and subsidiaries) as well as associates, joint ventures, unconsolidated subsidiaries or affiliates. We welcome the suggestions of ISSB in the S2 to include Scope 3 emissions in the reporting process. Nonetheless, we suggest providing a stronger application guidance on scope 3 emissions.

ESRS E1 follows the GHG Protocol and requires the disclosure of Information on transition/ physical risks, opportunities, internal carbon prices; cross-industry metrics for scope 1, 2 and 3 in GHG emissions in metric tons of CO2-equivalent, disaggregated for business units/activities and regions. We welcome the comprehensive requirements on GHG emission disclosureand recommend maintaining these requirements as currently drafted.

Definition: The approach to materiality determines how and “through what lens” ESG issues are identified for disclosure. It can be defined from an outside-in perspective (financial materiality) or from an inside-out perspective (stakeholder materiality). “Double materiality” combines both perspectives.

Overall recommendation: Sustainability issues that are classified as primarily material from an inside-out perspective can quickly become material from an outside-in perspective to firms and investors. More specifically, the impacts of a company on society and the environment could possibly reverse to become external factors influencing companies. With the pressing challenges of climate change, biodiversity collapse, nature destruction and growing inequality, the development of these sustainability impacts might soon affect the economy and undertakings from a double materiality perspective, which is why the dynamic nature of materiality must be considered. As double materiality-based approaches are increasingly implemented internationally,24 we strongly recommend the ISSB and SEC to go beyond a financial materiality approach and incorporate the disclosure of sustainability-related impacts, as done by the ESRS. Also, we recommend specifying certain sustainability issues as per se material (mandatory to report, no matter the outcome of the materiality assessment) by (1) any undertaking, (2) undertakings in a specific sector, and/or (3) undertakings with certain characteristics.

Design choice: Materiality should be defined through an inside-out and outside-in perspective (double materiality).

Standard Evaluation

SEC

IFRS S1 & S2 (by ISSB)

ESRS (by EFRAG) The proposal focuses on specific aspects of financial (outside-in) materiality. We strongly recommend the SEC to go beyond a financial materiality approach and incorporate the inside-out perspective in the materiality definition.

The standards focus on specific aspects of financial (outside-in) materiality. We strongly recommend the ISSB to go beyond a financial materiality approach and incorporate the inside-out perspective in its materiality definition.

The standards build on double materiality as a guiding principle. We welcome the adoption of a double materiality approach and highly recommend maintaining it.

Recommendation

Design choice: Materiality assessments need to be specified through clear and ambitious application guidance.

Standard Evaluation

SEC The financial materiality assessment (a matter is material if there is a substantial likelihood that a reasonable investor would consider it importantwhen determining whether to buy or sell securities or how to vote) is too narrow. Considering the dynamic nature of the materiality concept and coherence with other international regulations, we recommend the SEC to go beyond a financial materiality approach and incorporate a wider range of issues, such as disclosure of climate-related impacts on the environment and society, instead of only considering the impact on current and potential investments.

IFRS S1 & S2 (by ISSB) S1 is not detailed in their guidance on the materiality assessment. S2 provides industry-based (financially material) disclosure requirements. We welcome the industry-specific disclosure requirements in the Appendix of IFRS S2, but we propose that the IFRS S1 provides more specific guidance about the material issues (e.g. following the pollution-related specific application guidance of ESRS E2).

ESRS (by EFRAG) The standards include extensive guidance in ESRS 2, but also allow that entities can define most sustainability issue in ESRS topical or sectoral standards as “not material for the undertaking”, with the provision of a reason why. Recommendation

We welcome the extensive guidance on materiality in ESRS 2 and also the specification of certain per se material topics (e.g. ESRS 2 disclosure requirements or ESRS E1 disclosure requirements since the November update of the ESRS standards) but argue that further sustainability issues need to be specified as always material by (i) any undertaking, (ii) undertakings in a specific sector, and/or (iii) undertakings with certain characteristics, to enhance comparability and guidance.