The importance of double materiality has been stressed to the ISSB by organisations including European Union financial watchdog ESMA and the European Banking Federation (EBF) in consultation responses on the future work of the global sustainability standard setter.
In its response, the EBF wrote: “While we understand that the ISSB standards are currently focusing on investors’ needs, we believe over time it will be appropriate for the ISSB to consider criteria to target a wider set of stakeholders and move in the direction of double materiality.”
It added that it would appreciate it if the ISSB could “communicate its intentions on covering sustainability impact in the future developments of the ISSB standards”.
Double materiality is a European concept and refers to capturing a company’s impact on the environment and society in addition to the impact of sustainability factors on the company.
The EU’s focus on double materiality is a key difference between the standards being developed by the European Financial Reporting Advisory Group (EFRAG) and those from the ISSB.
In June, ISSB finalised its general (IFRS S1) and climate (IFRS S2) standards, less than two years after it was launched by the IFRS Foundation.
The ongoing consultation on priorities for the coming two years was launched a month earlier in May and is seeking feedback on whether the standards body should pursue research projects on topics including biodiversity, human rights and human capital management.
Such topical projects “could be the opportunity to further reflect on the intrinsic links between impact and financial materiality”, ESMA wrote in its response to the consultation.
“Should ISSB decide to pursue one or more new topical projects, ESMA considers that the inextricable link between risks/opportunities and impacts should be duly taken into account, as for example, prominent international references for biodiversity (eg COP15 Agreement) as well as for human rights (eg UN Guiding Principles on business and human rights), rely on or include consideration of impacts,” the securities and markets regulator added.
A draft response to the ISSB, which will be discussed on Monday at a public meeting of EFRAG’s sustainability reporting technical expert group, also raises the topic of impact, calling on ISSB to “explicitly integrate” investors’ interest in “impact materiality”.
The draft, which does not represent the official views of EFRAG, continued: “EFRAG notes that a growing number of investors base their investment decisions on information on impacts. In this context, it would also be beneficial for the ISSB to explain how the current definition of materiality in IFRS S1 and S2 is derived from the existing evidence of the investors’ needs.”
Focus on implementation of baseline
Many respondents to the consultation urged the ISSB to prioritise implementation of the two standards it has already published over new research projects in order to ensure their global baseline status.
The UK Endorsement Board (UKEB), Britain’s national accounting standards body, said the ISSB should deprioritise new research projects “until the ISSB is able to demonstrate that the initial goal regarding climate has been achieved and it has a long-term road map in place”.
By contrast, ESMA urged ISSB to deal with the “remaining topics of the ESG spectrum” as soon as possible, citing greenwashing concerns.
“[T]he partial or selective disclosure on some but not all material ESG topics is one of the root causes of greenwashing,” it wrote.
Echoing many other respondents, however, ESMA added that if ISSB is going to prioritise one topic it should be biodiversity. It cited practical considerations such as the “current international momentum on this topic”.
Interestingly, UKEB highlighted that some UK stakeholders, including investors, felt that the ISSB had ignored their concerns.
Citing the speed at which the climate standards were developed, the body said: “Unfortunately this, coupled with the size of those changes, means that some informed and knowledgeable stakeholders in the UK (including investors) feel they have not had the opportunity to fully engage with the ISSB’s process or, when they did engage, they did not feel listened to nor that their concerns were addressed.”
UKEB added that other stakeholders had also reported feeling “a lack of transparency around changes made in finalising the text of the standards during the redeliberation phase”. It added that this concern was common but “not universal across the stakeholders we engaged with”.
Earlier this month, the UK government announced that its Sustainability Disclosure Standards (SDS) will be based on the ISSB standards.
Last week, the UK’s Financial Conduct Authority (FCA) set out plans to consult on a series of climate-related disclosures for listed firms, which is expected to take place in the first half of 2024.
The ISSB’s consultation closes on 1 September.