ISSB’s Faber questions ‘simplistic’ push for double materiality

ISSB chair pens concerns about 'illusions' around what double materiality can deliver, adding that a push for only this approach is 'incompatible' with the urgency of the transition.

The International Sustainability Standards Board’s (ISSB) chair Emmanuel Faber has questioned the sole focus by some market observers on double materiality in a piece published in Le Monde late on Tuesday.

Faber wrote that European regulators have made an “ambitious regulatory choice” in requiring materiality assessments that extend beyond financial materiality.

Double materiality is a European concept that 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 European Sustainability Reporting Standards developed by EU standards body European Financial Reporting Advisory Group (EFRAG) and those from the ISSB, which focus on “enterprise value” or single materiality.

While Faber emphasised in a LinkedIn post today that there is “no war” taking place between different standard setters and that the two approaches are “perfectly compatible”, he said double materiality is “very, very ambitious” and will take time to produce concrete results.

In Le Monde, the ISSB chair writes that the push for double materiality is “simplistic”, and sets out his views that there is a “triple illusion” related to double materiality.

His first argument is that what is material for the market has long been understood by one factor – to buy or sell, adding that non-financial materiality factors would not necessarily be relevant to this. He added that for investors “one major subject for one actor will be secondary for another”.

He added that non-financial materiality has “no common denominator, and therefore no stable materiality”. Instead, Faber argued that it is a “myriad of fragmented information”, the impact of which is tiny in comparison with the materiality that directs financial market flows.

His second point is a claim that there is a misconception that double materiality would allow for the “exhaustive accounting” of a company’s impact.

Faber wrote that this is unrealistic due to the difficulties in measuring certain impact metrics, such as those related to biodiversity, adding that it is a “mammoth task” and “incompatible with the urgency of the transition”.

Finally, he claimed there is a misunderstanding in the market that a double materiality approach will result in companies complying with the goals in the Paris Agreement, which may not be the case.

Faber concluded the piece by saying that the ISSB’s general (IFRS S1) and climate (IFRS S2) standards – finalised in June – will allow for the climate transition to be financed on the “necessary scale”, adding that it is time to stop trying to push for the “interdependence between the economy and environment” in the context of financial markets.

EU banking body European Banking Federation (EBF) and European financial watchdog ESMA in August both stressed the important of double materiality in response to the standard-setter’s consultation on priorities for the coming two years.