The concept of materiality is a cornerstone upon which Sustainability Reporting is built.
However, we need to be careful what version and concept of materiality we are talking about in relation to Sustainability.
There are some key distinctions that we need to make in understanding this concept and to ensure we are speaking the same language.
Let’s take a look at the key concepts related to materiality:
Four Key Concepts:
1. Financial Materiality
The first concept of materiality which we are probably most familiar and comfortable with is financial materiality. This is where a sustainability issue may have a material financial impact on a company now or in the future. The most common reporting standard globally that incorporates this concept is SASB – Sustainability Accounting Standards Board (now known as the Value Reporting Foundation).
2. Stakeholder Materiality
The second concept of materiality is stakeholder materiality or in a traditional sense materiality to Sustainable Development. This differs to financial materiality in that it is broader and looks at what may have a material impact on a company and broader society in general. The other most common reporting framework for sustainability globally is the GRI or Global Reporting Initiative.
3. Double Materiality
It is increasingly difficult to ascertain and form a view as to whether financial or stakeholder material is more important. At the end of the day this is a judgment call and really in the eye of the beholder. The concept of double materiality is an attempt to look at both financial and stakeholder materiality in a combined way, as both forms of materiality are crucial.
4. Dynamic Materiality
Finally, the other key concept of materiality is what we call dynamic materiality. This is essentially a concept to see how sustainability issues evolve and develop overtime. It is important to have an open view and mindset as to what issues will evolve overtime and some cases take shorter term focus as the world is increasingly dynamic and fast changing.
Conclusion:
Overall, when you hear the word materiality it’s important to remember this concept has different lenses, and communication will be most effective if both parties at clearly talking about the same concept to avoid any miscommunication.
To date in Sustainable Finance the concept of materiality has been increasingly important for Sustainability Link transactions whereby the majority of issues are probably more financially material. However, as the whole market moves to a beyond carbon emissions viewpoint there is no doubt that broader stakeholder related material sustainability issues will be included in Sustainability Finance Linked instruments going forward.
