Materiality under the ISSB and ESRS

What is materiality under the ISSB?

IFRS S1 requires a company to disclose material information about the sustainability-related risks and opportunities that could reasonably be expected to affect its prospects: its cash flows, access to finance or cost of capital over the short, medium or long term. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports, which include the financial statements. The judgement is entity-specific, considers both the size and nature of a matter, and is reassessed at each reporting date. In identifying risks and opportunities, a company must refer to the SASB Standards and consider their applicability. See IFRS S1 and SASB standards and industry-based metrics.

What is materiality under the ESRS?

The ESRS use double materiality. A sustainability matter is material from the impact perspective if it relates to the company's material actual or potential, positive or negative impacts on people or the environment, in its own operations and value chain; severity, made up of scale, scope and irremediable character, and likelihood decide. It is material from the financial perspective if it triggers or could reasonably be expected to trigger material financial effects on the company. A matter material from either perspective is reported. The revised ESRS allow a top-down assessment and then filter the information itself: a company does not report datapoints that are not material. See double materiality explained and ESRS 1 general requirements.

How does materiality under the ISSB and ESRS compare?

The ISSB, the European Commission and EFRAG confirmed in their May 2024 interoperability guidance that the financial materiality definitions are aligned. See the ISSB standards and ESRS compared.

Materiality under both standards in practice: an apparel company

An apparel group that sources cotton and makes clothing in Asia assesses five matters under both sets of standards.

Emissions and forced labour risk in the cotton supply chain are material under every lens: forced labour is a severe impact and, because import bans can stop shipments, a financial risk. Living wages at suppliers and microfibre pollution are material impacts but, for now, have no material financial effect, so they appear in the ESRS statement only. Drought in cotton-growing regions is a financial risk without a material impact caused by the company, so it is material under the ESRS financial perspective and the ISSB. Every item material to investors is also material in the ESRS statement, which is what the alignment intends. See impact materiality and financial materiality.

Can one assessment serve both?

• Identify impacts, risks and opportunities once, across the value chain, using both the ESRS list of sustainability matters and the SASB topics for the company's industries.
• Score financial effects with one set of thresholds and time horizons, so the ESRS financial perspective and the ISSB report draw from the same results.
• Score impacts separately for the ESRS, on severity and likelihood; see materiality thresholds and scoring.
• Apply the information filter for each report, and document why items appear in one report and not the other.

See running a double materiality assessment.

Where can the answers differ?

Impact-only matters are the main difference, but they can move: an impact becomes a financial risk when regulation, litigation, customers or lenders react to it, so impacts reported under the ESRS are a watch list for the ISSB report. Differences can also come from the starting points, because SASB topics may raise industry matters the ESRS list does not name; from time horizons, if the company defines them differently for each report; and from the information filter, where the ESRS name specific datapoints and IFRS S1 leaves the detail to judgement. Opportunities can differ too: the revised ESRS ask for material opportunities only where the company is pursuing them, and IFRS S1 lets a company omit commercially sensitive information about an opportunity in limited circumstances.

What will assurance providers ask for?

Under the CSRD, limited assurance covers the process the company used to identify the information it reports, so the materiality assessment, its thresholds and its documentation are tested. Jurisdictions adopting the ISSB standards set their own assurance requirements, often starting with emissions. A single, well-documented assessment that shows how each perspective was applied is easier to assure than two separate ones. See stakeholder engagement in the materiality assessment.

This guide is general information. It is not tax or legal advice for your situation.