Let’s Talk: Performing a Materiality Assessment per ISSB Standards
The definition of materiality per the IFRS Sustainability Disclosure Standards (ISSB Standards throughout this reading) is the information about sustainability-related risks or opportunities that could reasonably influence the decisions made by investors or other primary users of general-purpose financial reports[1].
Materiality is entity-specific, so entities applying the ISSB Standards must determine which sustainability-related risks and opportunities are material to their unique operational circumstances.
[1] ISSB Standards (November 2024). Sustainability-related risks and opportunities and the disclosure of material information.
Why Materiality Matters in Sustainability Reporting
Sustainability-related issues are broad and complex. Without a proper process to determine what sustainability-related information is material, entities may improperly disclose, possibly hindering primary users in understanding how sustainability-related issues impact financial performance. A materiality assessment ensures emphasis is placed on the most decision-useful sustainability information, supporting users in understanding how this information affects economic returns.
The ISSB Standards Approach to Materiality
While the ISSB Standards do not prescribe a specific methodology to identify sustainability-related risks and opportunities, entities may consider required sources of guidance (e.g., SASB Standards, industry-based guidance) to aid in the process.
After an entity has identified all its sustainability-related risks and opportunities, it must evaluate the material information related to each. To help determine the materiality of information, an entity should consider if omitting, misstating, or obscuring it could reasonably be expected to influence the decisions of primary users.
A Pratical Example
To better understand how to identify and disclose material sustainability information, consider the following high-level example.
Company A has never prepared sustainability-related financial disclosures. To get started in reporting material sustainability-related information, Company A refers to the ISSB Standards. Upon reviewing IFRS S1, General Requirements, no specific ISSB Standard addresses several sustainability-related risks, so Company A considers the required source of guidance, the SASB Standards, for its industry. In reviewing the SASB Standards, Company A finds two disclosure topics (including accounting metrics and technical protocols) relevant to its business. Company A uses this as a starting point to assess which topics and metrics are material to its business.
Three Considerations When Assessing Materiality
To confirm the materiality of the information it has identified, Company A makes materiality judgements based on the following considerations:
Qualitative and Quantitative Data
Uncertain and Future Events
Changing Circumstances
Qualitative and Quantitative Data
An entity should evaluate qualitative and quantitative data to determine the materiality of sustainability-related information.
Qualitative data might include governance, stakeholder expectations, or environmental dependencies.
Quantitative data is related to the magnitude of financial impacts, such as revenues, costs, or asset valuations.
The presence of qualitative data can impact the quantitative threshold of material information; an entity must ensure the presence of qualitative data is substantial enough to result in immaterial quantitative data.
Uncertain and Future Events
Sustainability-related financial disclosures may be required for potential future events, even when the outcomes of such events are unknown. Per the ISSB Standards, the materiality of such information depends on the range of possible outcomes and the likelihood of such outcomes within the range (IFRS S1 paragraph B22).
An entity should assess the range of the likelihood, timing, and magnitude of potential future events and outcomes. Although an event may initially be characterized as low probability and high impact, if aggregated with similar events, the event may become material, and the entity would probably disclose this information.
Changing Circumstances
Materiality assessments are an ongoing activity. At each reporting date, an entity must reassess its material sustainability-related information and consider any new circumstances or changes in assumptions, especially if significant shifts occur within its value chain (IFRS S1 paragraph B28).
Based on these three considerations, Company A can collect and organize a preliminary set of material information for its sustainability-related financial disclosures.
What Happens Next?
An entity can organize and draft sustainability-related financial disclosures to enable primary users to understand the effects of sustainability-related risks and opportunities on the entity’s financial position, performance, and prospects.
To state compliance with the ISSB Standards, an entity must apply all the requirements in ISSB Standards, including those related to material information.
Need Help Getting Started?
Performing a materiality assessment is the starting point for complying with ISSB Standards. An entity must disclose material information about its sustainability-related risks and opportunities that could reasonably impact financial performance, position, and prospects. However, this assessment can be complex, especially if you’re new to applying the ISSB Standards.
Book a free consultation today to get support in identifying and disclosing material sustainability-related information.
Let’s make materiality meaningful and actionable for your business!