The IFRS Foundation recently published a guide, ‘Sustainability-related risks and opportunities and the disclosure of material information’, which aims to help companies applying the IFRS Sustainability Disclosure Standards (IFRS SDS) to identify and disclose material information about sustainability-related risks and opportunities.
Accounting professionals (including financial reporting practitioners) may be wondering if the materiality principle is the same for sustainability reporting as it is for financial reporting and if not, how to best navigate any differences between the two. When it comes to disclosures, materiality is a tale of two perspectives (or lenses): financial and sustainability.
The IFRS definition of materiality
The IFRS Foundation applies the same capital markets definition of material information to sustainability-related financial information and financial accounting information:
“Information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports, which include financial statements and sustainability-related financial disclosures and which provide information about a specific reporting entity.” (page 10 of the guide)
As the guide states, the IFRS SDS do not define material issues; rather, they focus on material information on sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects. This distinction is an important one, as it differentiates IFRS standards from others, such as the European Sustainability Reporting Standards, which define both material matters and material information. The concept of defining and determining material issues will be addressed in a future article.
Same definition, different applicability
The IFRS guide further explains that while the definition of information materiality is identical, there are distinct scopes of reported information between sustainability and financial disclosures, such as:
- longer time horizons;
- value chain considerations;
- different types of information, such as qualitative, forward-looking, non-financial; and
- the anticipated financial effects of sustainability performance.
As expected, this leads to different materiality judgements – different decisions of what constitutes material information to include in sustainability disclosures vs financial disclosures.
In other words, using the same materiality principle, what may not qualify as material information for financial reporting purposes may qualify for sustainability reporting purposes.
Table 1: The distinct scopes of reported information between sustainability and financial disclosures
From a sustainability to a financial materiality lens
A helpful way to think about materiality is as a telescope we could use to ‘see’ the universe of possible impacts, risks, and opportunities. Some of these will ‘materialise’ into events we need to address, while others will turn out to be nothing at all.
Figure 1: Materiality as a telescope with which to consider the universe of possible sustainability-related impacts, risks and opportunities
The sustainability materiality lens captures the elements we must monitor/manage because they are relevant to the company, although they may not affect us at the moment.
We then determine the information to disclose externally about the relevant impacts, risks and opportunities based on its materiality to users of general purpose financial reports, and which will be located in sustainability statements or the management discussion and analysis (MD&A).
We also identify any actual or anticipated tangible financial effects from these relevant impacts, risks and opportunities that qualify for inclusion in the financial statements or the MD&A under generally accepted accounting principles.
Level |
Description |
example |
|---|---|---|
First level |
Information is disclosed in the MD&A and sustainability statements. |
Water scenario analysis projections for all manufacturing site locations materially dependent on access to water; these projections carry estimation risk given uncertainty around climate (eg rainfall, water tables), government-imposed water restrictions, or population growth projections. |
Second level |
In addition to the above, information on the sources of estimation risk, significant judgments (IAS1), or contingencies that meet the criteria of liability disclosures under IAS 37 will be disclosed in the notes to the financial statements. | Site restoration costs for a plant that may be abandoned in 10 years’ time or may be refurbished and run for another 10 years or more; although the company expects to incur a cash outlay in 10 years’ time, it is not yet reasonably measurable, nor has the event leading to the contingency been taken (i.e, the usage decision); disclosure occurs in the footnotes (in accordance with IAS 16 Property, Plant and Equipment). |
Third level |
An event triggers an update to the above disclosure approach, which results in a financial measurement such as an asset impairment or a liability provision reported in the balance sheet. | A decision is made to close a factory in five years rather than 10 years, which requires incremental site restoration costs of $10M; the additional expected costs are added to the balance sheet value of the factory asset, and then an immediate assessment of possible impairment follows; the change in the useful life and estimated restoration costs for the plant, as well as the additional impairment analysis are disclosed (in accordance with IAS36 Impairment of Assets). |
More information
This guidance on connecting sustainability and finance information, performance and disclosure was created by Marie-Josée Privyk, Founder and ESG Advisor, FinComm Services, and David Wray, Board Member & ESG Working Group Chair, ICFOA & Founder, DW Group.
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