What’s the issue?

Materiality plays a critical role under the proposals1. Companies make materiality judgements to focus their reporting on sustainability-related information that is useful to primary users – i.e. investors and creditors – rather than simply providing a prescribed list of information. Information about how the company creates and erodes value can be material because it helps investors and creditors assess the company’s future prospects.

The proposals use the terms ‘enterprise value’ and ‘significant’ to help companies understand what to report. However, feedback showed that these terms created confusion, and highlighted the need to define the scope of ‘sustainability’. The International Sustainability Standards Board (ISSB) is therefore looking at other ways to help companies understand what to report.

Providing guidance on what is meant by ‘sustainability’ and linking this to value creation should help companies understand the relationship between their impacts and the risks and opportunities that are important to their investors.

Eddie Ng
Partner, ESG Advisory, KPMG China

Eddie Ng
Partner, ESG Advisory
KPMG China

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What was proposed?

Under the proposals, information would be material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial reporting make on the basis of that reporting. This text is aligned with IFRS® Accounting Standards.

In addition, the proposals explain that sustainability-related financial information is material if it would influence investors’ assessments of the company’s enterprise value. This investor-focused approach to materiality would require companies to provide information about the activities and impacts that affect their prospects, irrespective of the current-period financial statement impact.

The ISSB used the term ‘significant’ to describe the sustainability-related risks and opportunities for which material information would be required. However, it did not require companies to follow a particular process to make that assessment.

What’s the ISSB’s latest thinking?

The ISSB agreed to fully align its description of materiality with IFRS Accounting Standards. In doing so, it has removed the existing definition of ‘enterprise value’ and the words ‘to assess enterprise value’ from the objective and description of materiality in the proposals. It also agreed to remove ‘significant’ from the description of which sustainability-related risks and opportunities to disclose.

Explaining ‘enterprise value’

The ISSB plans to explain the interconnected relationship between value created for the company and value created for its stakeholders. It intends to develop its guidance based on descriptions of value creation included in the Integrated Reporting Framework and in the International Accounting Standard Board’s (IASB) management commentary proposals2.

The guidance will explain how value created for a company’s stakeholders (its impacts) can affect the availability of resources and the quality of relationships on which the company depends, which in turn gives rise to sustainability-related risks and opportunities that can affect its performance or prospects.

Describing ‘sustainability’

In the meeting, the ISSB clarified that sustainability would be described as:

‘the ability for a company to sustainably maintain resources and relationships with and manage its dependencies and impacts within its whole business ecosystem over the short, medium and long term’.

Replacing ‘significant’

The ISSB also plans to develop guidance to help companies apply the requirements on first identifying the risks and opportunities that matter and then the material information to provide in relation to them. It aims to build on IASB® literature such as:

  • the materiality assessment process described in IFRS Practice Statement 2 Making Materiality Judgements; and
  • explanations in the IASB’s management commentary proposals that support companies in making the link between matters that could affect prospects and material information.

At a future meeting, the ISSB will consider whether to require companies to describe their approach for assessing and disclosing material information and/or their materiality judgements.

What’s the impact?

These proposals are intended to clarify rather than substantively change how materiality judgements apply to sustainability-related financial disclosures.

Companies will need to review their existing materiality assessment processes and:

  • consider the resources and relationships that their prospects depend on;
  • identify the sustainability-related risks and opportunities that could affect the availability of these resources or the quality of relationships; and
  • determine the material information to disclose about those risks and opportunities.

Companies that are already experienced in sustainability reporting may find that applying this investor-focused description of materiality requires a significant change in their current approach to assessing materiality.

How is this different from a ‘double materiality’ approach?

Risks and opportunities often arise from the impacts that the company’s activities have on its stakeholders. This means that information about these impacts may be material for its sustainability-related financial disclosures.

Information about other stakeholder impacts – i.e. those that do not give rise to risks and opportunities that are relevant for investors and creditors – is less likely to be material under the ISSB’s proposals. In contrast, this information might be required by a framework that adopts a ‘double materiality’ approach (e.g. European Sustainability Reporting Standards).

Actions for management

  • Familiarise yourself with the proposals and understand what they would require. See our guide for more detail.
  • Assess whether your materiality assessment process is consistent with the ISSB’s proposed description of materiality.
    • See IFRS Practice Statement 2 Making Materiality Judgements for insight into how the ISSB may develop its guidance on making materiality judgements.
    • Identify the key resources and relationships on which your company’s prospects depend, and consider the sustainability-related risks and opportunities that result from these dependencies.
    • Consider whether information about these risks and opportunities, including information about the related impacts, may need to be included in your sustainability-related financial disclosures.

How did we get here?


Document version Reference
Proposed IFRS S1 ED/2022/S1 Published 31 March 2022
Proposed IFRS S2 ED/2022/S2 Published 31 March 2022
ISSB Board meeting: 20–23 September 2022; Frankfurt

AP3B and AP4B: Plan for redeliberations

Meeting summary

Topics that ISSB plan to discuss further included:

a) enterprise value; and

b) ‘significant’ sustainability-related risk or opportunity

ISSB Board meeting: 18–21 October 2022; Montreal

AP3: Cover note and summary of redeliberations

AP3A: Update to plan for redeliberations

AP3B: Fundamental concepts

AP3C and AP4D: Interoperability – key matters

The ISSB plan to make changes about:

a) the application of the concepts of materiality and enterprise value; and

b) the use of the term ‘significant’

ISSB Board meeting: 13–15 December 2022; Montreal

AP3: Cover note and summary of redeliberations

AP3A: Fundamental concepts

Meeting summary

The ISSB agreed to:
a) clarify the objective of proposed IFRS S1;
b) amend the proposed IFRS S1 illustrative guidance to further expand and clarify how to identify sustainability-related risks and opportunities and how to assess and disclose material information; and
c) provide further guidance for companies whose businesses span multiple industries

1 Proposed IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and proposed IFRS S2 Climate-related Disclosures.

2 Exposure draft Management Commentary.

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