20 December 2022 (Updated 31 August 2023)

What’s the issue?

Materiality plays a critical role under the IFRS® Sustainability Disclosure Standards1. Companies make materiality judgements based on their individual facts and circumstances to focus their reporting on information that is useful to investors, rather than simply providing all the information listed in the standards. 

Companies make judgements to determine both the sustainability-related topics they need to report on and the information they provide about them.

Companies will need a clear understanding of what information could affect an investor's assessment of their long-term prospects to make materiality judgements. These judgements help them provide real insight into how they are managing the sustainability-related risks and opportunities that drive their success.

What are the requirements?

Under the standards, information is 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 is the same basis that is applied under IFRS Accounting Standards. 

To help companies make these judgements, the standards explain that primary users’ decisions depend on their assessments of:

  • the amount, timing and uncertainty of the company’s future cash flows; and
  • management’s stewardship of the company’s economic resources.

Information that could reasonably be expected to influence these decisions is considered material. This is the case whether the information is quantitative or qualitative.

The standards focus on primary users’ common information needs, so companies are not required to consider the specialist needs of individual investors.

What’s the impact?

The basis for assessing materiality is inherently forward-looking. This means that:

  • information about a sustainability-related risk or opportunity that has not yet affected the company’s financial statements may still be considered material – e.g. because it provides insight into the resilience of the company’s business model; and
  • information about the company’s exposure to future events (e.g. possible regulatory changes) may be material, even though the potential outcome is uncertain.

Companies make materiality judgements based on the influence that information could reasonably be expected to have on primary users’ decisions at the reporting date. They do not need to provide information about every possible risk or opportunity.


How is this different from materiality judgements applied under other frameworks and standards?

Some sustainability reporting frameworks and standards are designed to meet the needs of a different set of stakeholders. They specify a different approach to determining materiality. For example, GRI Standards require a process of stakeholder engagement to identify the impacts and topics about which information may be material.  

Companies that are already experienced in sustainability reporting may find that applying the International Sustainability Standards Board (ISSB)’s investor-focused definition of materiality requires a significant change in their current approach. While many sustainability-related matters important to other stakeholders can create risks or opportunities for the company, investors may need different information about these matters.

The double materiality concept in the European Sustainability Reporting Standards requires companies to assess materiality from both a ‘financial’ and an ‘impact’ perspective.

Actions for management

  • Familiarise yourself with the standards and understand what they would require. Review your existing process for making materiality judgements over sustainability-related information to ensure that: 
    • it is aligned with the ISSB’s investor-focused approach;
    • the rigour applied and audit committee involvement is consistent with that applied for the financial statements; and
    • appropriate documentation is in place to protect against hindsight challenge.
  • Perform a preliminary assessment to identify, for example:
    • the resources and relationships that your company depends on or impacts;
    • the sustainability-related risks and opportunities that result from these dependencies; and 
    • the information about these risks and opportunities that may be material.

1 IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (together ‘the standards’).

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