Banks tell ISSB to include double materiality in disclosure standards

Banks, asset managers, investors and other financial actors have joined civil society groups to call for the adoption of a double materiality approach in proposed disclosure guidelines on climate and sustainability.

Responses to a public consultation on draft guidelines published by the International Sustainability Standards Board (ISSB) show wide disagreement with the enterprise value perspective of materiality suggested by the board, largely due to its failure to account for the rapidly accelerating transition away from carbon.

Enterprise value measures how climate and sustainability-related impacts might affect a company’s valuation. In contrast, a double materiality approach also seeks to measure a company’s impact on climate change and the environment.

Launched at Cop26 and supported by most central banks and financial authorities, the ISSB is charged with developing consistent and comparable global disclosure standards to give investors, regulators and other stakeholders the data necessary to effectively address climate change and ecological degradation in their activities.

However, the draft guidelines released earlier this year confine assessment of materiality to information that “could reasonably be expected to influence primary users’ assessments of an entity’s enterprise value”, and do not include double materiality data on how the activities of the reporting entity affect the environment.

Widely supported by NGOs and civil society groups focused on the climate and ecological crisis, a double materiality perspective already features in EU reporting requirements and is also the approach taken in the UK’s upcoming sustainability disclosure standards. The ISSB consultation responses show there is also wide support for the approach within the financial sector.

“The focus should be on double materiality and not on enterprise value,” the HSBC Bank (UK) Pension Scheme said in its submission to the ISSB. “Enterprise value is a backward-looking, lagging indicator,” it said, adding that “universal owners need a double materiality lens to inform critical, long-term decision making”. The scheme also called for greater transparency on how reported entities decide what is and is not financially material.

“A focus on enterprise value alone will not provide investors with a holistic picture of their exposures to climate-related risks and opportunities,” the Institutional Investors Group on Climate Change said in its submission, calling instead for “a holistic view of exposure to climate-related impacts and corporate alignment potential through double materiality”.

UK risk and investment group Cardano made double materiality its primary suggestion, saying that “the draft needs to address real-world impact, not the current sole focus on enterprise value”. Institutional investors increasingly share this double materiality view, it said, and want to incorporate both financial and environmental approaches into their investment process.

A partial review of more than 1,300 submissions received by the ISSB revealed that the greatest concern about materiality was the ambiguity of the term. In general, pension and other long term investment companies and groups were most concerned about climate and environmental impact reporting.

The ISSB will now assess and discuss the comments in its board meetings and is expected to finalise its proposed standards by the end of this year.