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More on the EU’s use of double materiality standards and how it conflicts with the view of financial materiality used by other frameworks, including the ISSB. Earlier this month, EFRAG attempted to clear the air around double materiality by publishing draft guidance on double materiality assessments. However, this guidance may have raised more questions than answers.

Corporate Disclosures pointed to a Venn diagram in the document with financial materiality on one end and impact materiality on the other – double materiality being the intersection of the two. This graphic implies there are issues that would create significant impacts, but not qualify as financially material. The guidance doesn’t clearly explain how such an issue would arise or where the boundary between impact and financial materiality is. Some believe that while the diagram is misleading, the concept of double materiality is straightforward, as an accountant speaking anonymously to Corporate Disclosures stated:

“Either you pass the financial materiality filter, or you pass the impact materiality filter, or you have a bit of both, and then it is material and you report on it, that’s my personal interpretation and I don’t think the size or the position of the circles is that relevant.”

The article also quotes Advisory Board member Donato Calace, who has long been involved with EFRAG, as being concerned about the complexity of the guidance document:

“There is no scenario where a private company with 250 employees will read this and say ‘it’s very clear to me what I need to do – not difficult at all… is this [guidance document] written to enthuse geeks like me or to really help practitioners understand with clarity what is a must have vs nice to have? What is rationale/basis for conclusion vs actual practical guidance?”

At the center of the confusion is whether an issue can be material from an impact materiality standpoint, but not from a financial materiality standpoint, or vice versa. The guidance appears to be aimed at helping companies consider both perspectives. However, the diagram implies that companies can categorize issues on an either-or-both basis. The guidance is presently only a draft that is to be presented at today’s EFRAG meeting. Hopefully a final publication will clarify these issues.

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The Editor

Zachary Barlow is a licensed attorney. He earned his JD from the University of Mississippi and has a bachelor’s in Public Policy Leadership. He practiced law at a mid-size firm and handled a wide variety of cases. During this time he assisted in overseeing compliance of a public entity and litigated contract disputes, gaining experience both in and outside of the courtroom. Zachary currently assists the editorial team by providing research and creating content on a spectrum of ESG… View Profile