The European Securities and Markets Authority (ESMA) and the European Banking Federation (EBA) responded to the IFRS ongoing consultation regarding the organization’s priorities over the next two years. IFRS standards use a financial materiality lens, whereas European standards require ESG disclosures to be made on a double materiality basis which combines impact materiality and financial materiality.
In their responses, the European regulators stressed the importance of impact materiality to investors and urged the group to consider moving to a double materiality standard for its ISSB reporting frameworks. Responsible Investor reported on the consultation response stating that:
“The importance of double materiality has been stressed to the ISSB by organisations including European Union financial watchdog ESMA and the European Banking Federation (EBF) in consultation responses on the future work of the global sustainability standard setter.
In its response, the EBF wrote: ‘While we understand that the ISSB standards are currently focusing on investors’ needs, we believe over time it will be appropriate for the ISSB to consider criteria to target a wider set of stakeholders and move in the direction of double materiality.’”
In June, the IFRS published its finalized ESG reporting frameworks which were met with excitement by investors and governments. Many jurisdictions are choosing to incorporate and transpose the IFRS standards into national law. This creates a substantial discrepancy in how the EU and much of the world define materiality. Last year, Lawrence mused if the ISSB may signal “the beginning of a slow death for ‘double materiality'” and whether we might be back at “square one in terms of trying to decode ‘materiality’ in accounting and disclosure regimes.” ESMA’s response makes clear that despite the wide appeal of the IFRS standards, the EU is not budging from its position on double materiality and sees double materiality as a natural evolution for other disclosure standards.