Latest News to Faber (ISSB): ‘Without double materiality, corporate sustainability is a fable’

The world of business is increasingly looking to balance financial performance with social, natural and governance performance. Emmanuel Faber, president of the International Sustainability Standards Board (ISSB), has recently criticised sustainability reporting legislation Corporate Sustainability Reporting Directive (CSRD) and the basic concept of “double materiality”. We are happy to set out how he overlooks the power of CSRD and double materiality.

Double materiality is about which social, natural and governance topics are important enough to be reported on. A topic is material if it has the power to influence a decision. Materiality is dual if two questions are asked. The first is how the company and its investors themselves may be affected. The second is what the impact is on nature and society.

The use of double materiality in CSRD is innovative. “Old” accounting rules only take into account financial materiality – with the idea that all important decisions are made by (or for) shareholders. For example, if climate performance depresses profits, you have to report it, otherwise it doesn’t matter. When you realise that other stakeholders – e.g. potential customers and employees, governments, NGOs – can also make decisions based on sustainability information, a broader view seems inevitable.

Still, Faber sees three problems. First, that the ‘other stakeholders’ all have different interests. With water pollution, for example, a local government thinks about costs for water treatment and an NGO may be concerned about protected species. But this shows precisely the need for a system that measures and shares all types of impacts so that the interests of all stakeholders are considered in decision-making. An issue is material if it clearly affects at least one stakeholder.

Second, Faber argues that for the impact on society, there are no financial transactions. But that is not a relevant criterion for keeping information out of reporting; after all, things like brand value or goodwill are also reported. Moreover, impact information can indeed influence transactions indirectly. A customer buying or not buying something based on sustainability information, for example. This is different from an investor buying a share, but no less important.

Third, Faber claims that it is too big a task to accurately measure all of a company’s impacts. In recent years, widely accepted methods and databases have become available for environmental impacts. The Greenhousegas protocol to give the clearest example, but also, for example, the biodiversity methods applied by ABN AMRO, ASN Bank and Triodos Bank. On the social side, various open source methods and data can be built on, for example from the True Price Foundation. Of course, sustainability reporting requires budget and manpower, but that is no different from financial reporting. And of course not every butterfly needs to be counted, just as the accountant does not count every euro cent.

Opportunity for businesses

We see that investors, customers and regulators want to be able to reward, standardise and price companies with a more positive impact. This is currently not possible, making polluting and exploiting cheaper. CSRD is changing this precisely thanks to its focus on dual materiality. We see that showing all impacts of a company, good and bad, helps make better choices. Finally, what is strong is that companies are asked to report not only numbers, but also how policies are adjusted, targets set and progress made.

Across Europe, thousands of companies and financial institutions are already enthusiastically preparing for and implementing CSRD. At last, stakeholders, nature and society are getting a voice in the boardroom. CSRD is a wonderful addition to financial reporting rules. Especially for companies themselves, now that they see that support for their business is under pressure and at the same time they feel that becoming more sustainable is more urgent than ever. Emmanuel Faber, get ready for CSRD!

Join, the movement to prevent CSRD dilution!

Michel Scholte, CSRD ACADEMY, Impact Institute

Werner Schouten, Impact Economy Foundation

Hajar Yagkoubi, cofounder Eenentwintighonderd

Volkert Engelsman, Robin Food Coalition

Teresa Fogelberg, ex co-CEO GRI

Herman Mulder, voorzitter SDG Nederland

Reinier de Adelhart Toorop, Erasmus University of Management

Carlota Paula de Coelho, B-Corp

Time for you to understand and
manage your biodiversity footprint

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