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Financial Materiality

Financial Materiality, in simple terms, is about identifying information that is important enough to influence the decisions of those who provide, or might provide, resources to a company. This concept is crucial in sustainability reporting as outlined in the EFRAG IG 1 document for December 2023, aiming to guide undertakings in their sustainability disclosures based on the double materiality principle.

The excerpts from the guidance document highlight several key aspects of financial materiality:

  1. Scope Expansion: Financial materiality for sustainability reporting expands beyond the traditional scope used in financial statements. This means considering not just what is currently impacting the company’s financial position but also potential risks and opportunities that could have material financial effects in the future.
  2. Beyond Financial Statements: Financial materiality in the context of sustainability reporting includes effects that might not currently meet the recognition criteria in financial statements. This includes both current financial effects recognized in financial statements and anticipated financial effects that could influence an undertaking’s financial position, performance, and cash flows in the short, medium, or long term.
  3. Risks and Opportunities: Financial materiality considers the potential financial impacts arising from sustainability matters, including risks and opportunities that might not yet be fully captured in traditional financial reporting. This encompasses both past and future events that could influence the company’s financial health.
  4. Dependencies on Resources: The concept also stretches to cover financial effects associated with dependencies on natural, human, and social resources, recognizing that these dependencies may trigger financial risks or opportunities.
  5. Investor Relevance: Information is deemed financially material if it could reasonably be expected to influence the decisions made by current or potential investors, lenders, or other financial stakeholders. This includes information that may affect the company’s ability to obtain finance or influence its cost of capital.

In essence, financial materiality in sustainability reporting is about providing a broader and more forward-looking view of the factors that could materially affect a company’s financial health. This requires companies to consider a wider range of information than what is traditionally included in financial statements, including sustainability-related risks and opportunities, and the financial implications of their dependencies on various resources.