Alignment of EFRAG and GRI reporting frameworks needs to emphasise impact on sustainable development, according to white paper.
Organisations implementing double materiality within their sustainability reporting processes largely only disclose the financially material impacts, according to a white paper commissioned by standards-setting body the Global Reporting Initiative (GRI).
In reporting terms, double materiality means that disclosures should both outline how sustainability issues impact companies and how companies’ activities impact sustainable development beyond their internal operations.
However, organisations are typically approaching double materiality with a ‘finance-first’ approach, GRI said, warning that this is “detrimental” to long-term financial performance and sustainable development.
“Privileging the [implications of sustainable development issues on enterprise value or financial statements] is not casting the net wide enough and [is] maintaining the tendency to privilege short-term profit,” the GRI said.
The white paper noted that the identification of an organisation’s material impacts on sustainable development must be “the starting point” for any double materiality approach.
The GRI has therefore called for the EU sustainable reporting regime, which is currently being developed by the European Financial Reporting Advisory Group (EFRAG), to provide further clarity on how double materiality should be implemented within sustainability reporting.
GRI research found that current implementation issues also include: variations in the approach used by organisations applying the GRI concept of materiality; insufficient skills to apply materiality to sustainability issues; and materiality assessments often falling outside the scope of sustainability assurance engagements.
Clearer guidance on reporting material sustainable development issues will enhance long-term financial performance, which will improve stakeholder engagement and enable more robust disclosure, the white paper added.
EFRAG’s proposed sustainability reporting standards aim to strongly align with the GRI’s existing reporting framework, of which double materiality is a central component.
This contrasts with the more gradualist approach favoured by the International Financial Reporting Standards (IFRS) Foundation, which focuses on the enterprise value. Experts previously told ESG Investor that the IFRS approach potentially works against sustainable development, due to the prioritisation of financial materiality.
Double materiality is also a key part of the recently updated Non-Financial Reporting Directive (NFRD), now known as the Corporate Sustainability Reporting Directive (CSRD).
“As the European Commission seeks a sustainability disclosure solution that has double materiality as the cornerstone, in which GRI is actively engaged, the time is right to assess the benefits of the concept. This paper provides the academic grounding for why we need a corporate reporting system with sustainability reporting on an equal footing with strengthened financial reporting,” said Peter Paul van de Wijs, GRI’s Chief External Affairs Officer.
This follows the GRI’s launch of two draft GRI Sector Standards covering agriculture, aquaculture, fishing and coal. The drafts are open to public comment until 30 July, 2021, with final versions published in 2022.
The GRI has also put forward an Oil and Gas Sector Standard, which is in the process of being finalised following feedback.
ESG Investor understands that these are the first of up to 40 sector-specific standards, which aim to give GRI members more transparency on sustainability issues across sectors with the most exposure to sustainability-related risks.
With its Global Standards Fund recently receiving financial backing from multinational professional services network PwC, GRI will be able to continue expanding this collection of new standards.