UK Urged to Move Away from Single Materiality Mindset

Respondents to a call for evidence on non-financial reporting flag importance of double materiality, though references to nature are scant.  

Investment industry bodies have underscored the need for double materiality in response to the UK government’s consultation on non-financial reporting.  

Following a call for evidence, the UK Sustainable Investment and Finance Association (UKSIF) said that enhancements to the quality of non-financial information disclosed by UK-based companies could offer “significant benefits to financial markets in the long run”.  

Replies from UKSIF and others suggest that non-financial reporting needs to incorporate social aspects, also emphasising the need for guidance on double materiality.  

Under double materiality, companies must report both on how their business is impacted by sustainability factors and how their activities impact society and the environment.  

To date, the UK has adopted just one mandatory non-financial reporting framework, in the form of the Taskforce on Climate-related Financial Disclosures (TCFD). In its response to the call to evidence, the Investment Association (IA) noted that TCFD disclosures in the UK are solely based on financial materiality, with the “onus being on companies to identify the impact of sustainability considerations on their business model and strategy”. 

It also noted that investors’ approach to materiality is also “evolving” as a result of regulatory and client demands which are “linked to broader societal expectations”. 

Bella Landymore, Policy and Strategy Director at the Impact Investing Institute, told ESG Investor that for non-financial reporting to be “truly meaningful”, it must evolve to incorporate a double materiality lens to include how companies impact people and the planet. 

The UK Department of Business and Trade (DBT) is working with the Financial Reporting Council (FRC) to evaluate the non-financial reporting requirements UK companies need to comply with to produce annual reports and meet broader requirements beyond the Companies Act. 

The DBT’s consultation on non-financial reporting closed on 16 August.  

Double materiality delays 

The UK government recently unveiled its plans for Sustainability Disclosure Standards (SDS), which will be underpinned by the International Sustainability Standards Board’s (ISSB) inaugural climate and general sustainability standards.  

In its response, UKSIF underlined that “substantial deviation” from the ISSB’s common baseline in terms of reporting on financial materiality should be avoided. 

While the EU is currently extending its taxonomy to incorporate non-climate criteria and recently adopted reporting standards based on double materiality under its Corporate Sustainability Reporting Directive (CSRD), the UK has yet to publish its green taxonomy and scope for potential introduction of double materiality remains unclear. 

In its consultation response, the UN Principles for Responsible Investment (PRI) said that the UK government must commit to implementing the ISSB’s general sustainability disclosure requirements standard (IFRS S1) and climate standard (IFRS S2) on an economy-wide basis by 2025 “at the latest”.  

It also underlined the importance of “coherency” within the UK SDS and non-financial reporting requirements to ensure that investor data needs are met.  

In July, the Financial Stability Board transferred responsibility for monitoring of the TCFD to the IFRS Foundation following the publication of its inaugural ISSB standards. Like the TCFD framework, the ISSB focuses on single rather than double materiality.  

However, there is potential for double materiality to be introduced by the UK Sustainability Disclosure Requirements (SDRs), intended to build on mandatory TCFD reporting by broadening the focus from climate to all aspects of a company’s impact on the environment.  

The introduction of the SDRs has not been entirely smooth, with UK’s Financial Conduct Authority (FCA) delaying the publication of a policy statement on them from Q3 to Q4 in July. The authority had already pushed the release back to Q3 earlier in the year and the rules are now not expected to arrive until H2 2024.  

James Alexander, CEO of UKSIF, described the delay as “deeply disappointing” and “symptomatic of the slow pace of implementation of other policies announced in the Green Finance Strategy”. 

Clearer intentions needed 

Alexander previously told ESG Investor that UKSIF would like to see the UK be “much clearer” on its intentions towards the adoption of double materiality approaches.  

UKSIF’s consultation response noted that committing to double materiality would fulfil the UK’s commitment in the ‘Greening Finance Roadmap’ published in October 2021 for companies and financial market participants to consider information relating to sustainability-related risks, opportunities, and impacts. 

“We welcome the focus within the FCA’s SDRs and investment labels, which is more centred seemingly on double materiality,” he added.  

UKSIF’s response said that should the UK target equivalent arrangements with the EU’s CSRD policymakers should “consider the introduction of a ‘double materiality’ dimension” to the UK’s reporting requirements to “satisfy any equivalence determination from the EU”. 

The organisation also suggested that a more “holistic approach” to corporate reporting on financial and non-financial factors would be “hugely beneficial” for investors. 

The IA said that in introducing the SDRs, the UK will need to “ensure alignment” in materiality assessments between sustainability requirements for corporates and financial services firms. 

Additionally, the PRI’s response noted there are currently “no plans in place to implement a UK social taxonomy”. 

The Impact Investing Institute’s Landymore underscored the “urgent need” to advance social-related non-financial reporting, especially given that social issues such as inequality, represent systemic risks and are “intertwined” with climate and wider environmental issues. 

“The transition to net zero must actively mitigate potential negative impacts on people as well as create and secure opportunities to thrive in a transformed global economy,” she added. 

Not accounting for nature 

In its call for evidence response, UKSIF said it was “pleased” about the UK’s commitment to the upcoming finalised framework from the Taskforce on Nature-related Financial Disclosures (TNFD) in its recent ‘Green Finance Strategy’ update. This includes an exploration of how best to incorporate the framework into the country’s policymaking later this year.  

The TNFD’s final recommendations are set to be released next month and follow a call for nature-related reporting in the Global Biodiversity Framework adopted at COP15 last December. 

A recent report by global non-profit disclosure platform CDP also found that financial institutions are “failing to integrate nature and climate”, with the issue being “consistently overlooked” in financial decision-making. 

Despite this, UKSIF’s response to the UK’s non-financial reporting consultation only briefly touched on nature, while the PRI and IA did not explicitly mention nature in their replies.  

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