EFRAG has made a draft version - subject to change - of its double materiality implementation guidance publicly available. Corporate Disclosures understands the document is unlikely to be approved by the Sustainability Reporting Board (SRB) at its next meeting (23 August) as members are still divided on a number of points.
The long awaited 46-page document covers what double materiality is, the need for a double materiality assessment, how that assessment should be performed, other sources of help and a list of FAQs.
The first area of contention, and not a small one, is on page nine where a figure (Fig 1) illustrates double materiality with three overlapping circles one for financial materiality, one for impact materiality and one for double materiality in the centre.
For some EFRAG staff members the figure is misleading because it implies that many impacts might not have financial effects. They argue that nobody has elaborated yet on "the possible border between impacts with and impacts without financial effects" and therefore want the figure removed.
Corporate Disclosures understands that SRB chair Patrick de Cambourg is not a supporter of having the figure in the document but argued that if it is to be included it should come with the following caveat: "For illustration only – the dimensions in the graph do not necessarily represent the expected overlap between financial and impact materiality. In many cases there will be a full overlap of both dimensions."
Corporate Disclosures understands De Cambourg told board and Technical Expert Group (TEG) members that the caveat should be integrated within the graph, as it will be reused and shared multiple times without the caveat otherwise. For him its conceptually counterproductive to visually imply that many material impacts may have no financial effects, as it paves the way to many 'political manipulation'.
By political manipulation the SRB chair is potentially thinking of the interoperability between the ESRS and the ISSB standards. Indeed, one of the key questions the ISSB is still to answer is: when is an impact not financially material. Now, with this graph, the door is open for the same question to be asked of EFRAG.
The guidance includes FAQs, one of which asks what needs to be disclosed if a matter is material from the financial (or impact) perspective only.
"Information about metrics may be limited to information that is relevant under the financial (or impact) materiality perspective only when the undertaking decides to omit disclosure requirements or datapoints that it has assessed to be not material," the document answers. "It might be the case that for a matter material from the financial (or impact) perspective only, the undertaking may conclude that a metrics related to the impact (or financial) perspective only can be omitted."
By essentially saying some matters may only be financially material, and that this would lead to different disclosures EFRAG, is opening a "political" can of worms, even if it added that "impact information is of interest to investors when a matter is financially material [and] financial information is relevant to other stakeholders when a matter is material from an impact perspective".
Donato Calace, SVP of accounts & innovation at Datamaran, tells Corporate Disclosures: "The ISSB is not using an impact materiality or double materiality lens, but it requires Scope 1, 2 and 3 emissions disclosures. If you think about it, those emissions are clearly a measure of the impact of the company on the outside world."
He continues: "If you put aside for a moment all these political debates around double materiality being the morally right perspective, and financial materiality being the 'evil' business as usual perspective, and tomorrow the ISSB said 'ok we care about impact', would IFRS S2 be any different? NO!"
"There is no scenario where a private company with 250 employees will read this and say 'it's very clear to me what I need to do - not difficult at all," Calace concludes.
An accountant speaking anonymously to Corporate Disclosures questions the authority of the document. "EFRAG produced a FAQ, which is an interpretation of a law which is under the authority of the European Commission, so the authority of this document remains to be seen, that is a question for the commission."
But EFRAG seems to have addressed this issue by including a disclaimer on the cover of the document stating that the implementation guidance is "non-authoritative and accompanies ESRS but does not form part of it".
"This means that if anything in this guidance appears to contradict any requirement or explanation in ESRS, ESRS takes precedent," the disclaimer continues.
The accountant wasn't fazed by Fig 1, arguing that the included caveat is sufficient and that their interpretation of double materiality is that it has to be seen as a whole: "Either you pass the financial materiality filter, or you pass the impact materiality filter, or you have a bit of both, and then it is material and you report on it, that's my personal interpretation and I don't think the size or the position of the circles is that relevant".
A stakeholder in the know on the EFRAG deliberation tells Corporate Disclosures that the figure is unfortunate because it creates a visual, but the text in the implementation guidance clearly states that "material risks and opportunities for the undertaking generally derive either from impacts or from dependencies".
Calace, later, in a LinkedIn post, questioned the guidance's helpfulness for companies that will do a double materiality assessment for the first time.
"Is it helpful to have extensive technical dissertations on how scale, scope, remediability of impacts could be visualized while FAQ 22 in the guidance clearly states that there's no requirement to disclose those dimensions?," he asks. "FAQ 8 asks: 'How frequently should an undertaking update its sustainability materiality assessment?' And, instead of providing a concise and clear answer, it goes on for five paragraphs, each giving a different answer to the question."
Calace concluded that, as an academic, he "loved" reading the document, "but that is a warning sign: is this written to enthuse geeks like me or to really help practitioners understand with clarity what is a must have vs nice to have? What is rationale/basis for conclusion vs actual practical guidance?".
A stakeholder close to EFRAG says the inclusion of a summary made of 10 key take aways at the start of the document offers a simple introduction to that first step. "EFRAG can't hold the pen for corporates," the stakeholder says. "And the reality is that for the smaller entities falling in the scope of CSRD/ESRS only want to understand the principles and then they will outsource the technical work to consultants."
Like or loathe it, the stakeholder says this document is the first real attempt to define the boundaries and interaction between impacts and risk and opportunities.
"EFRAG's work is pioneering, it might not be perfect for sure and over time it will be improve, but the EU through this work is well ahead of anyone else: the ISSB, the US, Japan...," the stakeholder said. "This tends to be forgotten these days amidst some critics that are constructive, and others that seem to be voiced just to throw a spanner in the works."
The implementation guidance will be discussed at EFRAG meetings next week and is very likely to be amended. Once approved, Corporate Disclosures understands EFRAG will not launch a public consultation, per se, but will leave it open for comment for a one month period.