A slew of fund managers have asked the body developing global standards for sustainability reporting to revisit their proposals and introduce the hotly-debated concept of “double materiality”.

The little known and relatively new principle is being used in new European Union legislation. The idea is that companies should report not only the impact of climate change on corporate prospects, but also the impact of corporate activity on the environment.

Some investors—including Allianz, Amundi, BNP Paribas, DWS, and Schroders—have, according to a new report, asked the International Sustainability Standards Board (ISSB) to place double materiality at the heart of new standards under development.

ISSB standards development has the backing of a number of big names, including BlackRock and Apple, and will attempt to set a baseline for global sustainability reporting, potentially ending the fragmentation of climate and environment-focused company disclosure systems. The UK pledged, ahead of COP26 in Glasgow last year, to implement ISSB standards as soon as they are ready to ship.

But a review of more than 600 responses to the ISSB consultation by market analysts Morningstar reveals an interest in double materiality.

Asset managers DWS urge the ISSB to work with other accounting experts to develop a “workable double materiality concept”.

‘Gold standard’

“This is a significant opportunity to address the fragmentation of reporting standards and develop a truly comprehensive ‘gold standard’ for sustainability reporting,” DWS writes.

BNP Paribas worries that “impact” information is only required by ISSB reporting if it affects enterprise value. But it notes multinationals can do many harms without reaching a “threshold of financial materiality”.

“Without a full inventory of impacts,” says BNP, “we cannot assess which are the most significant, where they are coming from, etc. Without this information, we cannot hope to reverse the systemic risk of nature loss, climate change or even child labour.”

Schroders raises another issue: the EU’s Corporate Sustainability Reporting Directive (CSRD) includes “double materiality”. If the ISSB puts the idea aside, reporting standards will once again be inconsistent.

That will make users unhappy, given one of the major aims of ISSB standards is to circumvent the multitude of sustainability reporting systems available for selection.

Morningstar itself backs a “gradualist approach”. “While we believe that ISSB should initially focus on financial materiality, we also recognise that it does not respond to all the needs of investors.”

Open to interpretation

However, simply bowing to public demand and embracing double materiality only starts a fresh discussion. Matthias Täger, a researcher at the London School of Economics, points out that while the principle is accepted, the meaning may still be lacking and could depend on what the reporting is used for—judging financial risks or for other reasons.

“As an abstract concept, double materiality still needs to be filled with life. Its actual meaning will most likely remain contested for a while.”

That said, there has been a hidden campaign under way to persuade companies to use double materiality voluntarily. However, it’s possible that the decision of whether double materiality ends up in ISSB standards could be a political one.

The EU is pushing ahead with the concept in its own legislation; meanwhile, the US is still to introduce climate-risk reporting. If the ISSB wants the greatest level of “interoperability” between US standards and its own, it may have to leave double materiality for another day.

There is more to consider in ISSB standards than double materiality. But it is an element that cuts to the heart of sustainability. Time will tell if the standard setter embraces it or leaves it on the shelf.