Is the International Sustainability Standards Board materially flawed?

There's been a lot of debate recently about different kinds of "materiality" and the role of the IFRS Foundation and the nascent International Sustainability Standards Board (ISSB). This LinkedIn post is one example.

I know many people are confused about this topic, so here's my attempt to clarify a few key terms and summarise why the IFRS is being criticised:

  • Impact materiality is about the impact OF an organisation ON the world: in other words, how people and the planet are affected by an organisation's actions. For example, human rights abuses in a company's supply chain can massively impact people's lives.
  • Financial materiality is about the impact ON an organisation OF the world: in other words, how external factors might affect an organisation's ability to make money. For example, water scarcity in a company's supply chain may cause an interruption in its sourcing of a critical raw material.
  • Double materiality is simply about considering both of the above together.
  • Dynamic materiality is concerned with the fact that issues can become material over time, and so any sensible materiality analysis should take a forward-looking perspective. For example, more progressive environmental laws might make previously acceptable emissions illegal.

Some impactfully material issues might over time become financially material. For example, if an organisation sells a drug which is addictive and harmful with prolonged use, there may eventually be a massive public backlash and boycott of the business.

But many impactfully material issues will never be seen as financially material, or at least not in any helpful timeframe. For example, some companies do not view their own CO2 emissions as financially material, because they either don't see climate change as financially material, or they see their emissions as but a tiny contributor to climate change.

The dictionary definition of "sustainable" is "the ability to endure". The ability of the global economy to endure depends upon the existence of a functioning society on a habitable planet. That requirement seems self-evident, as does the role of the economy in upholding it.

But the stated intent of the ISSB is to focus only on financial materiality. ISSB supporters say that this is an important first step, and much better than nothing: consolidating information relevant to capital markets at least gets their attention, and that has to be a good thing.

Critics counter that it's not a first step, it's a misstep: focusing all that attention on one side of the equation—the money-making side, and not the world-degrading side—is unhelpful at best.

ISSB seems to have consciously decided to tell only half the story. And it's by far the least important half, if we want capital markets to play their part in building a better world. That's why people are so frustrated.

I hope that's helpful, and if anyone from IFRS is reading and would like a constructive offline chat, I'd be delighted to hear from you.