The UK should seek a 'double materiality' reporting approach, writes Sarah Wilkin
The recent launch of a package of consultations by the UK government covering sustainability reporting standards (as well as sustainability assurance and transition plans) marks a milestone in the development of the UK's framework for how organisations report their environmental, social, and governance (ESG) impacts.
Ahead of this launch, PwC's 2024 Global Investor Survey found that 71% of investors agree ESG should be deeply embedded into corporate strategy, and more than half say firms must shift their business models due to climate risk. Meanwhile, 90% of public companies now publish sustainability reports, driven by investor expectations for transparency.
The sustainability reporting approach adopted in the European Union under the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS) is one of "double materiality", a position that the Institute of Chartered Accountants of Scotland (ICAS) has long championed. It means that a company would report on the impact it has on the economy, environment and society, in addition to the impact of such factors on the business. In other words, impact materiality and financial materiality.
In contrast, the UK has proposed adopting a "single materiality" perspective. This approach is centred on financial relevance to investors, through the endorsement of the International Sustainability Standards Board (ISSB) S1 and S2 standards. At the ICAS Sustainability Summit in April 2025, Andrew Death, Deputy Director for Corporate Reporting, Assurance and Governance at the UK Government, did however note a desire to explore regulatory equivalence with the EU. The aim: to reduce complexity and avoid the duplication of reporting efforts across jurisdictions.
Achieving this consistent and comparable reporting alignment, as well avoiding unduly burdening companies by requiring reporting under multiple frameworks, is the holy grail. But how do we get there given the likely divergence between the EU and UK regimes?
A potential pathway
According to KPMG's Survey of Sustainability Reporting 2024, the Global Reporting Initiative (GRI) standards are already used by 77% of the world's largest companies by revenue. As a framework that facilitates impact reporting, GRI could help bridge the gap between differing approaches. Under the EU's European Sustainability Reporting Standards (ESRS), companies are reporting 'with reference' to the GRI standards. So, an approach in the UK combining both ISSB standards and GRI standards could largely equate to equivalence with the EU system.
The GRI believes that an organisation needs to start with identifying its most significant impacts through broad stakeholder engagement, not limited to a narrow investor focus or financial lens. The benefit of this approach is a much more holistic view of risks and opportunities across the business, equipping leaders with better information to make informed decisions and improve business resilience. The drawback is the clear need for investment of both time and resources in engaging with stakeholders.
View from the market
Investors are assumed to be interested in a single/financial materiality lens, but anecdotally we hear they would appreciate the more holistic view a double materiality approach provides. Analysis from the Institutional Investors Group on Climate Change, for example, has shown demand for material information that enables investors to understand climate-related risks and opportunities. Engagement with a broad range of stakeholders, including but not limited to, employees, customers, suppliers and communities where organisations operate, yields a wealth of information on an organisation's operations, risks and opportunities which is relevant to investors. The ability to identify issues on the horizon that may not be financially material today but could be tomorrow (known as dynamic materiality) ensures investors are one step ahead at predicting a significant impact on their investee's performance.
The lines are increasingly blurred between "double" and "single" materiality, as in many cases items which are material from an impact perspective are also financially material - and are therefore captured under both approaches. The advantages of a more holistic and comprehensive approach, using a wider lens through which to view the business and identify risks and opportunities, are clear regardless of the terminology used.
An illustrative example
From a public interest perspective, reporting of sustainability information is equally as important (if not more so) than financial information. Investor trust is fragile: the PwC survey found that 94% of investors say sustainability reports contain unsupported claims, and three-quarters consider ESG risk management an important investment factor. If we get this wrong, then instead of (or perhaps as well as) investors losing money, there will be serious repercussions for the environment and society. We only need to look to examples like water companies discharging raw sewage into our rivers and seas to imagine the impact.
A single materiality approach that requires reporting with a financial lens, would be unlikely to require disclosure of the impact on communities of discharging raw sewage on to Britain's beaches, unless there was a material financial implication such as a regulatory fine or legal case. However, if a double materiality lens was applied and a wide range of stakeholders were consulted, this would likely be considered a material impact on the environment and on society. This is something investors would want to know about, even in the absence of an immediate material financial impact, given the potential adverse effect on reputation and consumer demand.
Sustainability reporting is a journey and, in the same way that financial reporting developed over time, sustainability reporting looks set to follow suit. Adoption of the ISSB global baseline standards is a first step in the right direction. However, a more holistic assessment of impacts, risks and opportunities across the business, through broad stakeholder engagement, will serve to better inform investors and other stakeholders of issues that may have significant financial impacts in both the short and the long-term.
As the proposed UK sustainability reporting regime takes shape and responses to the government consultations are drafted, will we seize the opportunity to lead by example with a holistic, resilient approach that is comparable to peers in the EU, or risk being left behind with a narrow, limited focus that could overlook material impacts? ICAS' order is for a double measure of financial and impact materiality.
Sarah Wilkin is Director of Sustainability at the Institute of Chartered Accountants of Scotland (ICAS)