INSIGHT by Nicolas Poolen, Senior Manager, Finance Engagement, Global Nature Positive Initiative, WWF International
* Updated on 14 August 2023
Last month, the International Sustainability Standards Board (ISSB) released its inaugural disclosure standards, which have already been widely recognized as a major cornerstone in the global disclosure landscape. They build on the momentum created by the Kunming-Montreal Global Biodiversity Framework, which includes a target for businesses and financial institutions to disclose nature-related impacts, dependencies and risks, in order to help deliver on the GBF’s objective of halting and reversing nature loss. However, ISSB’s divergence from a ‘double materiality’ approach, supported by many investors and adopted by the European Union, is cause for concern.
Resilient natural ecosystems are essential for a habitable planet, as well as resilient economies. More than 50% of our global economic value generation is dependent on nature, and the collapse of select ecosystem services could wipe USD 2.7 trillion off global GDP annually by 2030.
Many corporations and financial institutions are not fully aware of how much they rely on and impact the natural world. Ignoring this relationship has harmful consequences for people and nature, and may also expose companies themselves to significant risks and missed opportunities.
Transparent and consistent assessment and disclosure of corporate interaction with nature is essential to stimulate and inform positive business action for nature. Businesses can either disclose only nature-related financial risks and opportunities (referred to as ‘financial materiality’), or also all impacts on nature and society, referred to as ‘double materiality’.
| Is financial materiality bad?
Financial-materiality approaches are considered to be most relevant for meeting a corporation’s legal mandate to create value for its beneficial owners, and transparently disclose relevant information that may affect their ability to do so. This perspective informs ISSB’s objective, which follows the International Financial Reporting Standards’ (IFRS) approach, to provide capital market participants with all relevant information on sustainability risks and opportunities to support financial decision-making.
Relevant business impacts can be covered in such assessments and disclosures, since business impacts with material consequences for nature and society, may automatically translate into company-specific financial risks, through possible reputational, regulator, policy and legal implications. For instance, the impacts of BP’s Deepwater Horizon oil spill had significant financial consequences, including fines in the range of USD 62.59-144.89 billion, reported losses of USD 3.7 billion in 2010, a plummeting market cap, and share prices that never fully recovered1.
Financial materiality isn’t a bad thing to do. Robust assessment and disclosure of nature-related financially material information can boost understanding of how impacts and dependencies may translate into financial risks, and thereby spur positive business action, and reduce and avoid impacts on nature.
| A risky path ahead
However, not all impacts on nature lead to corresponding financial risks, and significant impacts may be ignored or deprioritized, when only viewed through a financial materiality lens. Furthermore, impacts on nature without immediate direct financial consequences may result in financial risks that only emerge over time, in particular through systemic risk dynamics. For instance, following the Deepwater Horizon oil spill, investments in other industries were exposed to risks beyond direct holdings in BP. The local tourism industry was affected with USD 22.7 billion in lost revenue by 2013, and the local fishing industry was expected to lose USD 8.7 billion in revenues by 20201. These risk dynamics may be difficult to predict and quantify, but will become increasingly significant, with five of the nine critical planetary boundaries (global environmental limits within which humanity can safely operate) now exceeded2.
Furthermore, the divergence on materiality may bear a secondary risk of fragmentation in the disclosure landscape, with governments feeling that they have to choose between frameworks and standards, and with financial materiality approaches requiring significantly less political investment. Most recently, the Australian government announced its intention to not make double materiality part of its climate disclosure regime, even though the Global Reporting Initiative’s standards (which follow an impact materiality approach) already dominate disclosures by large companies in Australia. Conversely, the European Sustainability Disclosure legislation has managed to avoid this risk, and is going ahead with its double materiality reporting standards. Fragmentation in the disclosure landscape will diminish comparability between disclosures, and thereby hinder investor efforts to align financial flows for a nature-positive future upon which our habitable world depends.
Notwithstanding these risks, ISSB’s standards are perceived as a global baseline which may stimulate positive progress, through building the support for mandatory sustainability disclosures and supporting data clarity and accessibility. In addition, requiring companies to disclose how nature impacts their finances first may be more feasible in jurisdictions where governments are still hesitant about mandatory sustainability disclosure, and may set the stage for more comprehensive reporting in the future. For instance, in the US there is severe political resistance to progressing ESG issues3. However, it should be clear that financial materiality reporting is ultimately complemented by reporting on all impacts, as suggested jointly by ISSB & GRI and as accommodated by the Task Force on Nature-Related Financial Disclosures’ ‘flexible materiality’ approach.
| Embracing double materiality
Double materiality assessment and disclosure is essential if companies are to align their actions with the global sustainability agenda and the needs of their stakeholders, and contribute to a more sustainable and resilient future. It will help shift global financial flows toward nature-positive outcomes, away from those that harm nature toward those that heal, and that are necessary for a resilient economy.
Currently, the global reporting landscape lacks consistency and clarity, which hinders the adoption and implementation of double materiality reporting. ISSB’s financial materiality approach may stimulate progress, but must not close the door on double materiality. Governments should quickly set a clear pathway to embracing double materiality in their disclosure regimes, and similarly, standard setters should stress the importance and benefits of doing so. By taking these steps, they can support companies in their reporting journey, and foster the transition towards a nature-positive future.
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by Nicolas Poolen
| about
Nicolas Poolen is a Green Finance Specialist at WWF. He has a background working on diverse topics ranging from Bankable Nature Solutions to engaging the financial sector on the integration of nature into financial decision making and regulation. Through this experience he has collaborated with and led projects with Dutch Ministry of Foreign Affairs, The Dutch Entrepreneurial Development Bank (FMO), the Taskforce on Nature related Financial Disclosures (TNFD), The Global Impact Investing Network, Rabobank and others. Since 2023, Nicolas has been managing the Finance Engagement, for WWFs Global Nature Positive Initiative. Prior to joining WWF, Nicolas was a Research and Engagement Advisor for Follow This, a movement of activist shareholders in the oil and gas industry. Nicolas has a background in business and sustainability.
[1] WWF (2019) The Nature of Risks, available here https://wwfint.awsassets.panda.org/downloads/wwf_nature_of_risk_final2.pdf
[2] Person et al (2022) A Safe Operating Space for Humanity: The Planetary Boundary for Novel Entities. Available here
[3] Responsible Investor (2022) US anti-ESG state officials home in on asset manager activism. Available here
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
