Financial materiality

Financial materiality is the outside-in perspective that identifies which sustainability matters, for example climate risks, could significantly affect a company's financial position, performance or value. It is one of the two dimensions of the double materiality analysis set out by the CSRD and the ESRS, and the central approach of the ISSB standards.

How the financial perspective works

The analysis starts from a simple question: which changes in the environmental, social or governance landscape could influence the company's results, financial position or prospects? The focus is on the effect the surrounding world has on the business, and on how likely and how large that effect could be. The outcome helps decide which matters deserve priority in strategy, in risk management and in the information shared with investors and lenders.

Examples of financially relevant matters

• Exposure to carbon prices: costs linked to carbon pricing mechanisms can make operations more expensive. Tools such as an internal carbon price help estimate that effect.
• Physical risk to facilities: extreme weather events can damage factories, warehouses or infrastructure and disrupt operations.
• Dependence on scarce resources: water, raw materials and other resources can change in availability or price and constrain production.
• Regulatory and market shifts: new legal requirements or changing customer preferences can alter demand for certain products and services.

Financial materiality and impact materiality

The CSRD and the ESRS combine two lenses. Impact materiality looks at the effects of the company on people and the environment. Financial materiality looks at the effects of the outside world on the company. A matter can be material from either perspective or from both, and the company documents the outcome in its sustainability report. The IFRS S1 and IFRS S2 standards, designed for investors, centre their analysis on the financial perspective.

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