With the dizzying number of sustainability reporting frameworks that are in use across the industry, we often hear about materiality and, therefore, which environmental, social, and governance topics companies must disclose. But sustainability reporting frameworks differ in how they define what’s “material.” The International Sustainability Standards Board (ISSB) and the European Sustainability Reporting Standards (ESRS) represent two major approaches. So what are the differences to look out for?
ISSB: Financial (Single) Materiality
ISSB’s standards (IFRS S1 and S2) define information as material if its omission “could reasonably be expected to influence decisions that primary users of general-purpose financial reports make.” These users are investors, lenders, and creditors — so the focus is outside-in, emphasizing how ESG factors affect a company’s value.
Material topics are those that could influence cash flows, financial position, or cost of capital over the short-, medium-, or long-term. ISSB allows for judgment rather than fixed thresholds, asking companies to weigh both qualitative and quantitative evidence. For example, climate risks, workforce retention, or supply chain dependencies could all be material if they affect enterprise value.
ISSB expects companies to integrate materiality assessments into existing risk management and reporting processes, considering the entire value chain where relevant.
ESRS: Double Materiality
ESRS expands the scope by requiring companies to assess two dimensions of materiality:
- Impact materiality (“inside-out”): the company’s significant positive or negative impacts on people and the environment.
- Financial materiality (“outside-in”): sustainability risks or opportunities that influence financial performance, cash flows, or access to capital.
A topic is considered material if it meets either test. This means ESRS reports include both sustainability impacts (even if not yet financially significant) and financially material risks (even if societal impacts are limited).
To determine this, ESRS requires companies to engage stakeholders and analyze impacts and risks across the full value chain. The process must be documented, auditable, and disclosed in the sustainability statement — a key difference from ISSB.
Comparing ISSB and ESRS Materiality Approaches
|
Aspect |
ISSB (IFRS S1/S2) – Financial Materiality |
ESRS (CSRD) – Double Materiality |
|
Core Concept |
“Outside-in” focus — sustainability matters that affect the company’s enterprise value |
Combines “outside-in” (financial) and “inside-out” (impact) perspectives |
|
Primary Audience |
Investors, lenders, and creditors |
Investors and other stakeholders (employees, communities, customers) |
|
Definition of Materiality |
Information that could influence investor decisions or affect enterprise value |
Information that is significant from either an impact or financial perspective |
|
Stakeholder Engagement |
Optional, used mainly for understanding risk |
Mandatory — integral to identifying impacts and assessing significance |
|
Disclosure of Process |
No formal requirement to disclose how materiality was determined |
Required — companies must describe and justify their materiality process and results |
|
Materiality Threshold |
No set thresholds; based on financial significance and investor relevance |
No fixed thresholds; based on severity and likelihood of impacts and financial effects |
|
Reporting Output |
Focused disclosures on sustainability topics affecting enterprise value |
Disclosure of both impact and financial material topics; transparency about omitted topics |
A noteworthy difference is the transparency of the materiality assessment process itself. ESRS explicitly requires companies to disclose their materiality assessment process and results in the report. This includes a description of steps taken, criteria and thresholds used, stakeholder engagement performed, and the list of material topics (with possibly some reasoning). The ISSB standards do not have an equivalent requirement to describe the materiality process. A company reporting under ISSB is typically not required to publish how it did its assessment; it must simply ensure all material information is included.
In practice, many companies (even under ISSB or other frameworks) do include a brief “materiality matrix” or description in sustainability reports. Under ESRS/CSRD, it is mandatory to include this, and auditors will check it.
Bringing both frameworks together in practice
The materiality assessment is a foundational exercise that not only drives the entire sustainability reporting effort, but also serves as a strategic management tool. A well-designed assessment clarifies which issues genuinely matter to the business and its stakeholders. These material topics should guide sustainability teams’ priorities, shape long-term strategy, and influence how budgets and resources are allocated. If organizations choose to shape their sustainability strategy without evaluating materiality, they risk diluting their efforts, missing opportunities for meaningful impact, and overlooking issues that could quickly become financially or socially significant.
Organizations applying these frameworks should recognize that ISSB and ESRS are not at odds, but rather complementary in many ways. ISSB’s materiality approach is a subset of ESRS’s broader approach. The choice isn’t one or the other — companies under EU law must do ESRS (and thereby cover ISSB’s ground), whereas companies elsewhere might choose ISSB’s investor-focused route but could increasingly face pressure to consider impact materiality from stakeholders or future regulations.
