The International Sustainability Standards Board (ISSB) is, thankfully, losing momentum in its call for a more joined-up approach to additional “double materiality” reporting requirements introduced in the EU’s recent Corporate Sustainability Reporting Directive (CSRD).
The CSRD is moving forward toward imposing separate reporting requirements for all corporates in the EU on their “second materiality” – the impact their activities have on their stakeholders and the planet. But, according to ISSB’s Chairman Emmanuel Faber, in the name of interdependence, it would be preferable if the first stage of materiality (reporting on sustainability issues that are material to financial performance only) integrated second materiality factors without splitting them in two.
In reality, however, changing the name of something does not prevent the outcome from being the same – it’s just a matter of vocabulary. The EU’s changes are, in fact, adequate for investors seeking to understand the positive and negative impact of their investments.
Double materiality under the new EU rules means that when investors look at an investment, they first consider the financial performance of a company (the first materiality). At this stage, they look at the balance sheet and income statement, analyze the numbers, and consider the internal and external elements that have influenced those results in the past and might affect them in the future. Then they consider the second materiality – how the company affects its stakeholders and the environment. As with an income statement, this social and environmental impact could be negative, with ideally a view to being reduced or turned positive.
The conscious or responsible investor looks at the second materiality, not just the first, to understand the cost or benefit that any investment might have on the planet and society. This is what it means to be an impact investor.
Understanding impact through ‘additionality’ and ‘attribution’
Central to the notion of second materiality – and an impact investor’s ability to understand how their investments are delivering on their goals – are the concepts of additionality and attribution.
Additionality asks whether the impact would have occurred anyway without the investee’s activities and the impact fund’s investment, while attribution asks how much of that change the investor is responsible for.
Attribution can be viewed as a slice of the pie of the total impact generated: how much impact can be attributed to my investment alone, knowing that there are several investors involved?
So, how does this work in practice? And what tools are out there to help investors understand the impact of their investments?
