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Frédéric Ducoulombier (EDHEC-Risk Climate) : « The double-materiality serves both investors and civil society »

Frédéric Ducoulombier , EDHEC-Risk Climate Impact Institute Director

In a Le Monde, op-ed, Emmanuel Faber (ISSB) represents that the double-materiality approach to sustainability reporting is a simplistic concept whose popularity derives from a “triple illusion.” [...] Frédéric Ducoulombier, Director of the EDHEC-Risk Climate Impact Institute, reviews the key elements of this debate.

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19 Oct 2023

In an op-ed published by French reference newspaper Le Monde on 10 October (1), IFRS Foundation International Sustainability Standards (ISSB) Board Chair Emmanuel Faber represents that the double-materiality approach to sustainability reporting is a simplistic concept whose popularity derives from a “triple illusion.”

Interestingly this offensive - simple materiality would be sufficient to finance a just transition - takes place as the first set of European Sustainability Reporting Standards (ESRS), which have double materiality at their heart, are under scrutiny by the European Commission’s co-legislators prior to definitive adoption. Frédéric Ducoulombier, Director of the EDHEC-Risk Climate Impact Institute (2), reviews the key elements of this debate (3).


What do we mean by 'materiality'?

Materiality is a key principle of corporate reporting, but its definition has evolved over time to capture changing priorities and it remains contested, especially in relation to corporate responsibility and sustainability – other contested concepts.

What is reasonably established is that an information is deemed to be material if omitting, misstating, or obscuring it could reasonably be expected to influence the assessments or decisions that users make based on corporate statements. Materiality however depends on perceptions of who these users are and what they need the information for.


What do single and double materiality mean?

What is now the traditional view of materiality in accounting is defined in relation to the financial decisions of providers of capital. This perspective need not disregard environmental or social factors, or the welfare, needs and aspirations of stakeholders other than providers of capital, but these are integrated, outside-in, only to the extent that a business case exists to do so. With this approach the only sustainability-related information that requires reporting is that which is seen as having financial materiality, sometimes called single materiality.

The alternative view considers the needs of a multiplicity of stakeholders – with nature as a silent stakeholder – that are or may be impacted by the activities of the reporting entity. The added inside-out perspective calls for the disclosure of the entity’s material impacts on people and the environment irrespective of financial materiality. The ESRS adopt a “double materiality” approach requiring entities to disclose both the material sustainability impacts of their activities (throughout their value chains) and, in alignment with the ISSB standards, any material financial risk or opportunity arising in relation to sustainability matters.


What are Mr Faber's criticisms?

Mr Faber calls double materiality simplistic, accuses parties espousing it of rejecting financial materiality and claims that simple materiality is sufficient to reorient the required funds towards the just transition within the allotted time. He also represents that the ISSB has sufficiently extended the scope of accounting materiality for corporates to become stewards of “human, social, and natural capital" and concludes his Blitz with a call to “put an end to groundless disputes". As double materiality subsumes financial materiality, it is challenging to understand how it could reject it; as it also extends financial materiality, it is challenging to see it as “simplistic”.

Above all, Mr Faber represents that double materiality perpetuates a triple illusion (4).

The first illusion would be that the “performative power of materiality”, by which Mr Faber means an “immediate, clear, and strong” market reaction, could extend beyond the economic sphere. Mr Faber represents that impact materiality disclosures serve “a myriad of piecemeal usages” whose impacts are infinitesimal. Financial materiality however is defined in relation to the judgment of a reasonable investor rather than the hypothetical reaction of an implicitly efficient market.  For centuries if not millennia investors and other stakeholders have integrated non-financial considerations into decisions that financially impact companies. As the weight of stakeholders responding in similar ways to a given environmental, social, or governance (ESG) issue increases, the issue can become financially material for capital providers. And while this typically happens gradually as societal norms change or impacts become better understood, the transition is sometimes so swift it can bankrupt blind sighted entities.

The second illusion would be that an exhaustive account of impacts be possible. However, reasonable people and the legislator amongst these, are only asking for disclosure of material impacts of relevance to stakeholders.

The third illusion would be to equate disclosure with change in corporate behaviour and let double materiality “obscure the need for political ambition”. There is theoretical merit in Mr Faber’s warning as the introduction of disclosure requirements has too often been promoted as a light-regulation solution to societal ills. In practice however, the role of the ESRS is to ensure transparency and accountability of companies in relation to their sustainability impacts, risks and opportunities in the wider framework of the substantive sustainability goals and policies of the European Green Deal. Double materiality is not a Trojan horse of business-as-usual interests. Actually, impact disclosures are opposed by some of the very same interests that are lobbying to derail or delay substantive regulation.


On the other hand, what are the key arguments that, in your view, strongly support double materiality?

The poly-environmental crisis we are facing is evidence of market failure linked to externalities – documenting these (impact materiality perspective) and the risk that they become partially internalised (financial materiality perspective) can only go so far. What is indeed needed is legislation to require that harm caused by economic activities be brought back to safe levels and to provide companies with an explicit and convincing schedule for the internalisation of externalities.

European lawmakers have adopted an ambitious program for ecological transition and the integration of social issues into economic activities. They have deemed it necessary to assess companies' sustainability performance and monitor their alignment with public policy objectives. The delegated regulation, prepared by the European Commission, reaffirmed the legislators' commitment to double materiality. This decision came despite intense lobbying by certain industrial and geopolitical interests that advocated for abandonment of double materiality in favour of alignment with the ISSB. As the rubber meets the road on the Green Deal, the legislators' determination is put to the test. Now is the time to double down on our commitments and bring our regulations and tools into line with epochal challenges.



(1) « Comptabilité d’entreprise : « Exiger que la matérialité s’étende au-delà du domaine économique est en réalité simpliste » », Emmanuel Faber, Le Monde (Oct. 10, 2023)

(2) The EDHEC-Risk Climate Impact Institute, an applied research centre, explores the challenges of dual materiality in climate matters to help decision-makers manage the financial risks associated with climate change and contribute to transforming financial tools to support the transition :

(3) The Fall 2023 newsletter of  EDHEC-Risk Climate features a Long Read interview titled "Sustainability reporting and material delusions", which discusses these issues in depth.

(4) A short version of this interview was published as an op-ed by Investment and Pensions Europe on 13 October 2023, see "Viewpoint: A response to ISSB's Faber's 'triple illusion' criticism of double materiality", by F. Ducoulombier.


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