Financial Materiality

Financial materiality is one of the two perspectives of double materiality under the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS). It considers sustainability matters from an outside-in perspective: the focus lies on the risks and opportunities arising from environmental, social and governance factors that affect the reporting company and that may influence its future development, financial position, financial performance, cash flows, access to finance or cost of capital over the short, medium or long term.

A sustainability matter is financially material when it triggers, or could trigger, a material financial effect on the company. A key consideration is whether information needed by the primary users of general-purpose financial reports (such as investors, lenders and other creditors) to make their assessments is missing. Financial materiality is assessed on the basis of the likelihood of occurrence and the potential magnitude of the financial effects. Dependencies on natural, human and social resources that may turn into risks or opportunities are equally relevant, as are physical and transition climate risks.

Financial materiality must be distinguished from impact materiality (inside-out), which captures the company's effects on people and the environment. A matter may be material under only one of the two perspectives, under both, or under neither; materiality under just one perspective already triggers a disclosure obligation. The results of the financial materiality assessment are documented in the IRO analysis (impacts, risks and opportunities) and determine which topical ESRS and data points must be disclosed in the sustainability statement.