The debate around materiality has been ignited again with the EU holding firm to double materiality, despite significant pressure to align with the ISSB’s financial-materiality-only framework. As the concept and terminology are crawled over, I’m drawn to recapping why we are doing this and looking more closely at how materiality is calculated.
The concept of materiality is sound: companies should focus on the sustainability issues that genuinely matter to their business and the world around them, thereby providing stakeholders with decision-useful information. Its purpose is to rid us of the nonsense, like a hotel chain focusing on tree planting and organic vegetables rather than energy, water and human capital.
Materiality has been around for aeons now and we risk overthinking it. The “financial versus impact” lens creates gaps that feel absurd. Ask any senior partner at a professional services firm and they will say that climate belongs on their materiality list, given client expectations, talent decisions, and reputational risk, but it’s not there under the SASB definition. For every firm, carbon and climate should be material and, if you are a supplier, what is material to your biggest corporate customer is material to you.
Yet the practical question of how firms quantify material sustainability-related risks and opportunities remains largely unaddressed. Both CSRD and IFRS S1/S2 require firms to do this, yet neither provides meaningful guidance on how to do the maths. It becomes yet more complicated when we consider how ESG issues shift over time: what is financially immaterial today – such as fertiliser use or operating in regions vulnerable to water-stress – can become financially material in the future, or indeed, the financially remote can become financially urgent quickly, as we’ve seen with the supply chain impacts from recent geopolitical events.
Finance teams regularly build business plans, run scenarios, or stress-test capital allocations, so they are used to forward-looking analysis, but historically this work has been for internal purposes. Sustainability reporting asks for forward-looking financial judgements in the public domain, under potential legal and reputational liability, with no agreed methodology for how to make the calculations. Plus, a lack of agreed metrics and broad estimate ranges for key assumptions add to accountants’ discomfort.
Take cotton, a raw material whose exposure to climate change is well documented. A 2025 peer-reviewed life-cycle assessment (Yang et al., ScienceDirect) shows emissions intensity ranging from 0.3 to 1.4 tonnes of CO2e per tonne of cotton produced, a nearly five-fold spread driven by geography, fertiliser use and farming system. Pricing that carbon footprint introduces further uncertainty: carbon credits range from under $1 per tonne of CO2e for avoidance credits to over $180 per tonne for durable removals, while EU ETS compliance allowances trade at €60–80 per tonne. Layer on considering the long-term progression of these metrics over different climate scenarios and the potential for variation based on assumptions chosen is mind-boggling; multiply this across all raw materials for an apparel manufacturer and the possible permutations become mind-numbing.
For companies with sophisticated enterprise risk management systems, these types of calculations are their business as usual, as they treat sustainability just the same as other risks and opportunities. A large oil and gas company routes sustainability risks through risk management infrastructure and financial modelling capability built over decades. But for many firms, this risk management-to-finance interface is nascent. Even with this capability, reliable comparability remains elusive unless the same key assumptions are used.
What would actually help? I have one internal recommendation:
• Materiality done well requires risk, finance, strategy and sustainability in the room together. The analytical skills exist across those functions, and they need to be brought to bear on the same problem with shared assumptions.
And three external asks:
• Collaboration among leading practitioners, academics and standard-setters to drive consensus and harness technological tools for consistent calculation methodologies so that “quantify your material risks” becomes an instruction with a toolkit rather than one without.
• Agreement on sector-level externality pricing for carbon, water and natural resource costs embedded in inputs and supply chains.
• Active pragmatism in sustainability reporting. We risk inaction by being held to the rigour that financial accounting took generations to achieve.
This is also, quietly, one of the more tractable problems in sustainability reporting. It is not a values debate; it is a methodology gap. AI can help close it. So let’s get on with it.
Leave a comment