Financial materiality

A sustainability matter is material from a financial perspective if it generates risks or opportunities that affect (or could reasonably be expected to affect) the undertaking’s financial position, financial performance, cash flows, access to finance or cost of capital over the short, medium or long term.

Financial materiality is an essential concept in corporate reporting that describes the relevance of information for the economic decisions of investors and other stakeholders. Information is considered material when it has potential impacts on a company's financial position, profitability, and cash flows. This principle has its origins in U.S. accounting standards and is also a central element of the International Financial Reporting Standards (IFRS).

With the introduction of sustainability reporting, particularly through the EU Directive on Corporate Sustainability Reporting (CSRD), the understanding of financial materiality has expanded. It is now an integral part of the "double materiality" principle, which considers both financial as well as environmental and social aspects. The outside-in perspective applied here highlights how external environmental, social, or governance factors can influence a company's financial health.Practical applications of these concepts can be found, for example, in the oil and gas industry, where climate risks can significantly affect business due to regulatory requirements and market changes. Identifying financially material topics is not only important for risk management but also plays a crucial role in strategic alignment and compliance with regulatory reporting obligations. Companies must establish appropriate thresholds to determine which topics are significant for their reporting.

Overall, financial materiality remains a central control instrument that helps companies effectively identify risks and opportunities and secure long-term economic performance, increasingly incorporating comprehensive environmental and social issues.