Sustainability reporting frameworks often differ in how they determine “material” topics to disclose. The European Sustainability Reporting Standards (ESRS) under the EU’s Corporate Sustainability Reporting Directive (CSRD) apply a double materiality concept, while the International Sustainability Standards Board (ISSB)’s IFRS Sustainability Disclosure Standards focus on financial materiality (sometimes called “single materiality”). Check out this detailed analysis of the ISSB vs. ESRS materiality analysis approach.
Materiality Assessment Concept: ISSB vs. ESRS
ISSB – Financial Materiality Assessment Concept
The ISSB’s standards (e.g. IFRS S1 General Requirements and IFRS S2 Climate-related Disclosures) require companies to disclose sustainability information that is material to enterprise value. In ISSB terms, an item is material if omitting or obscuring it “could reasonably be expected to influence decisions that primary users of general purpose financial reports make”. Primary users are defined as investors, lenders, and creditors.
In practice, this means ISSB materiality is an “outside-in” perspective – focusing on how environmental, social, and governance (ESG) matters create risks or opportunities that impact the company’s cash flows, financial position or cost of capital over the short, medium, or long term.
There are no preset quantitative thresholds; materiality judgments depend on the nature or magnitude of the effect on the company’s prospects, requiring management to consider both quantitative and qualitative factors. For example, a sustainability factor is material under ISSB standards if it could affect the company’s future net cash inflows or investor decisions, even if the effect is hard to quantify precisely.
The ISSB expects companies to consider a broad scope (including their value chain) when identifying sustainability-related risks and opportunities – i.e. dependencies on resources, suppliers, customers, etc., that could affect enterprise value.
ESRS – Double Materiality Assessment Concept
European Sustainability Reporting Standards (ESRS) apply a double materiality approach as mandated by the CSRD. Double materiality means a sustainability matter is material if it is material from either an impact perspective or a financial perspective (enterprise perspective), or both.
In other words, companies must consider:
- Impact materiality: the company’s significant impacts on people or the environment (an “inside-out” perspective), and
- Financial materiality: sustainability-related risks and opportunities that significantly influence the company’s financial situation (an “outside-in” perspective).
The ESRS define impact materiality as information about the undertaking’s material actual or potential impacts on people or the environment, positive or negative, over short-, medium-, and long-term.
Financial materiality in ESRS is defined similarly to the ISSB concept – information about sustainability matters is financially material if it could trigger or have a material influence on the undertaking’s financial position, performance, cash flows, access to finance or cost of capital over the short, medium, or long term (this aligns with the perspective of investors and other financial report users).
Importantly, under ESRS a topic is considered “material” if it meets either the impact criterion or the financial criterion. Thus, ESRS require a broader lens: companies must report not only on sustainability topics that affect the business’s financial value, but also on those where the business has significant sustainability impacts on society or environment, even if those do not (yet) affect enterprise value.
Like ISSB, ESRS do not set hard quantitative thresholds for materiality; companies must apply judgment using the qualitative criteria defined in ESRS 1 (e.g. severity and likelihood of impacts, and magnitude of financial effects). ESRS explicitly encompass the full value chain in this assessment – material impacts, risks, and opportunities (IROs) include those in the company’s own operations and upstream/downstream business relationships .
Comparison of ISSB vs. ESRS Materiality Orientation
The table below summarizes the materiality assessment concept in ISSB vs. ESRS:
| Aspect | ISSB (IFRS S1/S2) – Financial Materiality | ESRS – Double Materiality |
|---|---|---|
| Perspective | Single (financial) – “Outside-in” (effect of sustainability matters on company value). Focus on enterprise value and investor decision relevance. | Double (impact + financial) – Both “inside-out” (company’s impacts) and “outside-in” (impacts on company) considered. A matter is material if either perspective applies. |
| Primary Audience | Investors, lenders, and other capital providers (“primary users”). Material info is that which influences their decisions. | Investors and stakeholders (affected communities, employees, environment, etc.). Impact materiality reflects significance to stakeholders/society, not just investors. |
| Scope of Topics | Any sustainability-related risk or opportunity that could affect enterprise value. IFRS S2 covers climate specifically; other topics (e.g. social, biodiversity) are considered via IFRS S1 using guidance from other frameworks. Focus is on issues with financial impact on the company. | Ten ESG topics (environment, social, governance) with additional sub- and sub-sub-topics. ESRS provides a list of sustainability matters to consider (e.g. climate change, pollution, own workforce, communities, etc.). Any matter with significant impact or financial risk is in scope (including those mandated by EU law or policy objectives). |
| Value Chain Coverage | Considers value chain to the extent it creates risks/opportunities for the company. ISSB guidance notes that dependencies and impacts throughout the value chain (e.g. supply chain, product use) can lead to material risks for the company. | Explicitly includes upstream and downstream value chain in assessing impacts and risks. Companies must consider impacts connected to their products, services, and business relationships beyond their own operations. |
| Materiality Threshold | No fixed thresholds; entity-specific judgment required. Material if it could influence investor decisions or affect future cash flows significantly. Both quantitative (magnitude of effect) and qualitative (nature of issue, timing, likelihood) factors considered. | No fixed quantitative thresholds; based on criteria in ESRS 1 (severity and likelihood for impacts; size and likelihood of financial effects for risks). Companies set their own thresholds/criteria aligned with ESRS guidance. If an impact is severe (e.g. scale, scope, irreversibility), it can be material even if financial effect is small. Conversely, a significant financial risk is material even if societal impact is low. |
Materiality Assessment Process: ISSB vs. ESRS
Let’s look at the materiality analysis processes of the ISSB vs. ESRS frameworks in more detail.
ISSB Materiality Assessment Process (Financial Materiality)
ISSB’s IFRS S1 standard lays out the overall requirement to identify and disclose all material sustainability-related information, but it does not prescribe a single rigid procedure. Companies are expected to integrate this into their existing enterprise risk management and reporting processes. The ISSB has published guidance (e.g. an educational document in Nov 2024) illustrating a four-step process that an entity could follow to implement the materiality assessment. This process is generally applicable across sectors, focusing on identifying sustainability matters that could affect enterprise value:
Step 1: Identify Sustainability Matters with Potential to be Material
The company surveys its business context to identify sustainability-related risks and opportunities that could reasonably be expected to affect its prospects (value creation, cash flows, access to capital). As a starting point, management should consider the topics and disclosure requirements in ISSB Standards themselves. For example, IFRS S2 provides specific climate-related topics and metrics to consider for each industry, and if the company has other relevant sustainability matters (e.g. water scarcity, workforce issues) not yet covered by an ISSB Standard, IFRS S1 directs them to consider other reputable sources (such as SASB industry standards or other frameworks) for guidance.
The goal of Step 1 is to compile a broad list of sustainability information that might be material – essentially a pool of potential disclosures covering all significant ESG risks/opportunities for the business. At this stage, the filter is intentionally inclusive (casting a wide net), based on industry context, known sustainability trends, regulatory drivers, and the company’s own strategic and operational realities.
Note: ISSB expects companies to use “reasonable and supportable information” and consider their full value chain when identifying relevant sustainability risks.
Step 2: Assess Which Information is Actually Material
Next, each item from Step 1 is evaluated to determine if it is material to the company’s sustainability disclosures. ISSB standards emphasize applying judgment: information is considered material if omitting or misstating it could influence investor decisions. In this step, management weighs both quantitative factors (e.g. the potential magnitude of financial impact, such as effect on revenues, costs, assets, or cash flow projections) and qualitative factors (e.g. the nature of the risk or opportunity, its strategic importance, reputational considerations, or regulatory scrutiny). They also consider the time horizon and uncertainty – a risk expected to occur in the long-term or with low probability might still be material if the impact could be very large or if it aggregates with other risks.
ISSB guidance explicitly notes that even low-probability, high-impact scenarios should be assessed in aggregate, as several such issues together could become material. There are no preset thresholds, so each company must document its reasoning for why a sustainability matter is judged material or not, in the context of its business.
The output of Step 2 is a refined list of sustainability topics/information that are deemed material – i.e. those sustainability-related matters that will be disclosed because they clear the materiality bar for investors. Items not meeting the test are set aside and not reported, to avoid cluttering reports with immaterial information.
Step 3: Organize and Prepare Disclosures
Once the material topics and information are determined, the company prepares the draft sustainability disclosures. ISSB standards require disclosures to be presented in a clear, logical structure, often aligned with the four content areas of governance, strategy, risk management, and metrics/targets (as outlined in IFRS S1). In organizing the information, companies should ensure they aggregate or disaggregate data appropriately to avoid obscuring material details.
ISSB guidance cautions against generic boilerplate language and unnecessary duplication – disclosures should be entity-specific and concise. For example, if climate change and workforce retention are material issues, the company will integrate those into its report sections (governance, strategy, etc.), provide specific metrics and targets, and ensure the narrative is tailored to how those issues impact the business. The aim is to communicate material information in a way that is useful and understandable to investors. This step may involve cross-functional input (sustainability teams, finance, risk managers) to draft the content and cross-check against reporting requirements, such as any specific disclosures required by IFRS S2 for climate. The ISSB guidance notes that judgment is required in how information is presented – e.g. to avoid over-aggregation that might hide important differences, or over-disaggregation that overwhelms the reader.
Step 4: Review the Complete Draft for Completeness
The final step is a “step back and review” of the draft sustainability report to ensure that all material information has been captured and communicated fairly. Management should review the disclosures in aggregate and consider if the report as a whole provides a fair presentation of the company’s sustainability-related risks and opportunities. This includes
- checking for any gaps (e.g. if multiple small impacts collectively could be material, have they been disclosed?),
- ensuring that connectivity is achieved (i.e. links between sustainability information and financial statements or between different topics are clear),
- and verifying nothing material has been inadvertently omitted or obscured.
ISSB’s guidance suggests reconsidering borderline items in this holistic review – for instance, information that was judged immaterial in isolation might become material when considered alongside related disclosures. If any such adjustments are needed, the company revises the disclosures (which may mean returning to Step 2 for a particular item).
The output of Step 4 is the final set of sustainability disclosures ready for reporting, which should meet the ISSB’s materiality requirements and be integrated with the general purpose financial report. Notably, ISSB does not require a separate “materiality statement”, but material matters will be evident from the topics covered in the sustainability disclosures. If a common sustainability topic – like climate – is not discussed, investors may presume it was not material. In practice, many companies will state if a major topic is considered not material, for transparency, though ISSB standards stop short of requiring such a statement.
Documentation and Judgment in ISSB’s Materiality Assessment Process
Throughout the ISSB materiality assessment process, companies need robust internal controls and documentation. While ISSB standards focus on disclosure of outcomes (material sustainability information), auditors or assurance providers will expect to see evidence of the materiality assessment. Companies should document how they identified issues, the criteria used to judge materiality, and the rationale for conclusions – especially for borderline cases – to support the reliability of disclosures.
This materiality assessment process is entity-specific: two companies in the same industry might reach different conclusions on what’s material, depending on their strategy and circumstances. The ISSB’s approach is principles-based, allowing flexibility, which is important for cross-sector applicability. Regardless of sector, the core idea is to focus reporting on sustainability matters that meaningfully affect the company’s performance or value, ensuring investors get decision-useful information and extraneous details are filtered out.
How does the materiality analysis process differ between ISSB vs. ESRS?
ESRS Materiality Assessment Process (Double Materiality)
Under ESRS (as mandated by the CSRD in the EU), companies must conduct a double materiality assessment. The ESRS are also principles-based in that they do not dictate an exact one-size-fits-all procedure, but the standards and official guidance outline key steps and criteria to ensure both impact and financial perspectives are covered.
EFRAG’s Materiality Assessment Implementation Guidance (IG 1) suggests a four-step approach that companies can use to meet ESRS requirements. These steps closely mirror the ISSB process in structure, but with additional considerations for impacts on stakeholders and compliance with specific ESRS disclosure requirements. The double materiality assessment process below is generally applicable to any sector, as all companies must consider a broad range of ESG topics and stakeholder interests:
Step 1: Understanding the Context (Scope and Stakeholders)
The company begins by mapping its business context, activities, and stakeholder environment. This involves understanding the company’s operations, business and sustainability strategy, and value chain in relation to sustainability matters. Key actions in this step include:
- identifying all major business activities (including products, services, projects, and geographies) and
- the relevant upstream and downstream value chain elements (e.g. supply chain partners, distribution, end-use of products)
- identifying the key stakeholder groups and plans how to engage with them (Stakeholder Analysis).
Stakeholder engagement is a crucial part of ESRS materiality: companies are expected to consider perspectives from affected stakeholders (or their representatives) to understand actual and potential impacts. In practice, this may involve consulting employees, customers, local communities, NGOs, investors, etc., via surveys, interviews, workshops or other due diligence processes. While ESRS do not prescribe exactly how to conduct stakeholder engagement, the CSRD references international due diligence standards (e.g. UN Guiding Principles, OECD Guidelines) that encourage companies to identify stakeholder concerns.
By the end of Step 1, the company should have a comprehensive view of the sustainability context in which it operates – an inventory of its activities and their sustainability touchpoints, and an initial list of stakeholders and their concerns. This sets the stage for identifying specific impacts, risks, and opportunities (IROs) in the next step. Many companies leverage existing risk assessments, sustainability brainstorming, industry ESG issue lists, and frameworks like GRI or SASB at this stage to ensure no relevant topic is overlooked.
Step 2: Identify Actual and Potential Impacts, Risks, and Opportunities (IROs)
In this step, the company identifies the universe of sustainability matters that could be relevant – essentially all actual or potential IROs related to its business. This includes two dimensions:
- Impacts: how the company’s operations and value chain affect people and the environment, and
- Risks/Opportunities: how sustainability matters pose risks or opportunities to the company’s development, performance, or financial position.
A useful starting point is the list of sustainability matters in ESRS 1 Appendix (which enumerates environmental, social, and governance topics to consider) and the IRO Database by CSR Tools. For example, companies consider impacts and risks related to climate change, pollution, water and biodiversity, workforce conditions (own workers and value chain workers), community impacts, and business conduct (governance) among others. Furthermore, AI is transforming how double materiality assessments are being performed.
The EFRAG guidance indicates that engaging with stakeholders is often necessary here to surface relevant issues – for instance, hearing from local communities about environmental impacts, or from employees about labor issues. Internal stakeholders (management and experts across departments) are also engaged to identify where the company faces sustainability-related risks or opportunities (e.g. regulatory changes, market shifts towards sustainable products).
The identification should cover actual impacts (currently occurring or caused by the company) and potential impacts (that could reasonably occur in the future or as a result of the company’s activities). Likewise, risks and opportunities might arise from the company’s dependencies on natural, human, or social resources (for example, relying on water availability, or on skilled labor, or community goodwill).
Companies often use tools like materiality matrices or issue lists at this stage – but under ESRS, it’s critical that the list isn’t limited to what affects the company financially; it must also include significant stakeholder and environmental issues.
The output of Step 2 is a list of sustainability topics/IROs that are relevant to either impact or financial considerations (or both). This list can be quite extensive, especially for large companies, since it spans all ESG topics that could be significant.
The guidance notes that if a company has performed a GRI materiality assessment for impacts, that can serve as a good basis for the impact side of ESRS. Similarly, an ISSB/TCFD-like risk identification covers the financial side. ESRS encourages leveraging such existing assessments to avoid duplication.
Step 3: Assess and Prioritize IROs
In this step, the company evaluates each sustainability matter identified in Step 2 against the double materiality criteria to determine which matters are material and therefore will be reported. This effectively means applying two tests for each topic: an impact materiality test and a financial materiality test.
For the impact perspective, the company assesses the severity and likelihood of the impact on people or the environment. Severity is typically judged by:
- scale (how grave or beneficial the impact is),
- scope (how widespread it is), and
- irremediable character (how reversible or permanent) in case of negative impacts, and
- likelihood addresses the probability of the impact occurring (for potential impacts).
For example, a company might consider a potential impact on a community’s health from its operations: if it would be widespread, serious, and hard to reverse if it happened (high severity) and there is a reasonable chance of it happening, that impact is likely material from an impact perspective.
For the financial perspective, the company assesses whether the sustainability matter results in significant risks or opportunities for the business’s financial performance or position. This involves evaluating how the matter might affect revenues, costs, assets, liabilities, or cost of capital – and again considering magnitude and likelihood.
Companies may set internal thresholds or use scenario analysis for financial impacts (e.g. if a climate risk could cause a €X million loss, is that above our materiality threshold?). However, ESRS 1 explicitly says there are no uniform quantitative thresholds set by the standard; companies must use judgment and their context to decide what constitutes a “material influence” on financial metrics.
In practice, many organizations are using a double materiality assessment software or Excel template. Else, they have to develop a scoring system for impacts (rating severity/likelihood) and for financial risks (rating financial magnitude/likelihood) to help rank the issues. It is common to end up with a materiality matrix or similar, where one axis is impact materiality and the other is financial materiality, and topics that score high on either axis are marked as material. Notably, if a topic is very significant on one axis and not the other, ESRS requires it to be considered material (for example, a severe human rights impact must be reported even if it has little financial impact). Conversely, a pure financial risk (say, a regulatory climate risk in the far future with minimal stakeholder impact now) would also be material if it meets the financial significance criterion.
After this analysis, the company arrives at the final list of material sustainability matters (material IROs). This list is then cross-checked to ensure it’s complete – e.g. if a topic was found to have significant impacts, has any related financial risk been considered, since often impacts can turn into risks/opportunities over time, and vice versa. The EFRAG guidance suggests that impact and financial assessments should inform each other, noting that most material impacts eventually give rise to risks or opportunities for the business. If the company finds it has a very large number of material IROs, it can prioritize them for internal management purposes, but for reporting, all material IROs must be included – even if some are not yet addressed by the company’s actions. For instance, a company can’t omit a material issue from its report just because it has no current mitigation plan; that gap itself must be transparently reported.
At the end of Step 3, the company has its determined set of material sustainability topics which will form the content of its sustainability report under ESRS.
Step 4: Reporting and Disclosure of Materiality Assessment
The final step is to report the results of the materiality assessment and the material topics in the sustainability statement. ESRS not only require companies to disclose information on each material sustainability matter, but also to disclose how the materiality assessment was conducted and its outcome in their CSRD report. The best double materiality assessment software solutions, such as Materiality Master, provide at least part of this information to their clients.
In practice, this means the report should include a description of the process undertaken (methodologies, sources of input, stakeholder engagement, etc.), and a summary of the material matters identified. For example, ESRS 2 (General Disclosures) has specific disclosure requirements: ESRS 2 IRO-1 requires a description of the process to identify and assess material IROs, IRO-2 requires a list/table of the material sustainability matters (often mapped to the ESRS topics), and SBM-3 (Strategy and Business Model disclosure) requires explaining how these material matters relate to the company’s strategy and business model. Thus, in the sustainability report, one might see a section describing the company’s double materiality methodology (e.g. steps taken, stakeholder engagement done, criteria used) and a table of material topics (for instance, indicating that climate change, employee health & safety, and customer privacy were found material, while, say, biodiversity was not, with brief justifications).
Moreover, if certain ESRS topic standards are omitted because they were found not material, companies are expected to state that and possibly provide a brief rationale (especially if it’s a topic one would reasonably expect to be material, such as climate for a heavy emitter). ESRS also include “Minimum Disclosure Requirements” for some cross-cutting areas that must be reported regardless of materiality – for example, certain general disclosures (like governance of sustainability matters) are mandatory for all, and some specific data points required by EU law (like certain greenhouse gas emissions data) might need to be disclosed even if a topic is not material. Companies need to be aware of these and include them in the report (the materiality assessment primarily determines which topic-specific disclosures apply, not the general ones). After preparing the report content, there is typically an internal review (and eventually external assurance) of the materiality assessment documentation to ensure the process was robust and the conclusions make sense.
By completing Step 4, the company publishes a sustainability statement that focuses on its material sustainability matters, with transparency about how those were determined. This fulfills the ESRS requirement that the report be “based on double materiality” and allows report users (investors, civil society, etc.) to understand both the company’s significant impacts and its key sustainability-related financial risks and opportunities.
Note: ESRS explicitly require transparency and accountability in this process. Companies must be ready to justify their materiality determinations. The process and its results will be subject to audit/assurance as part of CSRD compliance, meaning that if a company claims a particular topic is not material, it should have evidence from its assessment to support that conclusion. This rigor aims to prevent companies from arbitrarily excluding issues and to ensure that stakeholder concerns are adequately reflected in reporting
Comparing the Methodologies and Materiality Processes of ISSB vs. ESRS
While the ISSB vs. ESRS frameworks have a similar high-level workflow for assessing materiality (identify issues → assess materiality → prepare disclosures → review/report), there are important differences in focus, criteria, and outcomes. Below we highlight key similarities and differences:
1. Overall Process Structure of ISSB vs. ESRS
Both frameworks recommend a structured approach to determine what sustainability information to report. In fact, the ESRS guidance acknowledges that an undertaking applying ESRS should also be able to meet the ISSB’s requirements for identifying sustainability-related financial information. The processes can be executed in parallel – a company can perform one integrated assessment that yields both impact materiality and financial materiality conclusions. The ISSB’s four steps correspond closely to the ESRS’s four steps. The naming and emphasis differ: ISSB’s process is oriented to material information for investors, while ESRS’s process explicitly differentiates impact vs. financial analysis. Nonetheless, in practice a company might conduct one set of workshops and analyses to identify all issues, then tag each issue as impact-material, financial-material, or both.
2. Identification Phase
ISSB vs. ESRS both start by casting a wide net across the company’s activities and value chain to list potential sustainability topics. A similarity is that neither standard prescribes a fixed list of issues that are automatically material – judgment is required. However, ESRS provides a comprehensive issue catalog (in ESRS 1 Appendix and the topical standards) that companies should consider, ensuring coverage of all ESG domains (environment, social, governance). ISSB does not enumerate all possible sustainability topics in the standards; instead, it relies on management to identify relevant issues, using ISSB’s own standards and other frameworks as guidance.
In effect, ESRS gives a more standardized starting checklist (which aids comparability and completeness across sectors), whereas ISSB offers flexibility – which companies may fill by referencing SASB Standards, GRI Standards, industry peer reports, and other sources to make sure they haven’t missed a significant issue.
Both frameworks encourage looking at the value chain broadly during identification, but the motivation differs: ISSB looks at value chain to find risks to the company; ESRS looks at value chain to find both risks to the company and impacts of the company.
3. Stakeholder Engagement in ISSB vs. ESRS
Engaging with stakeholders is implicitly valuable under ISSB (since stakeholder concerns can signal reputational or regulatory risks to the company), but it is not explicitly required by the ISSB standards. In contrast, ESRS strongly emphasizes stakeholder input as part of identifying and assessing impacts. ESRS guidance aligns with due diligence practice – for example, getting feedback from affected groups to gauge impact severity.
Thus, organizations applying ESRS will likely undertake dedicated stakeholder consultations (for instance, talking to community representatives about social impacts or environmental NGOs about ecological concerns). Under ISSB, stakeholder engagement might still occur but typically as part of enterprise risk management or materiality analysis without a formal mandate. The implication is that ESRS assessments may uncover issues that a purely investor-focused process might overlook or de-prioritize (e.g. human rights impacts deep in the supply chain) because stakeholders bring them to light.
4. Materiality Criteria
ISSB vs. ESRS both require a combination of qualitative and quantitative analysis, but what “materiality” means is different.
- ISSB’s sole threshold is investor impact – will this information influence investor decisions or affect enterprise value?
- ESRS uses a dual threshold – is there a significant impact on people/environment? is there a significant financial effect on the company?
One practical difference is that under ESRS, an issue could be deemed material purely on ethical or societal grounds (for example, contributing to biodiversity loss or having a positive impact on it’s workers), requiring disclosure if investors are not (yet) concerned about it and even if it is a positive impact only. ISSB’s process might flag the same issue only if it creates a risk to the company (e.g. risk of regulation or loss of social license to operate).
On the other hand, anything that is financially material to the company (e.g. a climate transition risk) should be caught by both frameworks. The double materiality approach can therefore be seen as an expansion: it includes everything ISSB would include (financially material matters) and adds additional matters that are important for sustainability impacts or stakeholder interests.
5. Documentation and Disclosure of Process
A noteworthy difference is the transparency of the materiality assessment process itself. ESRS explicitly requires companies to disclose their materiality assessment process and results in the report. This includes a description of steps taken, criteria and thresholds used, stakeholder engagement performed, and the list of material topics (with possibly some reasoning). The ISSB standards do not have an equivalent requirement to describe the materiality process. A company reporting under ISSB is typically not required to publish how it did its assessment; it must simply ensure that all material information is included.
In practice, many companies (even under ISSB or other frameworks) do include a brief “materiality matrix” or description in sustainability reports, but it’s voluntary. Under ESRS/CSRD, it is mandatory to include this, and auditors will check it. This means organizations under ESRS face a higher bar for internal governance and evidence of their materiality decisions – they need a clear audit trail for why each topic is in or out. For ISSB reporting, the focus of assurance is on the reported information itself, with the expectation that management’s judgment was sound (similar to how financial materiality is handled in financial reporting).
6. Dynamic vs. Static Materiality
Both frameworks recognize that material sustainability matters can evolve over time. ISSB’s guidance discusses revisiting assessments as conditions change (for example, new information or events can make a previously immaterial issue material). ESRS similarly would expect an annual reassessment and notes that emerging issues (especially impacts) should be continually monitored (aligned with due diligence processes).
Neither framework locks in a set list of topics year after year without re-evaluation. However, double materiality may lead companies to track a wider range of issues over time, since an issue might trend upward on one dimension. For instance, a minor impact issue could grow in significance and eventually also pose financial risks (often termed “dynamic materiality” – where today’s impact issue becomes tomorrow’s financial issue).
The ESRS approach explicitly visualizes that many material impacts will eventually intertwine with financial risks/opportunities. ISSB implicitly accounts for this by requiring forward-looking consideration of risks and opportunities (short, medium, long term). The difference is mostly in articulation: ESRS companies might publicly list an issue as material from an impact perspective even before it has a financial effect, whereas an ISSB-only reporter might start discussing it in depth only once it clearly affects financial outlook, though they are encouraged to consider long-term horizons too.
7. Sector-Agnostic vs. Sector-Specific
The question of sector specificity is interesting. Both ISSB vs. ESRS aim to be sector-agnostic at the top level – the processes described apply to all sectors. ESRS has sector-agnostic standards (applicable to all) and has initially planned to add sector-specific standards later. This plan has changed with the Omnibus proposal by the European Commission. ISSB similarly has industry-specific guidance via SASB standards. In terms of methodology, a heavy industrial company or a tech software company would follow the same steps, but the content of their material issues will differ.
One slight difference is that ISSB (via SASB) incorporates a lot of industry-specific metrics as guidance in identification – e.g. a water utility will have water management as a likely material issue per SASB standards, whereas a software company might not. ESRS’s approach lists broad topics (e.g. “water and marine resources”) for all, but it’s understood that for a software company that may be quickly deemed not material after conducting the assessment. So ESRS starts broad then narrows, while ISSB (with SASB) might start with a narrower set of likely issues per sector but then asks management to broaden out if needed.
Ultimately, both require company-specific judgment, and both will result in some topics being not material for certain companies (e.g. biodiversity might be material for an agriculture company but not for a bank, under both frameworks after analysis).
In summary, the ESRS and ISSB materiality assessment methodologies are aligned in process but different in scope and disclosure requirements. ISSB focuses on what investors need, and allows companies to keep the process internal, whereas ESRS requires showing consideration of stakeholders and publishing the process and full double materiality outcome. For organizations, this means that applying ESRS is more demanding in terms of breadth of topics considered and documentation, while applying ISSB is somewhat more streamlined but risks overlooking issues that, although not financially material yet, are of high importance to other stakeholders or the planet.
Implications for Organizations when reporting for ISSB vs. ESRS
Broader Range of Disclosures between ISSB vs. ESRS
An organization following ESRS will likely end up disclosing a wider set of sustainability topics than one following only ISSB standards. This is because double materiality captures more information – anything financially material plus significant impacts. For example, a manufacturing company with a small but concerning pollution impact might have to report on it under ESRS (due to stakeholder and regulatory interest) even if it has negligible financial impact; under ISSB, that might be omitted unless it poses a financial risk (like fines or reputational damage affecting sales).
The implication is that ESRS-compliant reports tend to be more comprehensive across ESG topics, whereas ISSB-compliant reports are more tightly focused on enterprise value drivers. Organizations need to prepare for this difference: those under CSRD/ESRS must gather data and manage performance on a broader array of sustainability indicators, including perhaps areas that weren’t previously on management’s radar as “business issues”. This can increase reporting workload, but it also ensures a company is aware of and accountable for its key impacts on society and environment, not just the ones that circle back financially.
Integration vs. Dual Reporting
Many large companies will have to satisfy both frameworks – for instance, EU companies that also have international investors may voluntarily report against ISSB standards or be asked by investors to do so. The good news is that the financial materiality portions are aligned: if you conduct a double materiality assessment properly, all financially material sustainability matters (the “outside-in” stuff) will be identified, which covers the ISSB scope.
In practice, companies can run one combined process, then slice the results for different audiences: the ISSB-aligned report (or section of the report) would include those matters that affect enterprise value, while the ESRS report includes those plus additional impact-only matters. It’s not necessary nor efficient to do two completely separate assessments. In fact, the ESRS guidance explicitly states that an undertaking applying ESRS should be able to satisfy ISSB’s requirements for financial materiality. The organization, however, must be careful in documentation to meet both sets of expectations – e.g. ensuring that for ISSB purposes, the link to financial impacts is clear, and for ESRS purposes, the stakeholder engagement and impact severity analysis is well documented.
Some companies might use Materiality Assessment Software or a consulting firm that map ISSB disclosures to ESRS disclosures, ensuring that, for instance, the climate-related financial disclosure (ISSB IFRS S2) is positioned appropriately within the ESRS report’s climate section (ESRS E1) if climate is material. Organizations will benefit from aligning teams – bringing together sustainability, finance, risk, and compliance departments – to conduct a unified materiality analysis workshop and then use the results for both frameworks. This reduces confusion and ensures consistency in messaging. Make sure to check out the Datapoint Mapping Tool by Materiality Master
Governance and Strategy Impacts of ISSB vs. ESRS
Different materiality approaches can influence corporate governance and strategy. With ISSB’s approach, sustainability issues get attention proportionate to their perceived financial significance. This aligns sustainability with financial value and may drive companies to integrate sustainability into core risk management, strategy, and financial planning, e.g. using scenario analysis for climate, as IFRS S2 encourages. ESRS’s approach, by requiring consideration of impacts, may push companies to strengthen their stakeholder governance and due diligence processes.
Boards and management might need new structures, like sustainability committees or impact assessment procedures, to oversee not just risks to the business, but risks the business poses to others. In terms of strategy, a company might, for example, set targets for reducing a negative impact (like community complaints or carbon emissions) because under double materiality that impact is a reportable, material matter – even if the business case in the short term is not obvious.
Over time, managing these impacts proactively can reduce future financial risks (regulation, reputation), so there is a convergence: double materiality can lead to more long-term resilience thinking. Organizations might find that issues highlighted by impact materiality today become sources of innovation or differentiation (opportunities) tomorrow.
Data Collection and Systems: ISSB vs. ESRS
Applying ESRS likely requires more extensive data collection. Companies will need to gather not only financially relevant ESG data points but also impact data, which could include, for example, tracking community impact metrics, human rights due diligence findings, etc. This could be challenging, especially for impacts that are qualitative or occur in the supply chain where the company has less direct visibility.
ISSB reporting also requires significant data (especially for climate metrics, Scope 1-3 emissions, etc.), but always with the filter of “material to the business”. ESRS may force data transparency on topics the company hasn’t measured before because stakeholders care. Organizations should invest in robust ESG software, such as data management systems & controls. The assurance requirement under CSRD means that data and processes must be auditable. This can actually benefit the company by improving the quality of sustainability information used internally for decision-making.
Communication and Stakeholder Relations
Under double materiality, companies will be explicitly reporting to a wider audience. Investors will read the ESRS report for the financially material pieces, but NGOs, employees, and regulators will scrutinize the impact disclosures. This means companies should be prepared for feedback and scrutiny from multiple fronts. The materiality assessment process results might be used by stakeholders to hold the company accountable: “You deemed X as material impact; what are you doing about it?”.
This implies that once an issue is reported as material (especially an impact issue), companies may need to allocate resources and develop action plans to manage it, even if it’s not a top financial risk. For organizations, this broadens the scope of sustainability management – it’s not just about risk mitigation, but also about impact mitigation and contribution to sustainability goals. On the flip side, ISSB-based reports targeted at investors might streamline the messaging to what financially matters, which some stakeholders might criticize as not telling the full story. Therefore, organizations will need to balance these communications. Many are likely to produce a single integrated report to satisfy both – providing comprehensive coverage (to meet ESRS) but with clear indication of which issues are financially material (to meet ISSB focus).
Compliance and Risk of Omission in ISSB vs. ESRS Process
One risk for companies is getting the materiality assessment wrong – either missing a topic that should have been considered material or misjudging something as immaterial that later proves important. Under ISSB, if a company omits an issue that later impacts its financials or investors find important, the company could face investor backlash or need to restate disclosures.
Under ESRS, since the process and outcome are published, there is an added layer of accountability: regulators or assurance providers may question why something was deemed not material. For example, if most peers report biodiversity as material but one company does not, it might draw scrutiny unless well justified. Thus, organizations must approach the assessment diligently and perhaps conservatively, when in doubt, lean towards transparency. The internal audit and audit committee will likely play a role in reviewing the materiality assessment process due to these implications.
In conclusion, organizations applying these frameworks should recognize that ISSB vs. ESRS are not at odds, but rather complementary in many ways. ISSB’s materiality approach is a subset of ESRS’s broader approach. The choice isn’t one or the other – companies under EU law must do ESRS (and thereby cover ISSB’s ground), whereas companies elsewhere might choose ISSB’s investor-focused route but could increasingly face pressure to consider impact materiality from stakeholders or future regulations.
The materiality assessment is a foundational exercise that does not only drive the entire sustainability reporting effort, but is also a strategic management tool. By understanding the requirements and steps of ISSB and ESRS, companies can design a materiality assessment process that efficiently meets both, ensuring they deliver decision-useful information to investors while also being accountable for their impacts on society and the environment
