In an age of rising concern over climate change, corporate disclosure standards are rapidly changing, and organisations are being encouraged to be more transparent in their annual reporting.

Unifying global standards

The past year has seen a number of major developments in corporate reporting, including the International Financial Reporting Standards (IFRS) Foundation’s creation of a new International Sustainability Standards Board (ISSB).

The ISSB is to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.

In January, the Climate Disclosure Standards Board was consolidated into the IFRS Foundation. The Value Reporting Foundation is also expected to be consolidated into the IFRS Foundation by June 2022 to provide staff and resources to the new ISSB.

The ISSB has recently launched a consultation on its first two proposed standards – one on general sustainability-related disclosure requirements and the other on climate-related disclosure requirements. The proposals build upon the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and incorporate industry-based disclosure requirements derived from Sustainability Accounting Standards Board (SASB) Standards.

Why materiality matters

Materiality assessments have been increasingly adopted by companies in recent years to demonstrate their efforts to consider sustainability risks and opportunities relevant to their businesses.

However, these assessments can at times fall short of expectations because of a disconnect in the longer-term impacts of megatrends and sustainability issues which attract stakeholder interest but may be deemed immaterial to current business interests.

The double materiality perspective was first formally described by the European Commission in the context of sustainability reporting in 2019 in a supplement to its guidelines on non-financial reporting.

It encourages companies to assess materiality from two perspectives – firstly, the impact on the financial value of the company and, secondly, the environmental and social impact of the company’s activities. The concept implies the need to assess the interconnectivity of the two. 

The concept has since generated worldwide discussion and has been elaborated upon by five international reporting standards organisations in a paper about “Reporting on enterprise value” in 2020, and in a subsequent report by the European Reporting Lab under the European Financial Reporting Advisory Group (EFRAG) in 2021.

EFRAG is running a public consultation on the first draft set of European Sustainability Reporting Standards, covering double materiality as well as a host of environmental, social and governance issues, until 8 August.

By applying double materiality, a company is able to better evaluate the inward and outward impacts of its business in its reporting. The concept can also help companies develop plans to manage these impacts.

Pioneering higher standards

CLP Holdings Limited (CLP) is an early adopter of integrated reporting and has been diligently reviewing its annual reporting approach to ensure stronger alignment with evolving international standards and reporting best practices.

The company publishes Annual Reports and Sustainability Reports. In past years, the Annual Report used to demonstrate how the company deployed capital inputs to meet its strategic objectives. The Sustainability Report, meanwhile, explored material topics considered most important to CLP’s prospects, as well as the interests of its stakeholders.

CLP adopted a double materiality approach after conducting a comprehensive review in 2021 to align its disclosure with evolving standards and to maximise the integration between the two reports.

As part of its new approach, CLP’s latest integrated Annual Report focuses on "financially material" topics that potentially create or erode the company’s enterprise value – issues that may be of most interest to shareholders and other capital providers.

These include shaping and executing the transition to net zero, pursuing growth opportunities in Hong Kong and the Greater Bay Area, building an agile and innovative workforce, and reinforcing resilience in a changing operating environment.

Meanwhile, "impact material" topics that reflect CLP’s impacts on people, the environment and the economy are featured in CLP’s latest Sustainability Report, addressing the concerns of a diverse range of stakeholders.

As well as the transition to net zero and the pursuit of growth opportunities, aligning business activities with community, employee and customer expectations is also considered a key element.

“Adopting the double materiality concept has helped us better reflect ESG risks and opportunities in our business strategy from both a financial and an impact perspective, while ensuring that our reporting is relevant to our different stakeholders,” explains Hendrik Rosenthal, Director – Group Sustainability.

“It also helps us better understand the external forces that are shaping our business and our impact on people, the environment and the economy.”

While climate-related financial disclosures were included in CLP’s Sustainability Reports in past years, CLP also published its first Climate-related Disclosures Report to address rising interest in the topic.

The report adopts the four pillars recommended by the TCFD to provide a consistent structure that allows for analysis and comparison with disclosures from other companies. It was also prepared with reference to the Climate-related Disclosures Prototype, released by the IFRS Foundation-chaired Technical Readiness Working Group in November 2021.

Reflecting on transparency

In an increasingly complex operating environment, businesses are being encouraged to review their materiality assessment and consider how to enhance the value of their assessment for reporting and strategy development.

CLP’s application of a double materiality approach underscores its commitment to integrate sustainability into its business strategy, and to respond to increasing stakeholder demands for greater corporate transparency.