Hold up, there’s a new Taskforce in town…
…and its material focus is inequality.
Over the past few years, sustainability reporting has becoming more prevalent, thanks to the development of numerous disclosure frameworks helping organizations measure, and report on sustainability-related risks and opportunities. While sustainability disclosures are crucial for a number of reasons, it can often be a daunting process as the list of sustainability factors is almost never-ending. To simplify the reporting process, companies usually focus on the issues that are deemed ‘material’ – in other words, those that are most important and relevant. But important and relevant to whom?
Different frameworks have taken different approaches to materiality – some focusing on what is most essential to business success, while others prioritize social impact. With the launch of TISFD this week, it is a good moment to reflect on earlier taskforces and how they have approached materiality.
Laying the Foundations: TCFD
First came the Task Force on Climate-related Financial Disclosures (TCFD) – a reporting framework designed to help companies and investors better understand the financial implications of climate change. The TCFD adopted a financial materiality approach, encouraging organisations to focus only on factors that could significantly impact their financial performance, either positively or negatively.
In October 2023, the TCFD was disbanded, with the responsibility for overseeing climate-related disclosures transitioning to the International Financial Reporting Standards (IFRS). However, before its closure, the TCFD’s recommendations had garnered support from nearly 5,000 organisations in over 100 countries (Source: TCFD).
Source: Task Force on Climate-related Financial Disclosures (TCFD)
With TCFD’s emphasis on single materiality – the impact of climate risks on the business’ bottom line – the move to IFRS (an organization that oversees financial reporting standard-setting) is understandable. It’s a milestone the sustainability professionals have been seeking for quite some time: by formalizing the standard, the onus is on businesses to strengthen their climate risk analysis and scenario assumptions, incorporating uncertainties and tipping points (Source: Climate Week 2024).
Building on Success: TNFD
Building on the success of the TCFD, the Taskforce on Nature-related Financial Disclosures (TNFD) emerged in June 2021, developing a set of recommendations for reporting on risks and opportunities related to nature. As of June 2024, 400 organisations had adopted TNFD’s corporate reporting recommendations (Source: TNFD). The TNFD provides flexibility for entities to report in line with the approach to materiality being applied in their jurisdiction. It recommends that all entities report on financially material information as a baseline but allows entities to go beyond this and adopt an impact materiality approach if preferred, considering the broader impacts of the company on the environment and society.
Still a relatively new kid on the block, companies are seeking ways to understand how nature-related risks along the supply chain would hit their bottom line. It’s a daunting task to assess but one that will make corporate supply chains more resilient.
Widening the Focus: TISFD
While the TCFD and TNFD have significantly advanced the integration of environmental considerations into financial reporting, it is crucial that social issues are not overlooked. Social sustainability criteria are harder to define, often qualitative, and can be subjective – but that makes it so much more urgent to understand.
Inequality, for example, is one of the biggest challenges facing the world: the richest 10% of the global population take home 52% of total global pay and own over three-quarters of all wealth, while the poorest 50% own just 2% (Source: Tackling Inequality). The private sector has the power to help tackle inequality and it is in its interest to do so: inequality is an urgent systemic risk (read more about these in our previous blog) and is therefore a material threat to businesses.
Enter the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) – due to launch this month (September 2024). Its aim is to strengthen the development of financial disclosures regarding inequality and social-related issues.
During its call for comments on the proposed scope and mandate for the TISFD, the ImpactARC team debated the TISFD materiality perspective. The Working Group proposes that TISFD develop disclosure recommendations that are interoperable with both an impact materiality perspective and a financial materiality perspective, delineating these perspectives where feasible, and that TISFD should explore the materiality of inequality as a system-level risk. However, if we delineate the financial impacts to a company (single materiality) from the broader impacts of a company on society (impact materiality) – do we risk exacerbating the issues this framework is trying to solve for? For example, is it only material for the company to consider climate risk if there is a high probability of business closures due to social unrest caused by increased climate disasters in the region? Does this approach discount the need for a social license to operate – the company’s ability to earn the trust and approval of the local communities and stakeholders it impacts?
At the core of the TISFD is the need to safeguard human well-being therefore, it is imperative that disclosures on inequality and social-related issues do not only consider single materiality and instead, adopt double materiality as a core foundation, considering the impacts on society as the primary consideration of reporting entities. In fact, even better would be to not separate financial materiality and impact materiality and instead recognise that they are one.
We look forward to the development of this latest reporting standard and welcome dialogue with peers nudging the system forward.
At ImpactARC, we establish impact verification criteria, taking global standards into consideration, and provide training to help clients gain a deeper understanding of these standards. Get in touch if you’re interested in learning more: daisy@impact-arc.com.