A Challenge for Auditors: Double Materiality in Practice, IFRS S1 and IFRS S2

Materiality analysis allows companies to prioritize and focus their resources on aspects that impact their financial performance and long-term sustainability. This approach enhances operational efficiency and strengthens relationships with stakeholders.

Implementation of the CSRD Directive

The EU Corporate Sustainability Reporting Directive (CSRD), approved on January 5, 2023, establishes a regulatory framework requiring companies to consider financial materiality and sustainability in their reports. This directive represents a significant shift in how organizations report their performance, ensuring that shareholder interests and social and environmental impacts are considered.

Double Materiality in Practice

  • Financial Materiality: Identifies and assesses material issues that affect the company’s financial performance, such as risks and opportunities influencing value in the short, medium, or long term. For example, climate change can impact production costs and the availability of natural resources.
  • Sustainability Materiality considers the company’s significant impacts on the environment and society, evaluating actual and potential effects across the entire value chain. This includes issues such as human rights and regulatory compliance.

International Sustainability and Climate Standards (IFRS S1 and IFRS S2)

To establish a global financial reporting framework integrated with sustainability criteria, the International Sustainability Standards Board (ISSB) published two essential draft standards in March 2022:

  • IFRS S1 – General Requirements for Disclosure of Sustainability-related Information: This standard provides guidelines for the general disclosure of sustainability information affecting a company’s financial information. IFRS S1 aims to offer a structured and consistent framework for disclosing relevant and significant sustainability information.
  • IFRS S2—Disclosure of Climate-related Information: This standard focuses on disclosing specific climate-related information, including risks and opportunities associated with climate change. It requires companies to disclose how climate-related events affect their operations and financial performance.

These standards represent a significant milestone in preparing accounting information for two main reasons:

  • Unified Integral Framework: They provide a single framework that promotes social responsibility and environmental care, consolidating financial and non-financial information into one coherent report.
  • Structured and Understandable Language: They use structured language that facilitates understanding and application by financial reporting teams, ensuring greater clarity and consistency in sustainability disclosure.

Adopting these standards is crucial for companies, as it paves the way for including information previously considered non-financial in financial statements. Sustainability issues have gained prominence on the agendas of CFOs, boards of directors, investors, and regulators globally.

Impact on Financial Audits

The implementation of IFRS S1 and S2 will significantly affect financial audits. Auditors must adapt to these new requirements, evaluating the accuracy of traditional financial information and the truthfulness and completeness of sustainability and climate-related information. This will involve a more integrated approach to auditing, assessing how sustainability practices and climate risks are reflected in the company’s financial information.

Benefits and Challenges of Materiality and New Standards

  • Benefits: Integrating materiality and adopting the new IFRS standards will enable companies to make more informed decisions, align financial goals with sustainability targets, improve transparency, and enhance competitiveness.
  • Challenges: Compliance with the new standards involves instilling a new organizational culture and collecting and safeguarding non-financial information. However, these challenges also present valuable opportunities for companies to implement effective sustainability strategies and generate long-term benefits.

Examples of Leaders in Double Materiality

  • Unilever: Has identified climate change and resource scarcity as financial risks, investing in sustainable practices and eco-friendly products to enhance market reputation and preference.
  • IKEA: Focuses on material efficiency and circular design to reduce costs and its carbon footprint, strengthening its relationship with customers who value social responsibility.
  • Tesla’s strategy is based on sustainability and the transition to clean energy sources, which will reduce its environmental impact and give it a competitive edge in the market.
  • Patagonia: Prioritizes positive environmental and social impact through recycled materials and carbon emission reduction, enhancing brand loyalty and financial success.
  • Nestlé: Invests in technologies to improve water and energy efficiency and reformulates products to enhance sustainability, responding to consumer and regulatory expectations.

Future Trends in Materiality

With the growing focus on sustainability, materiality is expected to evolve into a more profound integration across all organizational areas. Leading companies are using advanced technologies, such as data analytics and artificial intelligence, to improve the accuracy of their assessments and anticipate future impacts.

In summary, materiality analysis and the implementation of new sustainability standards are crucial for balancing financial goals with social and environmental responsibility. This approach improves operational efficiency and regulatory compliance and creates long-term sustainable value for all stakeholders.

The evolution towards a double materiality approach and adopting sustainability standards represent a fundamental shift for public accountants and auditors. This change redefines how financial and non-financial aspects are evaluated and reported and significantly expands the scope of auditing and accounting practices.

For public accountants and auditors, this development entails:

  • Adapting to New Standards: Professionals will need to become acquainted with the specific requirements of the new sustainability standards. This includes integrating non-financial information into financial reports and assessing the accuracy and completeness of sustainability and climate-related information.
  • Developing New Skills: To address the challenges of auditing sustainability information, new competencies will be required. These include the ability to evaluate risks and opportunities related to sustainability and the skill to interpret and apply guidelines in a broader context that combines financial and non-financial aspects.
  • Shifting the Audit Approach: Auditing must adopt a more integrated approach, considering how sustainability practices and climate risks impact the company’s financial information. This will require greater collaboration with other professionals and experts in sustainability to offer a comprehensive and accurate assessment.
  • Enhancing Transparency and Trust: Adopting these new standards and approaches will help public accountants and auditors improve transparency and trust in corporate reporting. A clear and comprehensive view of sustainability and financial performance will contribute to greater confidence among investors, regulators, and other stakeholders.
  • Creating Sustainable Value: Integrating sustainability principles into accounting and auditing practices will enable professionals to help companies align their financial goals with their sustainability targets. This will foster long-term organizational value creation and promote responsible and sustainable business practices.

In conclusion, the shift towards a double materiality approach and implementing sustainability standards represent significant opportunities for public accountants and auditors. By adapting to these changes, accounting professionals can play a vital role in promoting transparency, accountability, and sustainability in the corporate world, enhancing their relevance and value in the modern business environment.

Share This Post
Jorge Gutiérrez Guillén

With over 14 years of professional experience, I specialize in auditing and financial consulting, successfully leading the boutique firm JGutierrez Auditores Consultores S.A. Our mission is to provide quality services that not only meet industry standards but also bring a diverse and valuable perspective to business strategies. We are committed to integrating global accounting practices and ensuring compliance with Costa Rican and regional regulations, in line with our firm's values and culture. Our expertise focuses on implementing audits for various purposes, such as verifying the reasonableness of financial statements, ensuring compliance with tax and financial laws and regulations, evaluating the effectiveness of internal controls, improving processes, preventing fraud, optimizing resource use, and guaranteeing the security of information systems. Additionally, we concentrate on the new regulations related to financial and environmental sustainability responsibilities, all aimed at ensuring the transparency, efficiency, and legality of an organization’s operations. Furthermore, we offer consulting services in information systems and operational management, along with specialized consulting in ISO standards, transfer pricing studies, and industrial cost analysis. These responsibilities have enhanced our analytical and financial management skills, allowing us to contribute to the growth and strengthening of our client’s operations, always in collaboration with a team of highly skilled professionals and young talents who are experts in new technologies. Jorge Gutiérrez Guillén Business Consultant and Certified Public Accountant

Related Articles

Leave a comment

Hey, so you decided to leave a comment! That's great. Just fill in the required fields and hit submit. Note that your comment will need to be reviewed before its published.