Understanding materiality

Materiality is a “user-driven concept” relating to the information needs of intended users and what may reasonably be expected to influence their decisions based on reported sustainability information. Reporting frameworks like IFRS S1, GRI, and ESRS provide varying definitions, including financial materiality, impact materiality, and double materiality. Double materiality is a concept requiring an entity to consider impacts from two perspectives: the material impacts of sustainability matters on the entity and the material impacts of the entity on the environment, society, or economy. ISSA 5000, issued in November 2024, is effective for assurance engagements for periods beginning on or after December 15, 2026.

Matters related to the entity’s application of materiality

Entities use a “materiality process” to identify information to be reported. This involves identifying intended users and considering their information needs to determine which matters are material. Reporting frameworks may specify that certain matters are always required to be reported without needing a threshold. A reporting framework such as GRI 3 provides a four-step guidance for entities: understanding the organisation’s context, identifying actual and potential impacts, assessing the significance of those impacts, and prioritising the most significant impacts for reporting. The entity’s process is not the basis for determining if fair presentation has been achieved, as criteria more broadly determine principles for measurement and presentation.

Overarching matters related to the practitioner’s application of materiality

The practitioner applies materiality throughout the engagement for planning, risk assessment, and evaluating misstatements. Practitioners may group disclosures to assist in planning, such as grouping Scope 1 greenhouse-gas emissions across different facilities. Grouping is a matter of professional judgement and affects the level at which the practitioner considers materiality. It is noted that a sustainability assurance engagement ordinarily involves the application of multiple materialities rather than a single materiality for the information as a whole. Factors influencing materiality judgements include stakeholder sensitivity, industry relevance, and the prominence of the disclosure in reporting, such as messaging in a CEO foreword.

The practitioner’s application of materiality – considering materiality for qualitative disclosures and determining materiality for quantitative disclosures

ISSA 5000 adopts a “bifurcated” approach where the practitioner considers materiality for qualitative disclosures and determines materiality for quantitative disclosures. In considering qualitative materiality, practitioners reflect on factors that may lead to potential material misstatements. For quantitative disclosures, practitioners establish a quantifiable threshold regarding the magnitude of misstatements. This approach acknowledges that sustainability information comprises a diverse range of topics expressed in different units of measure, making it impracticable to determine a single materiality threshold for the entire report.

The practitioner’s application of materiality – performance materiality

Performance materiality is defined as “an amount less than materiality” and is determined to address aggregation risk. Aggregation risk is the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. For example, in a scenario where an entity has three locations with undetected misstatements totalling 2,250 tCO2e, applying a performance materiality of 500 tCO2e (where materiality is 1,000 tCO2e) increases the likelihood of detecting individual misstatements that might otherwise be overlooked. If no aggregation risk exists, such as when a disclosure is tested as a single population, performance materiality may be equal to materiality.

The practitioner’s application of materiality – evaluating the materiality of misstatements of the sustainability information

Practitioners must determine whether uncorrected misstatements are material, individually or in aggregate. While disparate disclosures like climate change and workforce safety may not be capable of being aggregated per se, their combined effect may still lead to the sustainability information being materially misstated if they collectively portray performance more favourably than supported by evidence. In one example, a practitioner evaluating a 250-page report found that water consumption was materially misstated. Because management declined to correct the isolated, non-pervasive error, the practitioner was required to issue a modified, qualified conclusion in the assurance report.