Double materiality and the shift from non-financial to European sustainability reporting: review, outlook and implications

Abstract

PurposeThis paper outlines the development of the principle of materiality in the European accounting framework, from the Modernization Directive (2003/51/EC) to the NFI Directive (2014/95/EU) and on to the proposals for a Corporate Sustainability Reporting (CSR) Directive (2021/0104 (COD)). The authors highlight how the requirements for corporate reporting in terms of sustainability matters have changed, underlining the main issues that require further attention by practitioners, researchers and legislators.Design/methodology/approachThis paper is based upon a historic analysis of European Union (EU) regulations in the field of non-financial and sustainability reporting and how these have changed over time. A conceptual comparison of different reporting concepts is presented, and changes in their relevance to the EU accounting framework are discussed as part of the historic analysis. Implications from corporate practice are derived from previous empirical findings from the EU Commission's consultations.FindingsThe proposed change from non-financial to sustainability reporting within the EU affects more than simply the terminology used. It implies that a different understanding is needed of both the purposes of company reporting on sustainability matters and the aims of carrying out such reporting. This change was driven by the need and desire to appropriately interpret the principle of materiality set forth in the NFI Directive. However, the recent redefinition in the shift within the EU Commission's proposals presents considerable challenges–and costs–in practice.Research limitations/implicationsFuture research on the conceptualization and operationalization of ecological and social materiality, as well as on the use of this information by different stakeholder groups, is necessary in order to (a) help companies that are applying the reporting requirements in practice, (b) support the increased harmonization of the reports published by these companies and (c) fully assess the costs and benefits associated with the increase in reporting requirements for these companies.Practical implicationsCompanies have to establish relevant reporting processes, systems and formats to fulfil the increasing number of reporting requirements.Originality/valueThis paper outlines the historic development of the principle of materiality regarding mandatory non-financial or sustainability reporting within the EU. It outlines a shift in rationales and political priorities as well as in implications for European companies that need to fulfil the reporting requirements. In consequence, it describes appropriate interpretations of this principle of materiality under current and upcoming legislation, enabling users to apply this principle more effectively.

Exploring sustainable development goals reporting practices: From symbolic to substantive approaches—Evidence from the energy sector

“…Second, the European region was chosen (Garcia‐Meca & Martinez‐Ferrero, 2021). This choice was motivated by the in‐depth regulatory process embarked by the EU to institutionalise CSR within corporate reporting practices (Baumüller & Sopp, 2022). As part of the CSR strategy for the years 2011–2014, on 22 October 2014, the EU released the Directive 95/2014, which, by imposing specific non‐financial disclosure requirements on all public interest entities with more than 500 employees, has created a “reporting cut‐off point” between the European region and the other geographical contexts (EU, 2014).…”

“…Second, unlike previous studies mainly focused on specific countries, this study offers evidence from a cross‐country and longitudinal perspective in the European domain. Europe represents a unique context to investigate, considering that in the last decades; the European Union (EU) has been involved in an in‐depth regulatory process to institutionalise Corporate Social Responsibility (CSR) within corporate reporting practices (Baumüller & Sopp, 2022). Under this trend, SDGs are considered an overarching priority, thus, the urgency for companies to report their contributions to the SDGs emerged (European Reporting Lab, 2021).…”

Swimming against the tide: back to single materiality for sustainability reporting

“…Researchers have examined the: evolution and current developments of the concept of materiality in sustainability reporting (Abela, 2022; Baumüller and Sopp, 2022); differences in the definitions of materiality adopted in different sustainability reporting regulations and by standards setters (Baumüller and Sopp, 2022; Chiu, 2022; Cooper and Michelon, 2022; De Villiers et al , 2022; Giner and Luque-Vílchez, 2022); limitations of various interpretations of materiality (Adams and Mueller, 2022; Adams and Abhayawansa, 2021; Cooper and Michelon, 2022); consequences of different interpretations of the materiality principle (Clark, 2021; Jørgensen et al , 2022); and the practice of materiality determination by companies adopting various sustainability reporting standards or frameworks (Beske et al , 2020; Gerwanski et al , 2019; Jones et al , 2016; Puroila and Mäkelä, 2019; Steenkamp, 2018). …”

Guest editorial Rethinking non-financial reporting in Europe: challenges and opportunities in revising Directive 2014/95/EU

“…Baumüller and Sopp (2022) outline the development of the principle of materiality in the European accounting framework from the Modernization Directive (2003/51/EC) to the NFI Directive (2014/95/EU) and on to the proposals for a Corporate Sustainability Reporting (CSR) Directive (2021/0104 (COD)). The authors highlight how the requirements for corporate reporting in terms of sustainability matters have changed, underlining the main issues that require further attention by practitioners, researchers and legislators.…”