Outside-in: financial materiality
Could it affect the company’s cash flows, access to finance or cost of capital?
UK SRS S1 ¶3; revised ESRS 1 ¶47.Materiality · the outside-in lens
Financial materiality: the outside-in test
Financial materiality asks how sustainability matters affect a company: its development, financial position, performance, cash flows, access to finance or cost of capital, over the short, medium or long term.
It is the whole of the UK test, which UK SRS S1 applies as single (financial) materiality, and one of the two lenses of the EU’s double materiality.
The ESRS and ISSB definitions are aligned, so the same evidence can serve both, but the scope is wider than the materiality used for the accounts.
What it means
Financial materiality in one paragraph
Financial materiality looks from the world towards the company.
A climate hazard, a carbon price, a water shortage or a change in law matters to it because of what it could do to the business, not because of what the business does to the world.
Read the two wordings side by side
The revised ESRS 1 ¶47 says a topic is reported from a financial materiality perspective “if it triggers, or could reasonably be expected to trigger, material financial effects”.
It continues: that is the case when risks or opportunities have, or could reasonably be expected to have, “a material influence on the undertaking’s development, financial position, financial performance, cash flows, access to finance or cost of capital over the short, medium or long term”.
UK SRS S1 ¶3 frames the sustainability-related risks and opportunities in scope as those that “could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term”.
The two financial tests read almost alike; the difference between the regimes is that the ESRS add a second, impact lens.
The concept as a whole, across accounts, audit and every framework, is on materiality explained.
A sustainability matter
Inside-out: impact materiality
Does the company materially affect people or the environment?
ESRS only; not a UK SRS test.The ESRS test
CSRD financial materiality: revised ESRS 1 ¶¶45–50
Chapter 3.2.2 of the revised ESRS 1, in Delegated Regulation (EU) 2026/1563, sets the financial materiality assessment out in six paragraphs.
¶45 says it “corresponds to the identification of information that is considered material for primary users of general-purpose financial reports in making decisions relating to providing resources to the undertaking”.
Read ¶¶46–50 and the application requirements
¶46: the scope of financial materiality for sustainability reporting “is an expansion of the scope of materiality used in the process of determining which information shall be included in the undertaking’s financial statements”.
It is not limited to entities within the undertaking’s control, but includes risks and opportunities attributable to business relationships in the upstream and downstream value chain.
¶48: risks and opportunities may arise from past or future events, and material ones arise from material impacts, from dependencies on natural, human and social resources, and from other factors such as exposure to climate hazards or regulatory changes addressing systemic risks.
¶49: dependencies are sources of financial effects, in cash flows or in resources not recognised in the financial statements, and “may be sources of risks or opportunities regardless of potential impacts on the natural, human and social resources relied on”.
¶50: “The materiality of risks and opportunities is assessed based on a combination of the likelihood of occurrence and the potential magnitude of the financial effects.”
AR 29 names the internal risk-management framework as a valuable input, and for credit institutions and insurers the prudential frameworks may inform the assessment.
AR 30 lists what dependencies may affect: access to resources, their quality and pricing, and the ability to rely on acceptable terms in relationships.
AR 31 asks the undertaking to consider likely scenarios and forecasts, and anticipated financial effects not, or not yet, reflected in the financial statements.
The paragraph numbers are the revised ones, which apply to financial years beginning on or after 1 January 2027; in the 2023 text the financial limb sat at ESRS 1 ¶49.
Where risks come fromExplore
Module 01 / 04
Material impacts
Impacts found in the impact assessment can trigger financial effects (¶48(a)).
Module 02 / 04
Dependencies
On natural, human and social resources, whatever the undertaking’s impact on them (¶¶48(b), 49).
Module 03 / 04
Other factors
Exposure to climate hazards or regulatory changes addressing systemic risks (¶48(c)).
Module 04 / 04
The test
Likelihood of occurrence combined with the potential magnitude of the financial effects (¶50).
The UK SRS and ISSB test
ISSB financial materiality and UK SRS S1: single (financial) materiality
UK SRS S1, published by the Department for Business and Trade on 25 February 2026, endorses the ISSB’s IFRS S1 and keeps its materiality architecture.
¶18 is the definition: information is material if omitting, misstating or obscuring it “could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports”.
Read the UK SRS S1 materiality provisions
¶17 asks for material information about the sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects.
¶2 explains where those come from: the entity’s dependencies on resources and relationships, and its impacts on them, “give rise to sustainability-related risks and opportunities for the entity”.
¶B19: “this Standard does not specify any thresholds for materiality or predetermine what would be material in a particular situation.”
¶B25: information otherwise required need not be disclosed if it is not material, even where a standard lists it as a minimum requirement.
¶B28: “An entity shall reassess its materiality judgements at each reporting date”.
Appendix A defines primary users as existing and potential investors, lenders and other creditors.
Under the FCA’s PS26/19, listed companies in the UKLR 6, 14, 15, 16 and 22 categories report against UK SRS on a comply-or-explain basis for periods beginning on or after 1 January 2027.
How the UK test is applied paragraph by paragraph is on UK SRS materiality, and the standard as a whole on UK SRS S1.
UK SRS S1 on materialityExplore
Module 01 / 04
¶17
Disclose material information about risks and opportunities that could reasonably be expected to affect the entity’s prospects.
Module 02 / 04
¶18
Material if omitting, misstating or obscuring it could reasonably be expected to influence primary users’ decisions.
A phrase to drop
Why it is not “enterprise-value materiality”
“Enterprise-value materiality” is still a common label for the ISSB test, and it describes a draft that did not survive.
The IFRS S1 Basis for Conclusions records at BC67 that the ISSB “removed ‘enterprise value’ from its description of materiality and removed the definition of ‘enterprise value’ from IFRS S1”.
Read the ISSB’s explanation
BC67 says the exposure draft proposed assessing materiality “in relation to the effects of sustainability-related risks and opportunities on an entity’s enterprise value”.
In response to feedback, the ISSB confirmed that its definition is aligned with the IASB’s definitions of “material information” and “material” in the Conceptual Framework and IAS 1, “which do not refer to enterprise value”.
BC39 adds that the definition of enterprise value was removed from the defined terms in Appendix A.
BC40 says the ISSB’s approach and its focus on users of general purpose financial reports remained unchanged.
So the accurate description of the UK and ISSB test is single (financial) materiality, judged by primary users’ decisions and by effects on cash flows, access to finance or cost of capital.
What the ISSB changedExplore
Module 01 / 04
Exposure draft
Proposed assessing materiality in relation to effects on enterprise value.
Module 02 / 04
BC34(b)
Removed the definition and the words “to assess enterprise value” from the objective and materiality.
Module 03 / 04
BC67
Aligned the definition with the IASB’s “material information” and “material”.
ESRS and ISSB
The financial definitions are aligned; the regimes are not
The joint ESRS–ISSB interoperability guidance of 2 May 2024 says “the definition of financial materiality in ESRS is aligned with the definition of materiality in IFRS S1”.
It is equally explicit that ESRS materiality “covers also the impact materiality lens”, so a matter can be reportable under the ESRS on impact alone.
Read what alignment does and does not mean
The guidance attributes the alignment to the ISSB and the European Commission services, together with EFRAG, working together while both sets of standards were developed.
It says it is not a formal statement of equivalence and that future amendments may change its analysis.
It maps the 2023 ESRS paragraph numbers, which moved in the revision, so read it for the principle and check any mapping against DR (EU) 2026/1563.
In practice a group reporting under both can take the financially material subset of its ESRS assessment as the starting point for UK SRS, which single vs double materiality works through.
- 1
One financial definition
ESRS ¶45 and IFRS S1 ¶18 both point at primary users’ decisions.
- 2
One evidence base
Risk registers, scenarios and dependency analysis serve both.
- 3
Different regimes
The ESRS add the impact lens; UK SRS does not.
- 4
Reuse with care
Check paragraph numbers against the revised ESRS before mapping.
Not the same as the accounts
Financial materiality versus accounting and audit materiality
All three uses of “material” share a core definition: information that could reasonably be expected to influence the decisions of the people who rely on it.
The accounting definition is in IFRS 18 Appendix A for periods from 1 January 2027, carried over from IAS 1 ¶7.
Read how the scope differs
IFRS 18 Appendix A: information is material “if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements”.
The ISSB says at BC69 that sustainability judgements “will inevitably differ” because the disclosures provide different information, are “unconstrained by definitions of assets and liabilities”, and look over longer periods.
The revised ESRS 1 ¶46 says the same from the EU side, calling sustainability financial materiality an expansion of the financial-statement scope.
Audit materiality is different again: ISA (UK) 320 asks the auditor to set materiality for the financial statements as a whole and a lower performance materiality, by professional judgement.
Its A8 examples, such as five per cent of profit before tax, are what an auditor “may consider”, and nothing in the ESRS or UK SRS imports them.
Three uses of the wordExplore
Module 01 / 04
Financial statements
IFRS 18 Appendix A from 1 January 2027; IAS 1 ¶7 before that.
Module 02 / 04
Audit
ISA (UK) 320: the auditor sets overall and performance materiality by judgement.
Module 03 / 04
Sustainability (ESRS)
An expansion of financial-statement materiality, including the value chain (¶46).
Module 04 / 04
Sustainability (ISSB)
Judgements “will inevitably differ” from financial-statement ones (BC69).
Anticipated financial effects
What the ESRS ask once a risk is financially material
Finding a risk financially material is not the end of the ESRS work: the effects then have to be described.
In the revised ESRS the anticipated-financial-effects requirements survive in ESRS 2 ¶27 and in ESRS E1-11 for climate, and the separate E2 to E5 requirements of 2023 are gone.
Read the reliefs and the climate carve-out
Revised ESRS 1 ¶125(b) lets wave-one undertakings omit “all information about anticipated financial effects, required in paragraph 27 of ESRS 2 General Disclosures and in ESRS E1-11 for their financial years prior to financial year 2028, with the exception of ESRS E1-11 paragraph 39(a)(b) and 40(a)(b)”.
¶125(c) does the same for quantitative information for financial years before 2030, with the same E1-11 exception.
Other undertakings have their own first-two-year and first-four-year versions of these reliefs.
That E1-11 carve-out is the point preparers most often miss, so a climate risk found financially material carries some disclosure from the start.
UK SRS has its own reliefs
UK SRS S1 and S2 sit under the FCA’s comply-or-explain regime, with a one-year relief for Scope 3 and two years for S1 matters beyond climate; UK SRS S1 and S2 sets them out.
Anticipated financial effectsExplore
Module 01 / 04
ESRS 2 ¶27
The general disclosure of anticipated financial effects, under SBM-3.
Module 02 / 04
ESRS E1-11
Effects of material physical and transition risks and climate opportunities (¶¶38–40).
Module 04 / 04
Reliefs
Wave one may omit before FY2028, quantitative before FY2030, with an E1-11 carve-out.
Finding the topics
Industry context: SASB and its “may”
Financial materiality is entity-specific, but a long list usually starts from what is financially material for an industry.
The SASB Standards, now the ISSB’s responsibility, cover 77 industries across 11 sectors.
Read the UK difference on SASB
UK SRS S1 ¶55(a) says an entity “may refer to and consider the applicability of the disclosure topics in the SASB Standards”, and might conclude they do not apply.
¶58(a) says the same of the SASB metrics, and IFRS S1 says shall where the UK says may.
¶59 still requires an entity to identify the standards, pronouncements and other sources of guidance it applied.
The SASB Standards in more depth are on SASB Standards.
Industry starting pointsExplore
Module 02 / 04
UK SRS ¶55(a)
An entity may refer to and consider the SASB disclosure topics.
Worked example
One risk, tested for financial materiality
An illustrative UK listed food manufacturer with an EU subsidiary in CSRD scope.
The figures are invented, and the thresholds are the company’s own choice.
| Matter | Source of the risk | Likelihood and magnitude | Conclusion |
|---|---|---|---|
| Water scarcity at a key ingredient supplier | Dependency on a natural resource (¶¶48(b), 49) | Likely within five years; a supply disruption the company rates as high magnitude | Financially material under both regimes |
| New packaging levy in two markets | Regulatory change (¶48(c)) | Certain; cost the company rates as moderate | Material if above its recorded threshold |
| Supplier workers’ excessive hours | An impact, not yet a financial effect | No current effect on cash flows or contracts | Impact-material under the ESRS; enters UK SRS only if it becomes a risk |
The first two rows are the same work under both regimes, because the financial definitions are aligned.
The third row is where the regimes part: it may be reportable under the ESRS on impact alone, and it becomes a UK SRS matter only if it would affect cash flows, access to finance or cost of capital.
The impact side of that row is on impact materiality.
This is a provisional illustration of method, not a finding about any company.
How the test arrived
Financial materiality in dates
The financial lens took its present wording in two standard-setters within three years.
Only dates read at source are shown.
- June 202301
IFRS S1 issued
The ISSB’s general requirements, with “enterprise value” removed from the materiality wording (BC67). - 31 July 202302
- 2 May 202403
Interoperability guidance
EFRAG and the IFRS Foundation say the financial-materiality definitions are aligned. - 19 November 202404
ISSB educational material
Material information explained in four steps; not part of the Standards. - 25 February 202605
- 30 September 202606
FCA final rules
PS26/19: comply or explain for listed companies, periods from 1 January 2027. - FY202707
Revised ESRS apply
Financial years beginning on or after 1 January 2027; the financial limb is now ¶47.
Doing it
A financial materiality assessment, step by step
The ISSB’s educational material describes four steps, and the ESRS add their own ordering inside a double materiality assessment.
This sequence is an illustration of one way to run the financial side, not a prescribed method.
- 01 / Identify01
Find potentially material information
Risks and opportunities from impacts, dependencies, hazards and regulation. - 02 / Assess02
Judge likelihood and magnitude
Over short, medium and long term, including effects not yet in the accounts. - 03 / Decide03
Apply recorded thresholds
Qualitative or quantitative, set by the company and applied consistently. - 04 / Organise04
Draft the disclosures
Connect each material matter to the financial statements and strategy. - 05 / Review05
Reassess at each reporting date
UK SRS S1 ¶B28; revised ESRS 1 ¶34 asks about significant changes.
What goes wrong
Five financial materiality mistakes
Most errors come from treating financial materiality as the accounting test with a new label.
It is wider in time, wider in scope, and judged against what primary users need to assess prospects.
Read the mistakes in full
Using the financial statements’ scope misses risks attributable to the value chain, which ¶46 brings in.
Borrowing an audit percentage imports a rule no sustainability standard sets, as materiality thresholds explains; both the ESRS and UK SRS leave the threshold to the company’s judgement.
Calling the UK test “enterprise-value materiality” repeats an exposure draft the ISSB changed.
Ignoring dependencies misses risks that exist even when the company does no harm, such as reliance on scarce water.
Treating “financial” as “quantified” is the fifth: the revised ESRS 1 AR 13 says a qualitative analysis may be sufficient.
Avoid theseExplore
Module 01 / 04
Using the accounts’ scope
Sustainability financial materiality is wider and longer-dated (¶46, BC69).
Module 02 / 04
Borrowing audit percentages
ISA (UK) 320 A8 is an audit example, not a sustainability rule.
Module 03 / 04
Calling it enterprise value
The ISSB removed the phrase; UK SRS never had it.
Module 04 / 04
Ignoring dependencies
A dependency can be a risk with no impact at all (¶49).
Frequently asked
Questions people ask
What is financial materiality?
Financial materiality is the outside-in lens: a sustainability matter is financially material when it affects, or could reasonably be expected to affect, a company’s development, financial position, performance, cash flows, access to finance or cost of capital over the short, medium or long term.
It is the only lens in UK SRS S1 and IFRS S1, and one of the two lenses in the revised ESRS.
What is CSRD financial materiality?
Under the revised ESRS 1 ¶47 an undertaking reports a topic from a financial materiality perspective if it triggers, or could reasonably be expected to trigger, material financial effects.
Risks and opportunities are assessed on a combination of the likelihood of occurrence and the potential magnitude of the financial effects (¶50).
What is ISSB financial materiality?
IFRS S1, and UK SRS S1 which endorses it, ask for material information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects (¶17).
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that primary users of general purpose financial reports make (¶18).
Is ESRS financial materiality the same as ISSB materiality?
The definitions are aligned.
The joint ESRS–ISSB interoperability guidance of 2 May 2024 says “the definition of financial materiality in ESRS is aligned with the definition of materiality in IFRS S1”.
What differs is the regime: the ESRS add impact materiality on top.
Is financial materiality the same as enterprise-value materiality?
No. “Enterprise value” was exposure-draft language.
The ISSB removed the definition of enterprise value and the words “to assess enterprise value” from the final IFRS S1 (Basis for Conclusions BC34(b), BC39, BC67), and the phrase does not appear in UK SRS S1.
The accurate name for the UK test is single (financial) materiality.
Is financial materiality the same as accounting materiality?
They share a definition shape but not a scope.
The revised ESRS 1 ¶46 calls financial materiality for sustainability reporting “an expansion” of the materiality used for the financial statements, and the ISSB says materiality judgements for sustainability-related financial disclosures “will inevitably differ” from those for financial statements (BC69).
Is there a numerical threshold for financial materiality?
No. UK SRS S1 ¶B19 says the standard does not specify any thresholds for materiality or predetermine what would be material, and the revised ESRS 1 ¶37 requires appropriate qualitative considerations and quantitative thresholds set by the undertaking.
Audit percentages such as those in ISA (UK) 320 A8 are examples for auditors, not sustainability rules.
Where do financially material risks and opportunities come from?
The revised ESRS 1 ¶48 names three sources: material impacts identified in the impact assessment; dependencies on natural, human and social resources; and other factors, such as exposure to climate hazards or regulatory changes addressing systemic risks.
What is a dependency in financial materiality?
A reliance on natural, human or social resources.
The revised ESRS 1 ¶49 says dependencies are sources of financial effects, in cash flows or in resources not recognised in the financial statements, and may be sources of risks or opportunities regardless of any impact the undertaking has on those resources.
UK SRS S1 ¶2 says dependencies and impacts on resources give rise to sustainability-related risks and opportunities.
Can an impact become financially material?
Yes.
The revised ESRS 1 ¶35 says an impact can be financially material from the start or become financially material when it is reasonably expected to affect the undertaking’s finances.
This is sometimes called dynamic materiality, but that is a description, not a separate test.
Does financial materiality need to be reassessed every year?
UK SRS S1 ¶B28 requires an entity to reassess its materiality judgements at each reporting date.
The revised ESRS 1 ¶34 asks whether significant changes have occurred that could affect the earlier conclusions, and to update the assessment if so.
Do I have to disclose anticipated financial effects under the ESRS?
For material climate risks, yes, under ESRS E1-11, with reliefs.
Under the revised ESRS 1 ¶125(b) and (c), wave-one undertakings may omit anticipated-financial-effects information for financial years before 2028, and quantitative information for years before 2030, except ESRS E1-11 ¶39(a)(b) and ¶40(a)(b).
The separate anticipated-financial-effects requirements of the 2023 E2 to E5 no longer exist.
Do I have to use the SASB Standards to find financially material topics?
Not under UK SRS.
UK SRS S1 ¶55(a) and ¶58(a) say an entity may refer to and consider the applicability of the SASB disclosure topics and metrics, where IFRS S1 says shall.
If an entity does use them, ¶59 requires it to say which sources of guidance it applied.
Does financial materiality decide whether a company is in CSRD scope?
No. Scope is a separate test: from financial years beginning on or after 1 January 2027 the CSRD reaches undertakings exceeding both €450 million net turnover and an average of 1,000 employees.
Materiality decides what an in-scope undertaking reports.
Sources
Primary sources
Every figure, date and status on this page traces to the instrument’s owner.
Secondary commentary is never the source for a number.
Checked against 14 sources fromEUR-LexCouncil of the EUDepartment for Business and TradeIFRS FoundationEFRAG / IFRS FoundationFinancial Reporting Council
- EUR-LexCommission Delegated Regulation (EU) 2026/1563 — revised ESRS 1 ¶¶23, 35, 45–50 and AR 29–31
The ESRS financial-materiality assessment as published on 21 September 2026; applies to financial years beginning on or after 1 January 2027.
- Council of the EUC(2026) 5010 final, Annex I — revised ESRS 1 ¶¶125–127 and ESRS E1-11
The anticipated-financial-effects reliefs and the climate carve-out.
- EUR-LexDirective 2013/34/EU, consolidated 18 March 2026 — Art 19a(1)
The operative text: how sustainability matters affect the undertaking’s development, performance and position.
- Department for Business and TradeUK SRS S1 — ¶¶2, 3, 17–19, B19, B25, B28
Single (financial) materiality: the decisions of primary users of general purpose financial reports.
- IFRS FoundationIFRS S1 Basis for Conclusions — BC34, BC39, BC67, BC69
Why “enterprise value” was removed, and why sustainability judgements differ from financial-statement ones.
- IFRS FoundationSustainability-related risks and opportunities and the disclosure of material information — educational material, November 2024
Explanatory only; no thresholds, four illustrative steps.
- IFRS FoundationIFRS S1 supporting materials
Lists the educational material at 19 November 2024.
- EFRAG / IFRS FoundationESRS–ISSB Standards Interoperability Guidance, 2 May 2024 — Introduction and §1.1
“the definition of financial materiality in ESRS is aligned with the definition of materiality in IFRS S1”.
- IFRS FoundationIFRS 18 Presentation and Disclosure in Financial Statements
Replaces IAS 1 from 1 January 2027; the definition of material is in Appendix A and ¶¶B1–B5.
- IFRS FoundationIFRS 18 — Appendix A, “material information”
The accounting definition the sustainability standards adapt.
- Financial Reporting CouncilISA (UK) 320 Materiality in Planning and Performing an Audit
Audit materiality and performance materiality: professional judgement, not a rule.
- IFRS FoundationSASB Standards
Industry-based topics an entity may refer to under UK SRS S1 ¶55(a).
- IFRS FoundationSICS industry list (10 October 2025)
77 industries across 11 sectors.
- Financial Conduct AuthorityPS26/19 — UK SRS on a comply-or-explain basis
Listed companies, periods beginning on or after 1 January 2027.
Continue reading
Read next
The other lens
Impact materiality
The inside-out lens: severity, likelihood and the four kinds of impact.
Compared
Single vs double materiality
What changes when the impact lens is added, and what carries over.
The UK test
UK SRS materiality
The UK test paragraph by paragraph.
The hub
Materiality explained
One definition, four tests: accounts, audit, UK SRS, the ESRS and GRI.