10 Reasons to Track a Corporate Carbon Footprint
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In this article, we’ll explain what a corporate carbon footprint is, why it’s important, how it is measured, and reasons why your company should track it too.
ESG / CSR
Industries
MEASURE
ACT
COMFORM
What is financial materiality?
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“ Financial materiality has become one of the most important concepts in corporate reporting today. It’s about understanding which factors, from climate risks to supply chain disruptions, could seriously affect a company’s financial performance. As more businesses begin reporting on sustainability, knowing which issues are financially material helps them focus on what truly matters for their bottom line. ”
At the same time, investors are paying closer attention. ESG factors that were once seen as peripheral are now central to assessing long-term value and financial resilience. The pressure to identify, measure, and report on these issues has never been greater, not just to meet regulatory expectations, but to stay competitive in a fast-changing market.
In this article, we’ll break down:
- What financial materiality means
- Why it matters to both companies and investors
- The difference between financial materiality and impact materiality
- How the concept fits into double materiality and evolving ESG standards
- Practical steps for conducting a financial materiality assessment
- How financial materiality links to investor confidence, regulation, and long-term business success
What does financial materiality mean?
“ Financial materiality refers to the sustainability and environmental, social and governance (ESG) factors that have a direct impact on a company’s financial performance. It’s about identifying which issues, such as regulatory risks, climate-related costs, or supply chain disruptions, could influence key financial metrics like cash flow, profitability, or access to capital. In other words, if something has the potential to affect investor decision-making or the financial health of the business, it’s considered financially material. ”
The concept is rooted in Generally Accepted Accounting Principles (GAAP), which have long guided the disclosure of financially relevant information to investors. As ESG considerations become increasingly linked to financial outcomes, financial materiality now plays a central role in helping companies focus their reporting on the sustainability issues that truly matter to their long-term performance.
In recent years, financial materiality has taken on greater importance as ESG reporting becomes more mainstream. Thousands of publicly listed companies have begun measuring and disclosing ESG-related risks and opportunities, not just for compliance, but to remain competitive and resilient.
This shift has been driven by multiple forces: companies recognizing the strategic value of sustainability, growing pressure from stakeholders and regulators, and a marked rise in investor interest. Asset managers and investment funds are now actively incorporating financially material ESG factors into their analysis, using them to inform risk assessments and capital allocation decisions.
Why is it important to consider financial materiality?
For companies
Financial materiality acts as a guiding strategy for organizations. It involves the identification of ESG considerations that have a direct bearing on a company's financial outcomes. Addressing these material ESG factors allows companies to mitigate risks, seize opportunities, and develop a more holistic understanding of how sustainability links to long-term business performance. Prioritizing financial materiality can lead to increased shareholder value, improved access to capital, and heightened competitiveness in the market.
For investors
Investors increasingly rely on financial materiality to guide their decision-making. ESG factors that have a clear financial impact, such as regulatory risks, climate change exposure, or reputational issues, are now seen as critical to assessing long-term value. Understanding which issues are financially material helps investors evaluate potential risks and returns more accurately and identify companies that are better positioned for sustainable growth.
For regulators and lenders
Regulatory bodies and credit institutions are placing more emphasis on the financial risks tied to ESG factors. Disclosing financially material issues not only ensures compliance with evolving regulations and financial reporting obligations but also influences credit ratings and borrowing terms. Companies that proactively address these issues are better positioned to meet disclosure standards and maintain favourable financial conditions.
Financial materiality vs impact materiality
Financial materiality and impact materiality are two terms that are often used in the context of ESG reporting, but they refer to very different things. While they’re sometimes confused or used interchangeably, each captures a distinct perspective on what makes an issue “material” to a business.
Here’s how they differ:
Financial materiality
Financial materiality centres on factors directly influencing a company's financial performance. These are aspects capable of significantly swaying investors' decisions and financial metrics, such as cash flow, revenue growth, and profitability.
Real-world example: Consider a manufacturing company that drastically cuts energy consumption through sustainable practices and technologies. This leads to substantial cost savings, thereby improving profitability - a clear illustration of financial materiality.
Impact materiality
Impact materiality, on the other hand, delves into the broader societal and environmental repercussions of a company's actions. It assesses how a company's operations affect various stakeholders, including communities, ecosystems, and society at large. Impact materiality encompasses the non-financial facets of sustainability.
Real-world example: Take a tech company actively promoting diversity and inclusion in its workforce, creating a more equitable workplace. While this initiative may not immediately impact financial statements, it generates a positive societal effect by fostering inclusivity - an example of impact materiality.
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The importance of both financial and impact materiality
“ Financial materiality and impact materiality complement each other within ESG reporting. While financial materiality is closely tied to traditional financial metrics, impact materiality addresses the broader implications of a company's actions. ”
To achieve comprehensive ESG reporting, both dimensions should be considered. Neglecting impact materiality can result in an incomplete understanding of a company's sustainability performance, potentially overlooking vital societal or environmental risks.
On the other hand, dismissing financial materiality can undermine an organization's ability to attract investors and maintain financial stability. Investors, particularly those integrating ESG criteria into their decisions, place substantial weight on financial materiality.
The concept of double materiality
Recognizing the value of both financial and impact materiality is increasingly seen as essential for credible ESG reporting. Rather than viewing them in isolation, many frameworks (such as the EU's CSRD framework) now encourage companies to consider them side by side, leading to the emergence of double materiality as a guiding principle.
“ The concept of double materiality acknowledges that sustainability factors can be material from both a financial perspective - affecting the company’s financial performance - and an impact perspective, where they affect the broader economy and society. ”
Double materiality requires companies to evaluate the materiality of sustainability factors from both perspectives. It entails assessing how sustainability issues may affect the company financially (traditional financial materiality) and how the same issues may have broader societal or systemic implications (impact materiality).
“ By adopting a double materiality approach, companies can provide a more comprehensive understanding of their sustainability risks and opportunities. This approach aligns with the evolving landscape of ESG reporting, where investors and stakeholders are increasingly interested in understanding not only the financial materiality but also the societal and environmental impact of corporate activities. ”
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What is a financial materiality assessment?
Assessing financial materiality involves evaluating specific factors that are likely to affect a company’s financial outcomes. These assessments typically draw on a combination of financial, strategic, and sector-specific considerations to determine which issues are most relevant.
Below are some of the key criteria companies use when identifying what’s financially material in the context of ESG.
Key factors and criteria
Impact on financial performance
Does an ESG factor influence profitability, cash flow or financial stability?
The key consideration when assessing financial materiality is whether an ESG factor has a meaningful impact on a company’s financial health. This includes anything that could influence cash flow, revenue growth, profitability, or overall financial stability.
Investor relevance
Is it material to investors' decision-making and risk-return profiles?
Financial materiality also reflects what matters to investors. ESG factors that could influence the risk-return profile or future performance of an investment, such as exposure to climate-related risks, regulatory changes, or supply chain instability, are likely to be considered material from an investor’s perspective.
Industry relevance
What’s financially material depends on your sector and context.
What’s financially material can vary significantly from one industry to another. For example, data privacy may be a key concern for a tech company, while emissions or resource use may be more relevant in manufacturing. That’s why materiality assessments need to be grounded in sector-specific standards and business context.
Regulatory environment
Laws and disclosure rules shape what must be reported.
Companies also need to factor in applicable laws and reporting requirements. Regulatory developments such as mandatory climate disclosures or ESG-related listing rules can determine which sustainability issues must be considered financially material. Staying aligned with these expectations is key to ensuring compliance and avoiding risk.
The benefits of incorporating financial materiality assessments
Although financial materiality is often framed in the context of meeting regulatory requirements like the CSRD, its real impact stretches far beyond mere compliance. Financial materiality shapes how companies manage their operations, engage with stakeholders, and make strategic decisions, helping them uncover value, control risk, and build trust across the board.
Here are some of the key advantages of implementing financial materiality assessments:
💰
Influencing investment decisions
Financially material factors shape how institutional investors assess risk and allocate capital. Companies that address these well are more likely to attract investment and secure growth funding.
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Enhancing financial resilience
Identifying financially material risks helps companies manage cash flow and profitability. This strategic foresight builds resilience, especially in times of economic uncertainty.
⭐
Reputation & confidence
Transparent financial materiality builds trust with stakeholders and investors. Clear disclosure signals strong governance and boosts confidence in long-term performance.
🏆
Competitive advantage
Managing financially material issues drives efficiency and strategic focus. This often leads to cost savings, innovation, and stronger market positioning.
🌐
Global recognition
Companies that act on financially material ESG factors are seen as credible, forward-thinking, and investment-worthy—especially by sustainable and long-term-focused funds.
How to conduct a financial materiality assessment:
Once you’ve understood what financial materiality means and why it matters, the next step is figuring out how to apply it within your organisation.
“ A structured assessment can help you identify which ESG issues are most likely to impact your company’s financial performance and ensure your reporting reflects the risks and opportunities that really count. ”
Here’s how to approach it:
Step 1
Identify key stakeholders
Map out relevant stakeholders like investors, customers, employees, regulators, and communities. Their expectations will guide your focus.
Step 2
Gather ESG data
Collect complete and current ESG data—such as emissions, energy use, governance practices, or labour metrics—across operations.
Step 3
Analyse financial implications
Assess how ESG factors could impact revenue, costs, risk exposure, or investor confidence. Identify both risks and opportunities.
Step 4
Prioritise material issues
Focus on the ESG factors most likely to influence your financial performance, such as margins, cash flow, or cost of capital.
Step 5
Conduct the assessment
Use a structured method like a scoring system to evaluate and rank financially material ESG issues for clarity and consistency.
Step 6
Report transparently
Clearly disclose the results in your ESG reporting. Explain what’s financially material, how it was identified, and how it informs strategy.
Top tips for strengthening your assessment
Engage stakeholders early
Run surveys, interviews, or workshops to gather input and validate your priorities.
This adds credibility and helps identify blind spots to improve your materiality assessment.
Refer to sector-specific standards
Use frameworks like SASB or other industry guidelines to align with best practices in your sector.
Ensure your assessment meets expectations by applying recognized, sector-relevant standards.
Tailor your approach
Materiality is not one-size-fits-all. Consider size, geography, and nature of operations.
Design your assessment to suit your company’s unique context and material ESG issues.
Update regularly
Materiality is dynamic. Reassess periodically to reflect changes in business and regulations.
Support continuous improvement by adapting your materiality process over time.
ESG reporting standards and financial materiality
Of course, financial materiality assessments don’t happen in a vacuum. Most companies are guided, or required, to carry them out in line with ESG reporting standards. Frameworks like the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) provide structured guidance on how financial materiality should be assessed, disclosed, and used to inform broader sustainability reporting.
“ Companies can leverage these standards to ensure their financial materiality assessments align with industry best practices and regulatory expectations. ”
Additionally, these standards facilitate comparability among companies within the same sector, aiding investors and stakeholders in evaluating performance.
Key ESG frameworks that incorporate financial materiality
| Framework | Applies to | Financial Materiality Role | Recent updates (2025) |
|---|---|---|---|
|
CSRD (EU)
|
EU large companies & listed SMEs | Requires both financial and impact materiality (“double materiality”) | Omnibus delay Reporting waves 2–3 delayed to 2027–28 |
|
ESRS (EU)
|
Mandatory under CSRD | Sets detailed guidance on assessing and disclosing financially material sustainability issues | Simplification underway Updates due mid‑2025 |
|
ISSB (IFRS S1/S2)
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Global — public & private companies | Focused solely on financial materiality for investor decision‑making | Now in force Effective from 1 Jan 2024 |
|
SASB (under ISSB)
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Sector-specific global guidance | Helps companies identify ESG issues most likely to impact financial performance | Fully integrated into ISSB since Aug 2022 |
|
TCFD / SEC climate rule (US)
|
Climate-focused disclosures | Emphasizes financially material climate risks | Referenced globally Forms basis for climate rules in UK, EU, Japan, Singapore & more |
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What about Greenly?
At Greenly, we offer a full sustainability suite designed to help companies track, analyse, and reduce their environmental impact, while meeting evolving stakeholder and regulatory expectations.
Our suite of services includes:
| Our Services | What They Deliver |
|---|---|
|
Carbon accounting
|
Measure Scope 1, 2, and 3 emissions across your operations and supply chain with precision and clarity. |
|
Life Cycle Assessments (LCAs)
|
Understand the environmental impact of your products and services, from raw materials to end-of-life. |
|
Materiality assessments
|
Identify the ESG issues that matter most to your business and stakeholders, using frameworks aligned with leading standards — including double materiality assessments. |
|
Sustainability reporting
|
Build investor- and regulator-ready reports aligned with CSRD, ESRS, ISSB, and other major ESG frameworks. |
|
Decarbonization strategy
|
Get a tailored action plan to reduce emissions, meet science-based targets, and future-proof your operations. |
Whether you're just getting started or looking to strengthen your sustainability strategy, Greenly's platform and expert support can help you take the next step with confidence. Get in touch today to find out more.
Sources:
- Greenly, ESG criteria: what you need to know
https://greenly.earth/en-gb/blog/company-guide/esg-criteria-what-you-need-to-know?utm_source=adwords&utm_medium=ppc&utm_campaign=1:%20SN%20|%202:%20Brand%20|%203:%20Search%20Brand%20google%20|%204:%20FR - Accounting.com, GAAP (Generally Accepted Accounting Principles)
https://www.accounting.com/resources/gaap/ - Greenly, What is ESG reporting and should you be doing it?
https://greenly.earth/en-us/blog/company-guide/what-is-esg-reporting-and-should-you-be-doing-it?utm_source=adwords&utm_medium=ppc&utm_campaign=1:%20SN%20|%202:%20Brand%20|%203:%20Search%20Brand%20google%20|%204:%20FR - Greenly, ESG investing: meaning and trends
https://greenly.earth/en-gb/blog/company-guide/esg-investing-meaning-and-trends?utm_source=adwords&utm_medium=ppc&utm_campaign=1:%20SN%20|%202:%20Brand%20|%203:%20Search%20Brand%20google%20|%204:%20FR - Greenly, Our guide to the CSRD’s double materiality assessment
https://greenly.earth/en-gb/blog/company-guide/our-guide-to-the-csrds-double-materiality-assessment - Greenly, What is the corporate sustainability reporting directive (CSRD)?
https://greenly.earth/en-gb/blog/company-guide/what-is-the-corporate-sustainability-reporting-directive-csrd?utm_source=adwords&utm_medium=ppc&utm_campaign=1:%20SN%20|%202:%20Brand%20|%203:%20Search%20Brand%20google%20|%204:%20FR - Greenly, Our guide to European sustainability reporting standards (ESRS)
https://greenly.earth/en-gb/blog/company-guide/our-guide-to-european-sustainability-reporting-standards-esrs?utm_source=adwords&utm_medium=ppc&utm_campaign=1:%20SN%20|%202:%20Brand%20|%203:%20Search%20Brand%20google%20|%204:%20FR - Greenly, Greenhouse gas emissions scopes 1, 2 and 3
https://greenly.earth/en-gb/blog/company-guide/greenhouse-gas-emissions-scopes-1-2-and-3
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