Are boards only seeing half the materiality picture?

A board gets the sustainability materiality matrix. Topics plotted on two axes, colour-coded, usually one slide near the back of the pack. It doesn't get the count underneath. How many Risks the assessment found, how many Opportunities, and how far apart those two numbers are.

As a Chartered Director and a GRI-certified ESRS Professional, an unusual pairing, this led me to wonder if boards were getting a true balance of Risks and Opportunities in their sustainability reporting. Counting them across 70 European sustainability statements, using the same rules on both sides: in 40 of Europe's largest ESRS filers there were 455 Risks and 196 Opportunities. In more than one in three topic assessments, a company set out the Risks and listed no Opportunity at all.

That is quite clearly asymmetrical information on which a board is basing decisions. But is this an ESRS problem, or something more fundamental? If the process systematically looks harder for Risks than Opportunities, does the same problem exist under TCFD, IFRS and other sustainability reporting frameworks? Are financial materiality assessments only half-baked?

These assessments do more work than most people realise. The materiality assessment sets the topics. The topics shape the strategy, the strategy shapes the capital plan, and the capital plan decides what actually gets built over the next three years. Start that chain with a thin Opportunity column and you get a narrower business at the end of it.

Directors are expected to make informed decisions, and a board can't be informed about a gap it has never measured. If an organisation systematically discovers Risk but not Opportunity, it doesn't just have an imbalance in its sustainability reporting. It has an imbalance in how it sees the future.

Part of the problem may actually lie in the rules themselves.

TCFD, 2017. Four pillars. Three of them are written as "climate-related risks and opportunities". The fourth is Risk Management, which only mentions Risks. So do its three recommended disclosures. Opportunity went under Strategy, where a company lists the Opportunities it has spotted. Nothing there asks how it went looking. TNFD repeated the shape six years later.

ESRS turned it into law, and ESRS says two things that don't fit together. It requires that Risks and Opportunities "shall receive equal attention", and its prudence clause states that "the exercise of prudence does not allow for the understatement of opportunities or the overstatement of risks" (ESRS 1, Appendix B, QC 8). Then the same standard adds a test that only Opportunity has to pass: is this Opportunity already being pursued and built into the strategy? There's no equivalent test for Risk anywhere in the standard.

So if you've found a Risk and haven't done anything about it yet, you still report it. If you've found an Opportunity and haven't started work on it, you leave it out.

The bigger gaps are in the companies nobody is required to check. The other thirty companies in my sample are mid-size firms reporting voluntarily under VSME, where that ESRS test has no application at all. They came in at 88 Risks against 30 Opportunities, and almost three-quarters of the companies showed zero in the Opportunity column. So when you take the requirement away, the gap widens even further.

None of that proves the rules caused it, and I won't pretend otherwise.

Yet, which of an assurer's checks would catch a company that looked much harder for Risks than for Opportunities? I've not seen that asked, let alone answered.

That leaves the board with one of two problems.

If what your company published is the real picture, you're setting strategy on a full account of what could go wrong and only a partial account of what could create value. If the internal picture is fuller, you've signed off a statement that understates your own Opportunities, which is the one thing the ESRS standard says prudence doesn't allow.

Both are governance problems, and they need different fixes. Most boards can't say which one they have though, because nobody has ever put the ratio in front of them.

There's a limit to what my research can show. I counted what companies disclosed. That isn't what they found. A company may have identified an Opportunity, weighed it and left it out. I'm not claiming anybody failed to look. I'm simply saying that this is a discussion we should all be having.

Where did the Opportunities come from? Was the process that discovered them as systematic as the process used to discover Risks? I call that missing step Sustainability Opportunity Discovery: a systematic search for candidate Opportunities, run before and separately from the materiality assessment, that leaves a record of what was searched.

Three questions, and a board can ask all three in one meeting.

1. Where did the Opportunities come from? Was the process that discovered them as systematic as the process used to discover Risks?
2. How many Risks and how many Opportunities are in our assessment, and what is the ratio between them?
3. How many Opportunities did we identify and then decide not to report, and on what grounds?

Companies that want to test how they searched for Opportunities before an auditor asks can use the Opportunity Challenge, an assurance-ready review of the Opportunity side of the financial materiality process. It can be downloaded at no cost here.

A white paper covering the research in greater depth, including possible ways to rebalance financial materiality assessments, is also free to download here.

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