In the coming year, expect to hear the terms impact and double materiality more frequently. European regulators are already asking companies to report on environmental, social, and governance, or ESG, risks for their businesses. Increasingly, companies will be asked to share how their businesses impact the world around them. This two-pronged assessment is called double materiality. New double-materiality reporting rules are part of the EU’s Corporate Sustainability Reporting Directive, or CSRD, and affect thousands of companies headquartered outside the EU, including Morningstar MORN.
Impact reporting isn’t to be confused with impact investing, a large and growing segment of sustainable investing. Impact investing seeks certain social and environmental outcomes, in addition to financial returns. But in theory, the new regulations will help investors across private and public companies see the impact of their investments and adjust their portfolios accordingly.
More information should be a good thing. Yet companies and investors have pushed back on the new rules, arguing that companies still are insufficiently focused on ESG risk, and that it’s too difficult to measure impact, much less agree on what it means. Consider the United Nations Sustainable Development Goals. The SDGs, released in 2015, called for nations to address challenges related to poverty, inequality, climate change, and peace by 2030. In theory, the framework would allow businesses and investors to speak the same language and work toward shared targets. Yet recently, the UN reported that only 17% of the SDG targets are on track to be met by 2030. Notably, the reporting framework doesn’t appear to line up with how companies currently report data.
Global Regulatory Trends in ESG Reporting and Sustainability
In December, I invited some Morningstar colleagues to unpack the double materiality issue. The conversation was wide-ranging—illustrative of the issue under discussion. Hilary Wiek is senior strategist for sustainable investing at PitchBook, Morningstar’s private-markets research arm. Matthew Gray is associate director, stewardship for Morningstar Sustainalytics, and is intimately familiar with current efforts to reimagine the SDGs. Gabriel Presler is Morningstar’s head of enterprise sustainability. Please read the condensed edited excerpts below.
Ron Bundy: Matthew, how are governments and companies in emerging markets thinking about double materiality and impact?
Matthew Gray: The second part of double materiality, meaning impact and not the financial materiality, has been in the UN’s wheelhouse for many years, across many agencies. However, the only binding treaty is the United Nations Framework Convention on Climate Change. All the other UN agencies and affiliated entities, such as Principles for Responsible Investment, or PRI, and the Global Reporting Initiative, or GRI, offer impact-related recommendations that aren’t binding. They advocate hard for these outcomes and have put in place a lot of policies and guidelines. As for governments: Europe is leading the way, as expected. Companies subject to CSRD will have to report according to European Sustainability Reporting Standards, or ESRS. Japan, Australia, Canada, the UK, and Singapore are running a close second. While they haven’t explicitly put “double materiality” in their disclosures, it’s inferred.
Further East, or South, things get more exciting. India is including some references to double materiality. Chinese companies will make certain environmental and social disclosures, but without explicit mention of double materiality. Saudi Arabia, Turkey, Brazil will come out in a year or two.
None of them explicitly mention double materiality. The main reason, in my view, is that they weren’t in the room when this reporting structure or terminology was devised. Still, they’re all moving toward increased disclosures, and it’s gone from voluntary to mandatory across most emerging markets. They take pieces from the menu of regulations, finding out what’s most culturally relevant and then what will have the strongest implications on their companies. And I assure you, the largest companies are intimately involved in the process. In stewardship, we hear this firsthand.
Impact Investing: Measuring Results Beyond Financial Returns
Bundy: Gabriel, what’s your perspective as an issuer and as Morningstar’s sustainability chief? Is it realistic to look at and report on impact?
Gabriel Presler: There’s already a lot to learn from current ESG data. Investors used it to study ESG risk, but it offers a lot of messages about impact. For example, if you’re a big player in airlines, a goal around decarbonization can be truly impactful. And if an airline company has a decarbonization plan that’s working, investors and flyers can see scope 1, 2, and 3 emissions change. In concert with other metrics, like miles flown or revenue or employees, they can get a sense of how the emissions intensity of a business is changing over time. If those numbers are going in the right direction, if the business really is decarbonizing, that is impactful, especially for those heavy emitters.
As investors, we love measures. But the blast effects, or impact, are still legendarily hard to measure, so impact materiality is a very new frontier. Fortunately, a lot in the ESG financial materiality data is extremely meaningful and comparable when it comes to addressing this investor desire to measure impactful performance.
Bundy: Hilary, you’re our private-markets expert. How does the story change when we’re talking about impact in private markets?
Hilary Wiek: The impact investing segment of the private markets is substantial, about $1.57 trillion this year. We define impact investing as seeking a positive financial return and a positive environmental and/or social outcome, but impact is still pretty much in the eye of the beholder.
For many, reporting an impact is seen as good. If you can measure something, you can at least prove it exists. Impact reporting could potentially allow for benchmarking, though it’s not quite the same as ESG benchmarking. For example, it’s in the eye of the beholder if an impact added enough positive to the world for their tastes. Some may be happy if some plastic was removed from the ocean, or some measurable decline in waste occurred. Others may only be happy if the company clears some hurdle set in advance. While ESG benchmarking can determine if a company is good enough versus peers in more immediately tangible things like emissions, workplace accidents, or board diversity, in impact, comparisons may be less standardized or direct.
There are real opportunities to make an impact in private markets, especially in private equity, where you can buy the whole company and control its path for years. In the public markets, you buy the company and hope for the best. Maybe you can agitate around the edges, but in the private markets, you’re on the board. You can effect change. However, the desire to do impact investing and the incentives must be there.
The vast majority of money going into the private markets is coming from North America, largely the US. And in the US, currently people don’t feel emboldened to talk about such things as sustainability and ESG and impact. That said, we run a sustainable-investment survey every year. And, despite what people may think, the vast majority of respondents are sticking to their ESG commitments and to their impact commitments. Many are increasing their focus.
The Role of the UN Sustainable Development Goals (SDGs) in ESG
Bundy: At one time, the SDGs were a promising framework for impact. But progress has fallen far short of the ambitious goals. Matthew, how are the SDGs playing out, in practice?
Gray: When the SDGs kicked off, I had a front-row seat as head of Africa partnerships for a large UN agency. Many in my network were in the rooms where the SDGs were set up, and companies were marginally—and I’m being kind here—included, and absolutely no investors.
The other key objective of the SDGs was to galvanize private-sector financing, because several UN agencies at the time were on the verge of bankruptcy or had donors pulling out. Investors weren’t brought in and private-sector companies were barely included. As the UN set out their 17 goals and the 169 indicators, it was never quite clear how it would roll out, what the ramifications would be for investors or companies, or whether there would be some level of accountability. Would the private or public sector lead?
The way the SDGs are set up, it is the responsibility of governments to get the data from companies through working groups or voluntary forms. But SDGs are confusing to companies. We just did a survey with 42 institutional investors, asking whether ESG or the SDGs were more material. The answer was predominantly ESG. With the SDGs, investors have no direct alignment at the indicator level to anything they can control or measure against their own portfolio metrics. They don’t have the capacity to engage with public-sector bodies such as the UN, let alone understand the SDGs. There are profound data gaps.
If you’re a country, to get the data from companies, you must work with the UN’s office in your own country who fill out a form every three years as a part of their UN Sustainable Development Common Framework. Much of that data is just not available. You will find 50 of the 169 metrics in many countries are absent or insufficient. The SDGs were doomed to fail in terms of data collection, because about 40% of required SDG data simply doesn’t exist. It’s not in government ministries. It’s not in the UN offices in those countries.
To this day, my top recommendation for the future of SDGs is that each indicator’s responsibility should be clearly delineated as private/government/civil society, or shared. This way, companies know specifically what is expected of them and the distribution of responsibility is far more actionable and accountable.
Private Markets and ESG: Challenges and Opportunities for Impact Reporting
Bundy: Is there a better metric out there to measure impact or double materiality?
Gray: Again, it’s the ESG metrics, ideally made mandatory by host governments. Our clients will continue to lean on ESG, and one day may find an easier modality to align it with SDG indicators. With new mandatory disclosures coming online in many markets by 2026, the next reboot could, for example, align to the future SDG indicators, post-2030. But the UN has stated that we must wait until September 2027 to begin the post-SDG discussion where such alignment could be considered.
Bundy: Hilary, is there a better framework for the impact investing in the private markets than SDGs?
Wiek: A lot of private funds, on their websites, display the cards for the individual SDG goals they are targeting. This is helpful to understand their intent and helps us at PitchBook identify impact funds and then tag them for the type of impact they’re implementing. But I found SDGs were one step removed from an investment model. One example is justice. It’s a great goal. But what kind of company can you own that would improve justice in the world? I did find a framework that was a better fit. It’s from the Global Impact Investing Network, or GIIN, a collection of impact investors who think about not just large companies, but also venture capital and other models that don’t fit as nicely into frameworks that were designed for the public markets. They have 17 categories of impact that are really designed to be business models.
In their framework, the GIIN will say exactly what they mean by energy, or water, or land: These business models count, these don’t. They have categories like waste and education and financial services that align well to the SDGs. And they provide linkages that show how they would map what they call their IRIS+ framework to the SDGs.
So, they recognize the SDGs as worthy goals, but they’ve created a framework designed for investors. Fund managers looking for companies that impact, say, education or health, can find more of a direct linkage to purpose than SDG goals that may not be investable.
Bundy: Gabe, how will Morningstar address the new impact reporting requirements?
Presler: Our goal at Morningstar is to be a leading partner to investors, shareholders, clients, and our key stakeholders including policymakers who seek transparency. As an international company with a substantial European footprint, we’re readying the organization to comply with some of the CSRD requirements in 2026. We see conversations about ESG risk to the business move beyond the corporate sustainability group into our finance and legal teams. Emerging reporting requirements are helping us build a shared language across the organization, a good thing. That’s new framing to help Morningstar and companies like us think about the robust future corporate strategy.
When it comes to SDGs, we use materiality as a framework to understand where we should focus. We want to be strategic about figuring out our role. We’re a small financial-services, research, and data-provider firm, based in Chicago, and we want to stay focused. We can move the needle on financial inclusion and climate, because we are one of the biggest providers of climate data to asset managers.
As Matthew pointed out, investors and companies might not have been at the table in that original conversation about SDGs. They’re entering the conversation now. Private investors are driving this, and investors of all kinds are starting to integrate this work into their strategies. It’s worth pointing out that Morningstar’s Voice of the Asset Owner survey showed 67% of asset owners globally believe that ESG has become more material to their investment process in the last five years. So big influential capital pools have their eyes on this right along with companies.
Bundy: At Morningstar, we talk a lot about the convergence between public and private markets. Is reporting and regulation too cumbersome for public companies, particularly smaller ones? Should investors look at private markets for a purer approach to measuring impact?
Wiek: There are many frameworks and lots of confusion. Our 30-question sustainable survey received responses from over 500 investors in the private-market ecosystem this year, sustainable-investing practitioners and those decidedly not. It’s robust data. They said in each of the last five years that for impact investors, measurement, reporting, and data collection are always sources of frustration. Another related finding was that the impact-investing practitioners are still not measuring anything. For those who do, individual companies measure impacts differently. For a fund investing in education, one portfolio company might be looking at graduation rates, another at test rates, while a third might just be keeping kids in school. So, if they’re measuring different things, and you roll that up into a fund, the fund manager must try to come up with something to report to LPs [limited partners are investors who have limited liability and no management authority], with three different sets of numbers. Then the LP who owns 20 different funds is reporting dozens of metrics, making it difficult to make any sense of it. Reporting and transparency are great. But data doesn’t always lead to information. In this example, you can see an LP throwing up his or her hands and saying, “I feel good that I was in education, I probably contributed to some positive outcomes, I just can’t tell you how much.”
There is no perfect framework in private markets for measuring ESG or impact outcomes. But maybe it’s not necessary to wait for one. In one framework championed by ILPA, the Institutional Limited Partners Association, some major GPs and LPs came together and said, OK, we’re not going to have the perfect framework. But let’s pick a few metrics in E, a few in S, and a few in G, and let’s define them clearly. Some 450 asset managers and limited partners signed on to the EDCI, or the ESG Data Convergence Initiative. They have specific metrics for things like greenhouse gas emissions, net new hires, and work-related accidents.
Every company should have that kind of metric, as opposed to the metrics that are super company-specific. The project gives me hope because if we can get some folks agreeing on a few metrics, and then gradually expand that, maybe it’s better than waiting for the perfect framework to materialize.
The Future of Impact Reporting and Double Materiality in ESG
Bundy: Recently, Morningstar’s CEO Kunal Kapoor suggested we focus mainly on financial materiality, or single materiality, to keep disclosures simple and achievable. To that, I’d add measurable. Is double materiality simply a luxury for us?
Gray: No. Well, I can only speak on behalf where most of the world lives and where mandatory sustainability is most on the rise. In Asia and also the Global South, many companies are so ingrained in their communities that they’re already fulfilling the requirements of impact materiality, they just didn’t give it a name. As an eye-opening example, every publicly listed company in India must give 2% of their revenue to corporate social responsibility and must have a CSR committee.
In some cases, countries leverage the reach of their top companies and outsource some of their public services to these large companies. This happens in Saudi Arabia, Turkey, and in tier 2 and 3 cities of China where companies are highly incentivized to provide such services at the provincial levels mostly. When companies work with provincial governments, they provide water and schooling and even subsidized pharmaceuticals and increased roads, which lead to economic growth and market access. From that perspective, it’s not a luxury—it’s a necessary public-private binary relationship underpinning a country’s growth.
Presler: Companies and investors are embracing the opportunity to think about the risks and opportunities that are implicit in a changing environment, amid changing social norms, with emerging data on governance. That’s the power of ESG data: It expands our understanding of what’s going to be material to companies in the future. That’s smart corporate planning and smart investing and we think of that as ESG financial materiality, or the material ESG issues that can affect the enterprise value of a firm in the future. Morningstar’s perspective is that we have a lot of information with which to guide company and organizational behavior. We make sure we fully understand material ESG issues that have business impact; that can tell us a lot about long-term social and environmental impact in the environments in which we operate.
Wiek: Let me dodge the exact question and address the financial materiality component. There’s so much short-termism in markets. A lot of private and public companies over my 30-year career aren’t investing for the future. Tax breaks have gone to share buybacks and dividends, rather than reinvestment in creating new and better products or improving existing products.
Sure, let’s focus on financial outcomes because we have the data. But over what time horizon? You need a longer-term perspective than quarter to quarter. If you want your company to be in a better place 10 years from now, you’ve got to focus on things that give your company more longevity, such as happier employees.
That’s where private markets have some advantage. You’re not in Wall Street’s view every minute and you can think about owning a company for maybe six years and trying to make money. It really is interesting that the number of US companies has halved to 4,000 over the course of my career. Maybe more people are seeing the benefits of being private. There’s opportunity in the private-market space to make companies better and more sustainable if the will is there.
Bundy: Thank you all.
The author or authors do own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
