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This is the first in a series of articles examining the concept of materiality in ESG disclosure.

As if “materiality” under the securities laws wasn’t a difficult enough concept, investors supporting various ESG frameworks and standards have been adding to the complexity. Responsible Investor published a short piece that summarizes comments submitted by six global asset managers on the IFRS 2020 Consultation on sustainability reporting. Unfortunately for those working on the company side, it means having to play “mix and match” with ESG reporting frameworks to try to satisfy multiple investor mandates.

To break it down, we have:

  • Traditional materiality, which relates matters that are directly linked to financial impacts from the viewpoint of the “reasonable investor”. As has been long established. traditional materiality focuses on financial risks TO the company. SASB takes this approach with its standards.
  • What I call “new materiality,” reflecting the perspective of stakeholders and impacts of a company. New materiality goes beyond a pure financial perspective and compels companies to evaluate their impact ON stakeholders and the communities in which they operate. This is the direction GRI takes in its reporting framework.
  • “Double materiality,” which encompasses both traditional and new materiality matters. Under the EU Non-Financial Reporting Directive (EU NFRD), companies are required to assess and report on both financial and non-financial matters. The European Financial Reporting Advisory Group (EFRAG), which advises the European Commission, follows the double materiality path.
  • “Dynamic materiality” – a concept acknowledging that materiality is a moving target, stemming from the idea that “stakeholders of companies have the capacity to determine what is material for a company” enabled by technology and social media. Some see this as similar to traditional materiality (in that as new information becomes known, it adds to what is important to investors in the total mix of information); others may liken it to The Blob of materiality.

Each of these will be reviewed in separate posts that follow.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile