This is the third in a series of articles looking at how non-financial disclosure frameworks and advocates are causing companies – and regulators – to reconsider what “materiality” means. This installment looks at what I call “New materiality”.
The two critical elements of new materiality that radically differ from traditional materiality (financial impacts of ESG initiatives ON the company) are:
- Assessment and consideration of things that don’t directly affect corporate finances, or may be contingent/not estimable.
- Assessment and consideration of external stakeholders beyond investors. There is a hidden recursive double-whammy here as it requires understanding both what information external stakeholders consider important, and how the stakeholders will react (which rather depends on the extent and nature of the information made available to them).
Proponents of new materiality believe that it is important for companies to capture – and be accountable for – impacts corporate activities have on society and the environment. In some ways, these can be externalities (as the economists call them) but are a result of a company’s operations and therefore, have responsibility for such impacts.
A good overview of new materiality is here.