This is the second 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 traditional financial materiality.
Traditional materiality in ESG is using the old-school materiality lens (i.e., TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976)) to a company’s ESG matters. The archetypal approach would be to gather and evaluate input from a variety of corporate departments/functions to reflect the multidisciplinary nature of ESG. However, counsel should assess potential liabilities to disclosing as newly material an activity or matter that is itself not new. In other words, why was something not considered financially material previously? Given that the SEC issued guidance on climate change disclosures in 2010, some may question why climate matters were not disclosed in the past.
Proponents of traditional materiality point to SEC’s mandate and, of course, the legal precedent. Among their points is that there is no need to redefine materiality for ESG – and that is a fair argument. But others see this as something of a loophole, or doesn’t capture what they feel is the bigger picture.