No matter where you fall in the spectrum of ESG materiality, investors are always in there somewhere. In the US, materiality is based in financial reporting and on the principle of a “reasonable investor” – something I wrote about in Killing Sustainability:
“[Materiality] is not defined so much as it is explained in the 1976 U.S. Supreme Court decision TSC v. Northway. The Court stated that for a matter to be considered financially material, ‘there must be a substantial likelihood’ that non-disclosure would be ‘viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.’”
Yesterday, Bloomberg‘s Matt Levine offered a modern take on “reasonable investors” potentially apropos to ESG-focused investors. He writes a federal judge ruled that the use of an emoji in a tweet (combined with an updated 13D disclosure) is securities fraud. Levine then questions whether reasonable investors are always a good way to think about materiality:
“… in the world of meme stocks, there are no reasonable investors. What matters is not cash flows or business plans but memes and influencers, and so the standards for fraud are … perhaps different? In the world of meme stocks, if you are a meme-stock influencer, and you tweet a moon emoji when you are in fact feeling pensive-face-emoji, then arguably you are lying, and arguably your misleading emoji is material to your meme-stock fans. They are not reasonable, necessarily, but they are the investors you’ve got, and if the stock doubles due to your emoji then I guess it was material.”
Unreasonable investors and influencers, with very different ideas about what is material, could make an ESG issue the reason a stock gets “memed.” That would change which issues are “material” as the meme may encompass more than what you considered. This is aligned with what Zach wrote about yesterday. One could argue some companies are already concerned about this in a related context: anti-ESG trends are being disclosed as a new 10-K risk.
ESG messaging and communications just got a little more complicated. At the very least, avoid using emojis.
