[Ed. note: In observance of Thanksgiving in the US, no blogs will be published from tomorrow through Friday. We will be back next Monday. Happy Thanksgiving to everyone!]
The UK’s Financial Reporting Council (FRC) recently published an article on materiality. Materiality is a useful tool for assessing issues that are most important to companies. FRC also urges companies to view materiality from the lens of the investor and to apply materiality concepts holistically rather than in silos. The article states that:
“Companies and their advisers told us materiality is typically considered through three separate lenses:
– Quantitative financial thresholds – typically assessed as a set threshold for correcting errors and including disclosures about significant transactions;
– Qualitative financial aspects – generally an informal understanding of ‘what’s important’ to the company that frames narrative reporting; and
– Sustainability-related information – a focused review on sustainability-related issues, typically collecting multiple stakeholder viewpoints and mapping these on a matrix.
While each of these lenses overlap and interrelate, most companies looked at them separately. This differs from how investors evaluate information for decision-making. Investors want to understand the business model and strategy in a holistic and connected way.”
The FRC is encouraging companies to bring these aspects together and report in a way that tells the whole story. This point is something that is often lost in the Financial vs. Double Materiality debate. For companies to adequately address sustainability risk, they need to understand how sustainability impacts their financial position. Some argue this cannot be understood if sustainability and finance are evaluated in vacuums.
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