It is winter, so a snow analogy is timely. Last week, John pointed me to some language in the seminal US Supreme Court decision on financial materiality TSC Industries v. Northway, Inc. This is the ruling that introduced the concept of the “reasonable investor” and information used in their “informed decisionmaking” for both investment and voting decisions. With so much confusion, turmoil and complexity around sustainability reporting at the moment, it seems appropriate to take a deep breath and think about something the Court said relative to determining what information is worth disclosing in the context of securities/financial reports:
“Some information is of such dubious significance that insistence on its disclosure may accomplish more harm than good. The potential liability for a Rule 14a-9 violation can be great indeed, and if the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management’s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking...
The general standard of materiality that we think best comports with the policies of Rule 14a-9 is as follows: an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote… What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. [Emphasis added]“
It is easy for ESG/sustainability practitioners to be drawn down rabbit holes when working on CSRD reporting, conducting double materiality assessments and trying to respond to every questionnaire that comes in the door. These distractions create work for matters that sometimes don’t matter – adding more snow to the “avalanche of trivial information”.
Maybe it’s uncomfortable to ask questions like “Is this issue really material to us?” or “Is this party important enough to the company to justify the effort/expense of responding?” However, doing so shows program maturity and business acumen. It also helps manage broader risks of an “unnecessarily low” standard of materiality envisioned by the Supreme Court.
Here at PracticalESG.com, we continuously track legal and regulatory developments related to materiality and disclosures as well as develop tools (such as sample disclosures) to help companies and their advisors with ESG/sustainability reporting. We know how difficult some of the reporting mandates are. Members can learn more about materiality here as well as our Guidebook How to Conduct an ESG Materiality/Double Materiality Assessment. Also, if you are interested in double materiality assessments, check out our newest podcast on the topic with FTI Consulting’s Miriam Wrobel and Alanna Fishman.
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