Author: Jordi Morrós Ribera
Faculty of Economics and Business. Business Department.
University of Barcelona
Foundation Lobbing, Business & Innovation (Icloby)
Abstract: This paper is an approach to new definitions of materiality as applied to corporate performance and disclosure practices. Over time, the materiality lens will have implications for multiple operating areas. They will range from; risk and compliance to strategy setting, corporate policy and governance, management practices including stakeholder engagement, and even human resource management. In the second part there is a presentation of the definitions, scope and perspectives of materiality according to six relevant standard-setters in the field of sustainability reporting. Finally there is the presentation of how materiality is reported according to the six biggest groups of quoted companies in Spain.
Purpose: The purpose of this paper is to synthesize what is the emerging field of materiality in sustainability reporting.
Design/methodology/approach: The approach is to outline a presentation of approaches and significant practices about materiality in sustainability reporting.
Findings: The need for quality researchers to address a number of pressing challenges posed by the rapid development of materiality in sustainability reporting practices.
Research limitations/implications: The paper provide insights into issues and aspects that need further development and need robust evidence to help inform improvements in policy and practice.
Practical implications: Highlight how companies may benefit from sustainability reporting in response to stakeholders’ calls for enhanced disclosure of environmental, social, governance and other non-financial information.
Social implications: The main social implication is to promote the wider public interest of improving the relevance of information for decision-making, for all stakeholders, and allow greater efficiency in the allocation of financial and other resources and in adding public value.
Originality/value: This paper offers a general view on a subject that is a challenge for entities oriented to the implementation of sustainability in their values and also in their reporting.
Keywords: Materiality & Sustainability reporting.
JEL Codes: M14: Social Responsibility. M41: Accounting
How to respond to new definitions of materiality as applied to corporate performance and disclosure poses one of the biggest challenges facing boards and senior executives. Traditionally, materiality has been defined through the lens of financial reporting. Now, there’s a powerful and growing movement to apply a more expansive definition that includes disclosure of the risks and opportunities posed by sustainability issues such as climate change, human rights, and board accountability. In addition to the substantive issues affecting Environmental, Social and Governance (ESG) domains, other features of this new materiality framework include: longer time horizons in which to gauge impacts on corporate performance, greater uncertainty concerning outcomes, and the views of a wider group of stakeholders who impact, and are impacted by corporate behavior.
New materiality management calls for a different outlook on reporting and valuation—one that needs to be effectively managed and wired into a firm’s operating system. Over time, the materiality lens will have implications for multiple operating areas. They will range from; risk and compliance to strategy setting, corporate policy and governance, management practices including stakeholder engagement, and even human resource management.
Numerous external forces are converging to create increased awareness of ESG factors. These forces are challenging Chief Financial Officers (CFOs) to reconsider a traditional reporting model that may not effectively meet today’s information needs. CFOs are becoming more involved in sustainability, with a total of 83 percent of respondents stating that they are always involved or frequently involved in setting sustainability strategy (up from 65 percent in 2012) and 80 percent stating that they are always involved or frequently involved in executing sustainability strategy (up from 66 percent in 2012) at their organizations.
Of the 250 largest companies in the world (G250 companies), 95 percent now issue separate sustainability reports. Moving forward, there likely will be greater alignment of traditional financial reporting and reporting on ESG topics. The International Initiative for Integrated Reporting (IIRC) is proposing integrating the disclosure of standard financial information with ESG information to provide a more complete view of the commercial, social and environmental context within which a company operates. Importantly, integrated reporting likely will require reporters to make valuation impacts of ESG information more explicit.
Right now, a disconnect often exists between what ESG information companies disclose to their stakeholders and the data that actually drives management and investment decisions. Most agree that it is hard to know which information is business-critical for the long run.
For these reasons, focus is increasing in the sustainability world on the principle of materiality as the essential filter for determining which ESG information will be useful to key decision makers.