Materiality is a fundamental concept in corporate reporting of all kinds. A piece of information is considered material if it would influence someone’s decision. It is audience specific but ultimately it is the company that decides what information to report.

In the case of financial reporting, every listed company must adhere to rigorous accounting standards for measuring and reporting on a broad range of financial information captured in the income statement, balance sheet, and footnotes. Companies listed in the U.S must also provide a “Management Discussion and Analysis.” In financial reporting, a piece of information is material if it would influence an investor’s decision. It is important to note that guidelines on materiality from the Securities and Exchange Commission (SEC) are broad and material information can be quantitative, but not financial (such as a company’s carbon emissions or percent of women in the workforce), or even qualitative (such as policies on raw material sourcing or paying a living wage). In all cases, materiality is a binary concept. A piece of information is either material (in which case it’s reported) or it isn’t (in which case it’s not).

The origins of sustainability reporting on economic, environmental, and social issues come from the work of Global Reporting Initiative (GRI) over 20 years ago. Using a stakeholder perspective, they used a different definition of materiality based on whether a company’s actions are having an important positive or negative impact on the world whether investors think this is important or not. However, investors are paying increasing attention to environmental, social, and governance (ESG) issues because they now matter to financial performance. The body of empirical evidence on this continues to grow. More recently, as investors realize the importance of the impact of their decisions at a system level, the focus of The Investment Integration Project (TIIP), the line between values-based and value-based investment decisions is beginning to blur. One implication of this is the need to develop a concept of standards for ESG materiality from both an investor perspective and a stakeholder perspective, which is the work of the Impact Management Project (IMP).

In their sustainability reporting, it is typical for companies to perform some kind of stakeholder assessment in which they gather views of a broad range of stakeholders about what they think are important. Compared to financial reporting, there are more nuances. Companies sometimes provide a “Materiality Matrix” where one axis is how important an issue is to the company from a value creation perspective and one axis is how important this issue is to aggregate stakeholder values sentiment. This suggests that there are degrees of materiality. Some companies even indicate whether the issue is growing in importance along both axes. But in the end, as with financial reporting, the company determines what information it considers important to report and whether it wants to take a binary approach or one based on a continuum of degree of materiality.

The Sustainability Accounting Standards Board (SASB), started in 2011 and for which I was the Founding Chairman, has developed a methodology based on the Sustainable Industry Classification System (SICS) to determine which of the broad range of ESG issues considered by GRI are material to investors. It encourages companies to report on them in their 10-K, sustainability report, or some other way. SASB classifies ESG issues by industry (77 organized into 11 sectors) by degree (high or medium). For example, the material issues for the iron and steel industry are GHG emissions, air quality, energy management, water and wastewater management, waste and hazardous materials management, employee health and safety, and supply chain management. The material issues for the commercial banking industry are data security, access and affordability, product design and lifecycle management, business ethics, and systemic risk management.

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