Materiality (ESG)
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Materiality, in the context of environmental, social, and corporate governance (ESG), refers to the effectiveness and financial significance of a specific measure as part of a company's overall ESG analysis.[1] Material factors are financial elements deemed fundamental to the long-term success of a company's ESG strategy.[2]
Background
Materiality measures the relative financial importance of a factor among a company's ESG considerations. The Sustainability Accounting Standards Board (SASB) defined material issues as those "that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors" as of February 2021.[3]
Material factors differ across business sectors and industries.[1] Materiality is a dynamic concept—an immaterial factor can become material as the result of a changing business model or landscape.[2]
Examples of material factors
Material factors that contribute to sustainability may include "environmental issues like climate change and natural resource scarcity ... social issues like labor practices, product safety, and data security [and] governance matters that include board diversity, executive pay, and tax transparency," according to the global professional services firm PricewaterhouseCoopers.[4]
The following table provides examples of potential material factors within a company's ESG framework:[2][4]
| Sample ESG material factors | ||
|---|---|---|
| Environmental issues | Social issues | Governance issues |
| Carbon emissions | Labor management | Board diversity |
| Product carbon footprint | Health and safety | Executive pay |
| Financing environmental impact | Human capital development | Ownership |
| Climate change vulnerability | Supply chain labor standards | Accounting |
| Water stress | Product safety and quality | Business ethics |
| Biodiversity and land use | Chemical safety | Anti-competitive practices |
| Raw material sourcing | Financial product safety | Corruption and instability |
| Toxic emissions and waste | Privacy and data security | Financial system instability |
| Packaging material and waste | Responsible investment | Tax transparency |
| Electronic waste | Health and demographic risk | |
| Opportunities in clean technology | Controversial sourcing | |
| Opportunities in green building | Access to communication | |
| Oportunities in renewable energy | Access to finance | |
| Access to healthcare | ||
| Opportunities in nutrition and health | ||
Noteworthy events
SEC broadening definition of materiality
In a March 15 speech given to the Center for American Progress, Acting SEC Chair Allison Herren Lee said that she was grateful for the opportunity “to reflect on the enhanced focus the SEC has brought to climate and ESG” and “on the significant work that remains.” Lee indicated that the Commission will utilize a much broader definition of materiality (which measures the relative financial importance of a factor among a company’s ESG considerations) over the course of its next term. Lee did not indicate whether this change in definition will be formalized or will be accomplished through informal attention to ESG-inspired disclosure rules. Lee stated the following:[5]
| “ | “The most fundamental role that the SEC must play with respect to climate and ESG is the provision of information – helping to ensure material information gets into the markets in a timely manner. Investors are demanding more and better information on climate and ESG, and that demand is not being met by the current voluntary framework. Not all companies do or will disclose without a mandatory framework, raising the cost, or resulting in the misallocation, of capital. Investors also aren’t getting the benefits of comparability that would come with standardization. And there are real questions about reliability and level of assurance for the disclosures that do exist. Meanwhile issuers are assailed from all sides by competing and potentially conflicting demands for information. That’s why we have begun to take critical steps toward a comprehensive ESG disclosure framework aimed at producing the consistent, comparable, and reliable data that investors need…. …two weeks ago, we announced the formation of the first-ever Climate and ESG Task Force within the Division of Enforcement. The Task force will work to proactively detect climate and ESG-related misconduct, including identifying any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules and analyzing disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.”[6] | ” |
Senator Pat Toomey (R, PA), the Ranking Member on the Senate Banking Committee, responded to the pre-release of Lee’s comments, tweeting, “This would be a total abuse of power and a politicization of SEC’s disclosure standard. What matters is whether an issue is financially material to a reasonable investor, not if it conforms to the woke Left’s opinion about what’s best for humanity’s general welfare.”
See also
External links
Footnotes
- ↑ 1.0 1.1 Impactivate, "ESG Materiality Reflects What Matters Most," May 9, 2019
- ↑ 2.0 2.1 2.2 Capital Group, "Materiality is the foundation of our ESG approach," accessed February 4, 2021
- ↑ Sustainability Accounting Standards Board, "Materiality Map," accessed February 4, 2021
- ↑ 4.0 4.1 PricewaterhouseCoopers, "ESG oversight: The corporate director's guide," accessed February 4, 2021
- ↑ SEC, "A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC," March 15, 2021
- ↑ Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
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