Materiality Momentum

15 July 2013 Dashboard Insights Blog

The following post is provided by our guest author, Karen Lutz from TRC Environmental Corporation.

In April, a number of interesting developments occurred that contribute to the momentum on the topic of materiality in sustainability reporting. The common theme is a focus on better defining material environmental, social and governance (ESG) issues and integrating these issues with financial reporting. Key developments last month include:

1.     INCR issued a proposed sustainability standard for all stock exchange listings.

The Investor Network on Climate Risk (INCR) proposal is intended to develop clarity and consensus on a unified sustainability disclosure listing standard that could be adopted by all stock exchanges. 

While several exchanges have adopted their own sustainability listing requirements and guidance, INCR, NASDAQ OMX, and others are promoting a uniform standard that includes the following elements as a baseline regardless of size, location or familiarity with sustainability issues:

  • A materiality assessment in annual financial filings where management will discuss its approach to determining the company’s material environmental, social and governance (ESG) issues,
  • A hyperlink in annual financial filings to a Global Reporting Initiative (GRI) Content Index, and
  • Corporate ESG disclosure, on a “comply or explain” basis, on key ESG themes in the format and location of the company’s choosing. 

2.     SASB issued a Materiality Map for the Financial Services Sector.

The Sustainability Accounting Standards Board (SASB) is focused on establishing an understanding of material sustainability issues facing industries in the U.S., and creating sustainability accounting standards suitable for disclosure in standard filings such as the Form 10-K and 20-F. The Financial Services sector materiality map is the second such industry sector publication, following the initial Health Care Materiality Map published late last year. 

3.       IIRC issued a draft framework on Integrated Reporting.

The International Integrated Reporting Council (IIRC), a coalition of companies, investors, accountants and NGOs, is promoting the concept of an integrated report (IR) designed to provide investors, governments, NGOs and communities with a deeper understanding of how financial data (e.g., revenue, and profits and losses) is helped or hindered by things whose monetary value isn’t immediately obvious, such as annual employee turnover, water efficiency, or community relations. The IR standard will align with the GRI G4 standard.

4.       The European Commission proposed a directive to enhance the transparency of certain large companies on social and environmental matters.

This proposed EC directive calls for disclosure of information on policies, risks and results regarding environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors.

This momentum is in part responsive to the ongoing challenges in market confidence.  Here in the U.S., Sarbanes Oxley and Dodd-Frank in the span of one decade did not adequately create confidence in the capital markets. A broader perspective to include natural and human capital, in addition to financial capital, is recognized as a missing component. 

As sustainability reporting matures, there is also a strong realization that consistency across reports is important. Strong financial filters will always be relevant, but investors want a complete view of sustainability risks facing companies over the long haul, in addition to access to comparable, material data to fully characterize the potential for long term value creation. 

Sustainability reporting is maturing away from “marketing splash” and is increasingly recognized as an effective tool to communicate longer term business strategy. Rather than carrying the message “We do a lot of sustainable stuff,” the expectation is increasingly around balanced and verifiable reporting; with communication on progress to date, challenges ahead, and efforts to address those challenges over the next 5, 10 or 20 years as part of the core business strategy.

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