Does Materiality Serve Regulators or Stakeholders?

The following is part of a series by our friends at CSRHub (a 3p sponsor) – offering free sustainability and corporate social responsibility ratings on about 7,000 of the world’s largest publicly traded companies. 3p readers get 25% off CSRHub’s professional subscriptions with promo code “TP25.″ 

By Bahar Gidwani

gold w captionOur friends at Agrion organized a Sustainability Summit last week.  About 250 people gathered in New York to discuss various aspects of corporate social responsibility (CSR) and sustainability practice.  I had the opportunity to lead an all-star panel on materiality in sustainability reporting.  (Our panel included speakers from NASDAQ, Bloomberg, Rockefeller, and the CFA Institute.)

When we met ahead of the meeting, our group expressed a collective fear that we’d put our audience to sleep. Materiality can be a pretty technical subject.  Here’s a quick definition of the word, in case you need it: Materiality is a measure of the estimated effect that the presence or absence of an item of information may have on the accuracy or validity of a statement.

We discovered that our panel of experts disagreed about exactly how materiality should be used in sustainability reporting.  One camp felt that sustainability reporting should be centered around a legal/regulatory view of materiality.  This perspective was well expressed in a recent SASB/Harvard article:

“…the courts and the SEC have generally defined information sufficiently ‘material’ to require reporting as information that would be useful to ‘reasonable’ investors considering a ‘total mix’ of information in their decision making…the SEC has an obligation to require sustainability disclosure if a substantial portion of the investment community considers this information material…”

The other group felt that sustainability reporting should focus on what matters to a company’s stakeholder groups.  A recent CSR report from Electrolux put forth this view:

“In the context of sustainability, materiality relates to identifying the issues most relevant to conducting business responsibly and well. These issues can either potentially affect our performance, or the development of our business.”

Our audience initially agreed with the second (stakeholder) view.  After hearing the arguments in favor of the legal/regulatory view, almost the whole audience changed its opinion to agree that both perspectives should be considered when doing sustainability reporting.

Although our panelists disagreed initially on this definition issue, they agreed on many other points.  For instance they all felt:

  • More companies are releasing more data, and some of it is becoming more material.  But we still get a lot of lousy data and smaller companies lag behind.
  • Stakeholders have different views of what data should be provided and whether or not it is sufficiently material.
  • It would be great if we could consolidate all the competing materiality standards into a single set, but this is unlikely to happen.

We spent a lot of time on the question of standards.  It was obvious that our audience (mostly corporate sustainability managers) felt strongly that the standards environment was confusing and counterproductive.  Most of the audience had a favorable view of the work that has been done by the GRI (Global Reporting Initiative) and there was a lot of enthusiasm for the ISO26000 framework.  Fewer people knew about SASB’s initiative and those who did expressed concern that it would distract from the standards that were already known and in place.

I resisted dropping the Rodney King line (“Why can’t we all get along”) and instead appealed to our audience to be aware of and actively participate in the standards-setting process.  Our panelists offered similar closing remarks and reminded the audience that materiality discussions should lead to better understanding of the business opportunities (and risks) that come from sustainability reporting.

Bahar Gidwani is a Cofounder and CEO of CSRHub. Formerly, he was the CEO of New York-based Index Stock Imagery, Inc, from 1991 through its sale in 2006. He has built and run large technology-based businesses and has experience building a multi-million visitor Web site. Bahar holds a CFA, was a partner at Kidder, Peabody & Co., and worked at McKinsey & Co. Bahar has consulted to both large companies such as Citibank, GE, and Acxiom and a number of smaller software and Web-based companies. He has an MBA (Baker Scholar) from Harvard Business School and a BS in Astronomy and Physics (magna cum laude) from Amherst College. Bahar races sailboats, plays competitive bridge, and is based in New York City.

CSRHub provides access to corporate social responsibility and sustainability ratings and information on nearly 7,000 companies from 135 industries in 82 countries. Managers, researchers and activists use CSRHub to benchmark company performance, learn how stakeholders evaluate company CSR practices and seek ways to change the world.

CSRHub provides access to corporate social responsibility and sustainability ratings and information on nearly 5,000 companies from 135 industries in 65 countries. Managers, researchers and activists use CSRHub to benchmark company performance, learn how stakeholders evaluate company CSR practices and seek ways to change the world.CSRHub rates 12 indicators of employee, environment, community and governance performance and flags many special issues. We offer subscribers immediate access to millions of detailed data points from our 140-plus data sources. Our data comes from six socially responsible investing firms, well-known indexes, publications, “best of” or “worst of” lists, NGOs, crowd sources and government agencies. By aggregating and normalizing the information from these sources, CSRHub has created a broad, consistent rating system and a searchable database that links each rating point back to its source.

One response

  1. SASB works within securities law because, well,because, it’s the law. Debate materiality all you’d like, but the SEC (thanks to the Supreme Court) has a clear definition of it. Material information has been defined by the U.S. Supreme Court as
    presenting a substantial likelihood that the disclosure of the omitted
    fact would have been viewed by the “reasonable investor” as having
    significantly altered the “total mix” of information made available.
    (TSC Indus., Inc. v. Northway, Inc. 426 U.S. 438 (1976)). As mega-trends such as population growth, resource constraints and climate change become more and more intense, environmental, social and governance (ESG) issues are becoming more and more material, in line with the aforementioned, Supreme Court definition of materiality.

    SASB standards “solve for a different variables” than other initiatives such as GRI. SASB solves for variables of interest to the capital markets, while other initiatives solve for variables of interest to a wide variety of stakeholders. Investors turn to the Form 10-K when seeking to compare, on a peer-to-peer basis, how businesses in an industry manage risks and opportunities. SASB standards are developed with 10-K reporting in mind. We believe they will spark a “race to the top” as investors seek to reduce ESG-related risks (or increase exposure to companies that are managing ESG-related opportunities well) in their portfolios. Businesses will be first, be in compliance with existing regulations. Second, they will be better able to measure and manage what is material to their industry, gaining competitive advantage over companies that manage these risks and opportunities poorly.

    Mr. Gadwani’s closing remarks called for better awareness of and active participation in standards-setting processes. I could not agree more. I encourage you to get involved in SASB’s standards setting process. Our period of public comment on standards for the health care sector is now open and we welcome your input. Please comment here:

    We are also recruiting industry working group members for our Technology & Communications working groups as well as our Non-Renewables Industry working groups:

    Get involved. Submit evidence. Stay engaged. We look forward to hearing from you.

    Katie Schmitz Eulitt
    Associate Director, Stakeholder Engagement
    Advisory Council Chair
    Accounting Standards Board
    Tel: (415) 830-9220, ext. 105

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