Materiality (Esg)

Environmental, social, and corporate governance
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See also: Environmental, social, and corporate governance (ESG)

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[edit]

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[edit]

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[edit]

SEC issues Staff Legal Bulletin 14M, emphasizing company-specific materiality[edit]

Staff Legal Bulletin 14M, issued in February 2025, reversed earlier guidance that allowed ESG shareholder proposals to advance based on social significance. The bulletin restored the requirement that proposals demonstrate company-specific economic relevance, re-centering the proxy process on traditional financial materiality.^[5]

Fifth Circuit vacates Nasdaq board diversity rule[edit]

In December 2024, the Fifth Circuit vacated a Nasdaq rule (which the SEC had approved) requiring companies listed on the exchange to either have at least two diverse directors according to Nasdaq's definition or publicly explain why they do not. The court held that the SEC failed to demonstrate that board diversity is financially material to investors, rejecting the idea that ESG attributes are inherently material. The decision argued disclosure requirements should be tied to financial relevance rather than social significance. ^[6]

SEC adopts climate disclosure rule[edit]

The SEC finalized the The Enhancement and Standardization of Climate-Related Disclosures for Investors rules in March 2024, requiring public companies to report certain climate-related risks and financial impacts only where those risks were material to investors. The rule explicitly reaffirmed Basic v. Levinson's (1988) financial materiality standard and rejected broader materiality concepts or Scope 3 emissions disclosure requirements.

SEC broadening definition of materiality[edit]

In a March 15, 2021, 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:^[7]

“

“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.”[8]

”

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[edit]

• Environmental, social, and corporate governance
• Sustainability

External links[edit]

• Search Google News for this topic

Footnotes[edit]

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