Who Decides What is Material With ESG Disclosures?

Standard, required, comparable and verifiable ESG or sustainability disclosures provide a necessary basis from which investors can extrapolate information and make investment decisions. Companies frequently analyze whether issues are material to their firm on a pre-established time period, e.g., annually, biennially, triennially, etc. Allowing companies to re-assess materiality over different time periods means that disclosure topics are likely to vary over time. For example, a firm may identify a strategically important area that requires disclosure and attention in a biennial ESG materiality review. The firm discloses the issues and lay out a medium- or long-term plan to handle the problems. At the next biennial materiality review, the company may determine the sustainability issues are no longer material and disclosures are not necessary. For investors concerned about particular ESG or sustainability issues, this lack of disclosure consistency poses an analytical and monitoring. For ESG-type disclosures to be used as effective decision-making tools, they must be consistently measured and presented over time.

Regardless of legislative points of view, standard disclosures across sustainability and ESG topics, regardless of materiality in a specific company’s instance, is necessary to provide a foundation for evaluation across firms and time. Allowing companies to provide contextual guidance about how such disclosures fit into risk management activities or long-term strategy also provides useful information upon which investors and other market participants can base decisions.

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