In financial accounting, materiality is a way to figure out what information in corporate reports is important and needs to be paid attention to. It is similar to how each and every one of us filters what is important in our lives, on our calendars, or on our social media feeds. Originally, the concept was used to help companies, investors, and auditors focus on the big stuff that could affect a company’s financial situation, rather than getting bogged down in tiny and relatively less important details. It showed that rather than quantity of reporting, focus was more important so as not to distract from key issues. Over the past 25 years, materiality has expanded into sustainability reporting. This is where companies disclose their environmental and social impact – such as how much pollution they create, how they treat their workers and are ensuring modern slavery has no place in their operations, or what they are doing to address their effects on nature and climate. Sustainability reporting is a growth industry. In the early 2010s, only 64% of the world’s largest corporations reported sustainability-related information. By 2022, the figure had risen to almost 100%. As materiality has moved into and grown in this new area, it has evolved. This has led to debate over how it can be used, and to what end, when it comes to communicating useful information to company stakeholders. Our research shows just how materiality has changed over the last quarter-century. We interviewed 91 professionals and standard setters who work in the field and discovered that it has gone through four main phases. THE FLEXIBLE BEGINNING In the early days, materiality was a broad and flexible concept within sustainability reporting: a blank canvas. Different groups could paint on it however they wanted. Companies, government officials, and industry leaders all saw the potential of using materiality to improve sustainability reporting, but they each went about it in their own way. Since everyone was focused on their own interpretation, there was little engagement between groups using it in different ways during this phase. THE DEBATES BEGIN As time went on, these groups started paying more attention to how others were using materiality. The debates began. Each group wanted to define materiality in ways that supported their own interests and viewpoints, and boundaries evolved as they used the same concept in different ways. One big argument was about the twoby-two materiality matrix – a chart that helps organise what information is considered important. For one group, one axis measures concern to external stakeholders; on the other is current or potential impact on the company. Materiality here relates to issues that meet both criteria. This can be understood as an early version of the ‘outside-in’ perspective, looking at how business value is affected by social and environmental issues. Others proposed that factors meeting one or other of the criteria were just as important as those meeting both. And rather than impact on the company, they placed the organisation’s significant economic, environmental and social impacts on one axis. This was an early ‘inside-out’ perspective, analysing the impact of business activities on the natural environment and society. Even though there were disagreements, materiality – and the two-by-two matrix – still served as a meeting place where different groups could discuss their perspectives on sustainability reporting. Those on each side could see relatable and familiar aspects in the other. BUILDING BRIDGES In the third phase, materiality became a common language that helped bring different groups together. There were two main approaches: 28 |
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