• Financial materiality: Prioritising Environmental, Social and Governance (ESG) information that affects a company’s financial performance • Impact materiality: Prioritising information about how a company affects society and the environment The Global Reporting Initiative (GRI) put its focus on corporate impact and responsibility at this time – taking the latter approach. On the other side, the creation and rise of the Taskforce for Climate-related Financial Disclosures (TCFD) benefited the prominence of financial materiality, with other standard setters such as the Sustainability Accounting Standards Board (SASB) and the Climate Disclosure Standards Board (CDSB) showcasing how they aligned with the TCFD perspective. Instead of competing, those on either side cooperated. Differences and boundaries were downplayed to allow for collaboration for the collective goal. People felt connected to the overall issues through discussions on materiality. There was the ability to demonstrate that social and environmental impacts already have a financial effect, and these impacts will only grow – uniting in some ways the two viewpoints. This cooperation created a more complete picture of sustainability issues. THE GREAT DIVIDE In the most recent phase, materiality has become a source of major division. Arguments about what materiality means have become more intense and cooperation has ground to a halt. Instead of bringing different groups involved in sustainability reporting together, materiality is now highlighting the big differences between them and making it harder for them to work together. Those on each side of the fence have become more convinced that theirs is the superior methodology, providing them and the companies they work alongside with a competitive advantage. Those siding with impact materiality, for instance, claim theirs is the ethical approach, whereas financial materiality is morally problematic. One of the people we spoke to accused proponents of financial materiality of ‘shooting themselves in the foot by ignoring [sustainability] content and impact’. Meanwhile, proponents of financial materiality have begun to leave the debate to avoid being framed in a hostile light. There is a general sense of disinterest in each other’s perspective. Both sides are content to go it alone. A CHANCE FOR REUNION Materiality started as a simple way to focus on what is important in business reporting. As it moved into sustainability, it became much more complex and controversial. While materiality once helped to unify different viewpoints and encouraged collaboration between individuals and organisations, it now causes fragmentation and division between these groups. Companies are caught in the middle of these disagreements. They are being required or encouraged to report on their sustainability performance, but receive mixed messages about how to do it properly simply because the experts cannot agree on what materiality actually means. This confusion takes attention away from the real goal: achieving practical and real sustainability that protects our planet’s future. The system is not broken. There are opportunities to fix these problems and reduce the tensions in the materiality debate. Hopefully, those on both sides of the debate can come together once more in the next phase of development around sustainability reporting. If we continue to only pursue impact materiality without considering financial materiality, we are likely to produce ‘very important wishful thinking’ – plans without the support of those companies with the resources to act. On the other hand, embracing only financial materiality would lead to a ‘means-ends decoupling’ where actions can never reach the desired goals. Some important sustainability goals will be ignored altogether. People involved in sustainability reporting need to reconcile their different views so they can spend less time arguing and more time creating positive change for our planet and society. There will be loss all around if they do not come together once more. FIFTY FOUR DEGREES | 29 Dr Di Wang is a Lecturer in Accounting in the Department of Accounting and Finance. His research focuses on sustainability reporting. The paper Sustainability (Environmental, Social, and Governance) Reporting: Tracing Materiality’s Visionary and Relational Role over 25 Years through Boundary Objects and Boundary Work, by Dr Di Wang, of Lancaster University Management School; Professor Stuart Cooper, of the University of Bristol; Professor Christopher Chapman of the University of Bristol and Kyoto University; and Donato Calace, of Datamaran, is published in The Accounting Review. di.wang@lancaster.ac.uk Listen to Di discussing his work on the Transforming Tomorrow podcast: https://pod.fo/e/272c21 trAnsfoRming toMorrow
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