Materiality

How is the term "materiality" going to evolve?

Some time ago, mainly those involved in the financial world used a term that is now evolving: materiality. This means: The things that matters. And the question is: Things that matters for whom? Who cares?

I say it is evolving because initially, when used in the world of finance, the answer to who cares? was: shareholders, investors and those who have a financial interest in the organization.

Subsequently, this term started to be used also in the world of those of us dedicated to the topic of sustainability since a few years ago, after a new perspective was included: Climate Change. The answer of who cares? remained the same. The shareholders.

At that time, the focus was mainly on companies and investors, as the perspective had to do with financial reporting and how external factors, in this case climate change, offered them both risks and opportunities. That is why it is said that the perspective was from the outside in.

This vision, fortunately, has been evolving, and in 2019 the European Commission in its Guidelines for reporting climate-related information, introduced the term "Dual Materiality" which promotes a new perspective, not only from the outside in, but also from the inside out, making the company aware of the impacts that the organization generates from the inside out, e.g. the impacts that its activities have on the environment and people, its diversity, equity, equality, working conditions, human rights, among others. In other words, the answer of who cares? expands, since now, not only the shareholders would be taken into account, but it opens up to include all stakeholders that are impacted by the company's activities.

In my very particular point of view, in the issue of sustainability and especially in what refers to the environment, the "stakeholders" should be all of us, since the impacts being to the environment, affect the place where we all coexist. Risks and opportunities are no longer the same, and therefore, reporting changes.

Now we could start talking about Dynamic Materiality according to the "Statement of Intent to Work Together Towards Comprehensive Corporate Reporting" report published in 2020 by the main sustainability standards organizations: CDP, CDSB, GRI, IIRC and SASB. This is because a topic is material under different assumptions and is communicated in different ways to different stakeholders.

For example, there is materiality if climate change impacts the company, also when the organization's activities impact the economic, environmental and social, but there is also materiality when they impact the way in which the organization may or may not create value and when they affect the decisions that are made based on the financial statements and that somehow relate or not to the non-financial impacts. As we can see, the reports can be very different, even if the materiality has overlapping areas.

This can be very confusing and tiring for organizations, which is why it is very important to advance in the understanding and development of the different standards and ways of reporting. It is important to have a clear understanding of everything that is involved in the term "materiality" and its evolution, since this is the starting point for the development of the strategies that organizations will decide to establish. This influences all the decisions made in the company, in its activities and in the statements presented to the different users of the information.

Here is the link to the report for those interested in learning more about the subject.

Click to access: Statement-of-Intent-to-Work-Together-Towards-Comprehensive-Corporate-Reporting.pdf