By Emma Abrams
What information should companies be reporting- in other words, what information is “material?”
According to the Harvard Business School, “Materiality is an accounting principle which states that all items that are reasonably likely to impact investors’ decision-making must be recorded or reported in detail in a business’s financial statements”. Information that is important enough to influence decision-making is ‘material’ and shouldn’t be omitted from financial reporting. Companies have historically only reported on financial information, but the effects of climate change being felt seemingly everywhere.
Is climate-related information material, and should companies report on it? The short answer: yes! More and more companies are choosing to disclose climate information; 90% of the largest 500 companies by market cap published a sustainability report in 2019. Although some requirements (like the proposed SEC rules) are still pending, there are already some requirements on what information is important enough to report- in other words, what information is material.
The SEC’s 2010 Climate Change guidance explains that some climate information is already material. Companies should “disclose the material effects of transition risks related to climate change that may affect your business, financial condition, and results of operations”, including “the impact of pending or existing climate-change related legislation, regulations, and international accords; the indirect consequences of regulation or business trends; and the physical impacts of climate change”.
The International Financial Reporting Standards (IFRS), which are required by countries around the world, issued IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information this June. It “requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term”. This includes the entity’s strategy for managing sustainability-related risks and opportunities and its performance in sustainability.
What kind of information is this referring to? The Sustainability Accounting Standards Board develops standards for non-financial reporting on the most material ESG areas. SASB standards define what ESG issues their board has found material for different industries. For example, product quality & safety, supply chain management and material sourcing & efficiency are relevant for the apparel industry. Energy management is material to solar technology, but not for apparel. This is because “management of energy efficiency and intensity, energy mix, as well as grid reliance” is relevant for the solar industry but not for apparel.
As we discussed earlier this month, proposed SEC rules will change what is required of reporting US companies. These new rules seek to address the current lack of standardization in reporting. They will require a ‘Climate Related Disclosure’ section in annual reports that will cover greenhouse gas emissions, climate-related governance and more. These rules will effectively end the debate over what is material for US companies; all reporting companies will be required to report the same information. For example, all reporting companies will be required to disclose their GHG emissions and identified climate-related risks. This is good news for investors and consumers as it will provide a consistent data set across companies and industries.
Is your company prepared for these new disclosure requirements? We can help! You can learn more about our Sustainability Consulting Services on our website or contact us today!
Emma is our 2023 Summer Sustainability Intern, and a sophomore at the University of Delaware, where she is majoring in Environmental and Natural Resource Economics. She spent her first semester studying in Auckland, New Zealand. While an avid world traveler, the lowcountry will always be home; She grew up swimming and tossing cast nets in the creeks around Charleston and Edisto, and her love for this environment drives her passion for sustainability. Emma has long been involved in environmental activism, and now hopes to make a career in protecting the ecosystems and communities she cares about. With experience in advocacy, research, data analysis and a healthy dose of optimism, she hopes to bring a fresh perspective and new solutions to the environmental field. Emma is excited to be working with Emerger Strategies to help Charleston create a greener future.