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Materiality in a non-financial reporting environment
Today’s non-financial reporting environment can seem complex, but there is one commonality among the various reporting initiatives — materiality.
The meaning of materiality can vary between stakeholders within the environmental, social and governance disclosure discussion.
Leading sustainability reporting organizations, including:
- Global Reporting Initiative (GRI)
- Sustainability Accounting Standards Board (SASB)
- International Integrated Reporting Council (IIRC)
- Investor Network on Climate Risk (INCR)
- Sustainable Stock Exchanges (SSE) Working Group
are seeking to provide clarity and guidance on what is most material in non-financial reporting.
Their guidance differs in scope, but these groups all agree that concentrating on materiality will better inform stakeholders and guide the decision-making process by offering insight into the most relevant environmental, social and governance risks and opportunities facing organizations.
While materiality is commonly thought of in financial terms, the correlation between material non-financial issues and value for companies is becoming more important.
According to a recent Ocean Tomo study, physical and financial assets make up only 20% of a company’s value today. Carbon Disclosure Project found that Global 500 companies that disclose non-financial information publicly outperformed their peers that did not.
A recent paper sponsored by the Boston College Center for Corporate Citizenship and EY, Value of sustainability reporting, highlights the fact that investors increasingly prefer to invest in transparent enterprises due to higher stakeholder-manager trust, more accurate analyst forecasting and lower information asymmetry.
Conducting a non-financial materiality assessment lays the foundation for future reporting, such as reporting in accordance with the GRI G4 Sustainability Reporting Guidelines. Many companies are engaging third parties to advise them on their materiality assessment process and to assist in identifying issues.
Identifying and reporting on the most material non-financial information can provide a company and its stakeholders with valuable intelligence to better measure, manage, and assess the business short and long-term. It can also enhance brand reputation, identify potential cost-savings within the company and can even improve access to capital.
Assessing materiality is integral to the emerging reporting standards
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