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March 31, 2022 04:17 PM

An Open Letter on the Materiality Debate in Sustainability Reporting

Following the Materiality Debate, the organizing committee of the event from the University of Bristol Accountability Sustainability and Governance Research Group prepared an open letter addressed to the EFRAG and the IFRS Foundation, and their respective boards – the EFRAG Sustainability Reporting Board (SRB) and the International Sustainability Standard Board (ISSB). The open letter is endorsed by 109 signatories from across the globe. The open letter calls for (1) better acknowledgement of the interdependencies of financial sustainability with the sustainability of the planet and society, (2) collaboration between various standard-setting bodies, jurisdictions and voluntary reporting initiatives, and (3) greater use of leading-edge sustainability and social science research in sustainability reporting standard-setting.

In preparing the letter, we received wide ranging responses, including endorsement messages, suggestions of amendments, references to related bodies of work, and questions about our position. Reflecting on these responses, it is clear that the Materiality Debate needs to continue. Although virtually everybody acknowledges its importance, materiality remains poorly defined and articulated, particularly in the context of sustainability reporting.

Different notions of materiality are floating around – ‘financial’, ‘impact’, ‘double’ and ‘dynamic’ materiality – and they all seem to be attached to different definitions (e.g. ‘Group of Five’, TruValue/ WEF, EFRAG SRB, etc.). These different notions of materiality create misunderstanding that leads to an unnecessary divide between those who are interested in more-or-less the same thing. In the open letter, we indicate that there needs to be a better articulation of materiality to bridge this divide and that is in alignment with the scientific evidence monitoring the environmental sustainability and social wellbeing of our planet and its inhabitants.

Another important element of this debate is the implication of materiality on practice. Given the subjective nature of materiality judgments, there remains concern over the misappropriation of sustainability reporting (as shown extensively in the academic literature – see References supporting academic research stated in Open Letter to IFRS Foundation). In this regard, we see value in the development of innovative approaches to materiality determination that is designed for sustainability reporting, including context-based materiality approach (for example, see McElroy, 2019, Making Materiality Determinations: A Context-Based Approach).  

The Materiality Debate reflects the complexity of sustainability reporting and the discord around the definition of materiality is just the tip of the iceberg. We call for greater research to provide a better understanding of this highly complex area.

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About Giovanna Michelon

UNIVERSITY OF BRISTOL
Chair of the EAA Virtual Activities Committee

Giovanna is Professor of Accounting at the University of Bristol. Her research focus is at the interface between corporate governance and social responsibility, broadly this involves: building upon a stakeholder-oriented approach to governance;...

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