Is Sustainability and Climate Reporting Material?
ESG reporting has been carried out for years in a variety of voluntary forums. However, we are now entering a new era where investors are demanding more information on climate and environmental risks, and the lines between financial and non-financial information are becoming blurred. This trend is clearly demonstrated by the significant rise in shareholder proposals requesting that companies conduct scenario analysis to determine the financial impacts of climate change on their businesses and by the recent implementation of the EU’s Directive on the reporting of non-financial information.
These trends raise significant questions about what types of climate and environmental information is relevant to the financial performance of companies, an inquiry which is substantially complicated by the multitude of voluntary reporting standards and their different conceptions of materiality. For example, the Global Reporting Initiative (“GRI”) defines an issue as material for reporting if it reflects a significant environmental, economic or social impact caused by the reporting company or would substantively influence the decisions of stakeholders. In contrast, the reporting guidelines of the Carbon Disclosure Standards Board (“CDSB”) and Sustainability Accounting Standards Board (“SASB”) adopt more traditional definitions of materiality that are focused on factors that will impact the financial condition or operating performance of a company.
In addition, the various voluntary standards differ in their expectations regarding the accuracy of data. For example, the GRI Standards state that data should be sufficiently accurate to assess the company’s performance but that the threshold for data accuracy can depend on its intended use. However, if investor expectations are evolving and data included in sustainability reporting will be considered material, reporting companies may wish to reassess how they collect and verify the data included in their voluntary reports.
As a first step, it is important that company officials with financial reporting responsibilities understand the basic climate and sustainability reporting frameworks that are out there and how their investors are viewing them.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.