Past definitions of materiality in financial reporting recognize that judgement is exercised in due consideration of surrounding circumstances.


Current sustainability or shared value approaches put operational circumstances in the broader context of societal and ecological trends. The case of climate is illustrative. It reveals a chain of cause and effect from operational or organisational context to industry, market, socio-economic and ecological context.


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“Of the Global 500, well over a 100 do not disclose their GHG emissions.”

Cooling TowersStandards such as those issued by the FASB and regulatory requirements issued by institutions such as the SEC have always recognized that materiality is context-specific. This implies the situation or circumstances of the reporting organization. These are factors that also courts would view as reasonable considerations. In financial accounting the tendency has been to interpret this first and foremost as referring to the organizational context of the reporting organization itself (its performance), its industry (peers) and markets. The social responsibility debate since the 1980s has taken “context” to a much broader, ecological and societal meaning.

The GRI has “sustainability context” as one of its reporting principles, encouraging users to consider for example available international publications (such as IPCC reports) and to convey the magnitude of their impacts in appropriate geographic contexts. This is part of the “combination of internal and external factors” the GRI expects the reporting organization to refer to when determining if an aspect or topic is material. Sustainability context raises in particular scientific studies, in other words the “sustainability impacts, risks or opportunities identified through sound investigation” referred to by GRI G4.

Experts such as the Sustainability Context Group argue that most corporate sustainability programmes come short in that they focus on the micro level. They advance incremental improvements in company performance compared to past years or peers, but not compared to limits and thresholds at the broader social and environmental levels. It is with this in mind that the WRI, CDP and WWF have launched the “Mind the Science, Mind the Gap” initiative to develop a sector-specific methodology for companies to set themselves IPCC science-based emission-reduction targets.

The climate debate and calls for science-based targets serve well to illustrate the meaning of sustainability context and thresholds in determining materiality. Consider the report Assessing Corporate Emissions Performance through the Lens of Climate Science (2013) by Climate Counts and the Centre for Sustainable Organizations. It examined the operational (scope 1 GHG emissions) performance of 100 global corporations to determine their performance against science-based targets. The point of departure was a threshold or global cap of GHG emissions to keep our planet below 350 ppms or 2 degrees Celcius.

The 2013 study used data from a scenario developed by the Tellus Institute that suggests an emissions pathway up to stabilization at 350 ppm by 2100. With this global budget in mind, emissions allocations to the 100 companies were made based on their dollar contribution to GDP. As organizations grow / shrink in size annually, an adjustment is made to their emission allocations (entitlements i.e. emissions reduction targets per dollar contribution to GDP). Looking at their performance over 2005 – 2012, the study found that only 49 of the 100 companies are on track to reduce their GHG emissions in line with the science-based targets. The findings also showed a complex relation between context-based climate performance, carbon intensity and financial performance as defined in terms of e.g. revenue, EBITDA and market capitalization.

While the above study examined companies that have well been disclosing their GHG emissions since 2005, critical examination also needs to be done of those who do not disclose in the first place. This is what BSD Consulting set out to do with Thomson Reuters, zooming in on those large corporations who do not disclose their GHG emissions to the CDP and/or the public. In the report Global 500 Greenhouse Gases Performance 2010 – 2013 (2014) by BSD Consulting and Thomson Reuters, trends in scope 1 and 2 emissions over the post financial crisis period by the world’s 500 largest corporations were examined. The Global 500 are directly and indirectly (through energy use) responsible for over 10 percent of world-wide GHG emissions. For the over 100 corporations among the Global 500 who do not disclose their GHG emissions, estimates were calculated based on data (e.g. industry averages) of the Thomson Reuters Asset4 Median, energy and CO2 methodologies.

The 2014 study found among others that scope 1 and 2 emissions by the Global 500  increased by 3.1 percent from 2010-2013. This implies an annual increase of 1 percent versus a 1.2 – 1.7 percent average annual decrease required to stay within the 2 degrees Celcius scenario. The top 50 emitters account for 79 percent of Global 500 emissions. Being among the top 20 emitters is determined, among others, by the size of the corporations involved. An example would be the newly merged Lafarge Holcim. The top two emitters among the Global 500, who also do not report their GHG emissions, are PETROCHINA Co Ltd and China Petroleum & Chemical Corporation. The study highlights the importance of considering absolute emissions as well as the trend over time.

Earlier analysis by BSD Consulting and Thomson Reuters found that of the Global 500, 153 companies did not to disclose their 2010 carbon emissions and 169 did not disclose their 2011 emissions. It is clear that the quality of self-reported emissions can vary tremendously from company to company. Yet the value of comparing reporters with non-reporters lies in the ability to assess “where are the emissions?”, mindful that what gets reported tends to be conservative numbers. Out of 347 reporters in 2010, the top 20 companies were responsible for 58.1 percent and the top 10 for 38 percent of reported emissions. The research confirmed known challenges for carbon intensive industries, including new reporters from emerging markets.

A problem for any analyst is the inability to know what potentially material information has not been disclosed. Based on public research on carbon on other resource intensities by sector, the likelihood of a company having high/low intensities can be judged with reference to sector averages. Comparison can also be made with what sector peers report on as ‘material matters’, as well as what standards such as SASB consider as material key performance indicators for the sector involved.

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