Here at SASB, we’ve noticed some confusion about the term "materiality."
Such confusion is understandable. “Materiality” has different meanings when used colloquially and when used legally. Within the law, materiality has different meanings within securities law, contract law and the law of evidence. Due to this range of possible definitions, “materiality” has come to resemble “sustainability” as a word that can mean everything at once and thus nothing at all.
To address potential confusion, SASB abides by the U.S. securities law definition of the materiality. Our use of the term is therefore legally sound. Read on for an explanation of the most common misperceptions about SASB and materiality.
Myth #1: SASB is trying to broaden the U.S. Supreme Court’s definition of materiality.
SASB standards abide by the U.S. Supreme Court’s definition of material information, defined as “presenting a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.” (TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976)). The Supreme Court recently affirmed this definition (Matrixx Initiatives, Inc. v. Sircusano, 563 U.S. __ (2011).
In the case of conflict minerals legislation, for example, some have noted that federal securities laws can be used to achieve social policy goals. But, the purpose of the securities laws is not to right the world’s wrongs — it’s to disclose material information that informs investment decisions. While SASB standards may have the end result of improving corporate performance on material sustainability issues, the primary purpose of the standards is to provide investors with a full view of corporate performance. SASB standards provide investors with information on material sustainability issues, thus allowing investors to make better informed investment decisions. This approach comports with the U.S. Supreme Court definition of materiality.
Myth #2: SASB is taking away a company’s right to make the final determination of materiality.
SASB identifies the minimum set of sustainability issues most likely to be material for companies within a given industry. However, the final determination of materiality is the onus of the corporation. The Supreme Court explains that the determination of materiality is an “inherently fact-specific finding” (Matrixx, 563 U.S. __ 2011). In determining whether a particular piece of information is material, the company should take the perspective of the reasonable investor because in litigation over whether the company met its obligation to disclose material information, the court will assume the perspective of the reasonable investor. The focus is on the reasonable investor, not the reasonable person as some have mistakenly stated. The corporation is responsible for including material information in their Form 10-K or 20-F and other periodic SEC filings.
Myth #3: SASB uses the same definition of materiality as GRI and the IIRC.
As mentioned above, SASB uses the U.S. Supreme Court definition of materiality. Our standards are designed primarily for the benefit of investors.
The GRI and the IIRC use their own proprietary definitions of materiality. As key points of difference to note, the GRI definition serves all stakeholders (not just shareholders) and the IIRC definition uses a modified definition of materiality.
- GRI: Information that “may reasonably be considered important for reflecting the organization’s economic, environmental and social impacts, or influencing the decisions of stakeholders.”
- IIRC: “A matter is material if it is of such relevance and importance that it could substantively influence the assessments of providers of financial capital with regard to the organization’s ability to create value over the short, medium and long term.”
What other materiality questions do you have?