Page 578 - COSO Guidance

2. Strategy and objective-setting for ESG-related risks

Table 2.7: Resources for performing ESG materiality assessment

Framework, guidance Description
and standards
AccountAbility Designed to help organizations identify:
Five-Part Materiality Test • What issues are most material, or relevant, to their business and its stakeholders.
• What information should be disclosed or reported in sustainability and corporate social
responsibility reports.
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Ceres Roadmap for Resource to help companies re-engineer themselves for success in a world beset with unprecedented
Sustainability 2010 environmental and social challenges that threaten the economy and local communities; designed to
guide companies toward corporate sustainability leadership and ultimately support an accelerated
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transition toward a more sustainable global economy.
Environmental and social Completed separately or together, these assessments are designed to identify and quantify the
impact assessments environmental or social impact from business activities or projects; impacts are measured against
a baseline by identifying and assessing the drivers for impacts – both independent and related.
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Global Reporting General and industry-specific guidelines for reporting a full range of economic and ESG impacts
Initiative Standards (GRI) of operations.
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Human rights due Human rights due diligence described by the UN Guiding Principles Reporting Framework is “an
diligence ongoing risk management process…to identify, prevent, mitigate and account for how [to address]
adverse human rights impacts.” It includes four key steps: assessing actual and potential human rights
impacts, integrating and acting on the findings, tracking responses and communicating about how
impacts are addressed. 44
Integrated Reporting Framework for the preparation of an integrated report that explains to providers of financial capital how
<IR> Framework an organization creates value over time. It provides a process for identifying risks based on the legal,
commercial, social, environmental and political contexts that affect the entity’s ability to create value in
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the short, medium and long term.
Sustainability Investor-focused standards on suggested material issues by industry and category: environment,
Accounting social capital, human capital, business model and innovation and leadership and governance. SASB’s
Standards Board five-factor test enables an organization to systematically consider each topic and draw insights
(SASB) Standards regarding topics that are reasonably likely to have material impacts. 46

The concept of materiality

Much like the term ESG, there is no universally accepted definition of materiality, though the term is
used pervasively. In the context of financial or legal filings in the US, information is material if there is “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.” This definition
n
o
has been adopted by SASB to identify sustainability topics that are reasonably likely to be material
for a specific industry. SASB recommends that a company’s management consider these “material”
topics to determine whether the relevant SASB standard should be used to comply with the disclosure
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requirements of the federal securities laws.
Conversely, some ESG practitioners and organizations guide entities to take into account the perspectives
beyond those concerned with financial capital in defining materiality. For example, GRI defines “material
aspects as those that reflect the organization’s significant economic, environmental and social impacts;
or that substantively influence the assessments and decisions of stakeholders.” GRI, therefore,
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recommends highlighting the importance of considering issues that are not yet financially material.
p
Similarly, the IIRC defines a matter as material “if it could substantively affect the organization’s ability to
create value in the short, medium or long term.”
This distinction is important to help risk management, sustainability and other practitioners to
communicate in a common language when leveraging an organization’s ESG materiality assessment to
understand an organization’s ESG issues.

. . . . . . . . . . . . . . . .
n The Financial Accounting Standards Board (FASB), the US Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB) and
American Institute of Certified Public Accountants (AICPA) define materiality as “the magnitude of an omission or misstatement of accounting information that, in the
light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by
the omission or misstatement” (Financial Accounting Standards Board (2008). “Original Pronouncements as Amended: Statement of Financial Accounting Concepts No. 2.”
o SASB applies the US Supreme Court definition, suggesting that information is material if there is “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)).
p For further information, the differences in the concept of materiality offered by various organizations has been covered to a larger extent in the March 2016 publication
“Statement of Common Principles of Materiality of the Corporate Reporting Dialogue.”
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