Materiality

Would it make a difference in a decision?

Just as with financial reporting, management must make a decision about what is material or significant enough to provide in a sustainability report. To determine materiality, a good question to ask is whether having the material would make a difference in a decision. If the answer is yes, then it is material.

Aspects of operations are material if they have a fairly large impact on the organization or its stakeholders. Materiality affects all the following decisions:

  • which indicators to present individually and which indicators to aggregate with others;
  • which topics to include in the report; and
  • which indicators to have checked for accuracy.

This process is similar to financial statement presentation. Often the results of operations (income statement) contains one line called “selling general and administrative expenses.” This one line is a total of many, many individual expenses. Generally more detail on these aggregated numbers can be found in the notes to the financial statements.

Similarly, when reading a sustainability report, you might notice that your favorite topic or environmental condition has not been discussed by an organization, and you might feel that the organization is attempting to hide something. Even though this indeed might be the situation, an alternative explanation might be that management decided, due to space limitations, to do any of the following:

  • include what others thought were more critical issues;
  • aggregate the data with other numbers; or
  • place the data on the organization’s website.

For example, you might notice that a petroleum company does not report flaring (burning of excess gas) in its sustainability report. If you live in a community in which flaring occurs, you feel that it is a potentially serious condition that is material and could have major health effects on your family. However, flaring can be combined with greenhouse gas emission and other emissions in the report. Also, it might be that flaring information is provided on a company’s website.