Materiality is a fundamental principle of financial reporting in the United States. The concept of materiality recognizes that some information is important to investors in making investment decisions.
Federal securities law seeks to protect individual investors by requiring publicly listed companies to disclose annual and other periodic performance information that would be necessary for a reasonable investor to make informed investment decisions. U.S. Federal law requires publicly listed companies to disclose material information, defined by the U.S. Supreme Court as information 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 Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976)). Both U.S. and global companies that trade on U.S. exchanges are subject to Federal disclosure requirements.
Regulation S-K, which sets the specific disclosure requirements for Form 10-K and other SEC filings, requires that companies describe known trends, demands, and uncertainties that have a material impact on financial results in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of Form 10-K.
Why is Disclosure of Material Sustainability Information Important?
SASB establishes sustainability accounting standards for use by U.S.-listed corporations in disclosing material sustainability information for the benefit of investors and the public. SASB standards are designed for disclosure in standard filings to the SEC, such as Form 10-K and 20-F.
Disclosure of material sustainability information is important to investors, companies, regulators, and the public for the following reasons:
- The SEC already requires disclosure of material information in Form 10-K, 20-F and other filings used by investors.
- Institutional investors have a fiduciary duty that requires them to consider material, non-financial information.
- Investors need context to help them understand to what extent reported financial information is indicative of future performance.
- Companies have limited resources, and must therefore be able to focus on managing the highest-impact issues.
- The negative social and environmental impacts of companies’ operations present material costs to investors, companies, and society that are not currently accounted for in a company’s financial reporting.
- By more effectively communicating how they address material sustainability risks and opportunities, companies can increase their access to capital and lower its cost.
SASB and Materiality
To ensure that its sustainability accounting standards are decision-useful for investors and cost-effective for issuers, SASB uses the U.S. Supreme Court definition of materiality in its development process. SASB believes that every investor has the right to material information in an accessible and cost-free format. Accordingly, SASB focuses on making material sustainability information available in the Form 10-K filings of U.S.-listed companies.
SASB identifies the sustainability issues that are likely to constitute material information for most companies in an industry. SASB’s materiality assessment is similar in nature to that applied by companies in the preparation of their Form 10-K filings. (For more information on SASB’s process, please see the Materiality Assessment page.) By developing industry-specific metrics suitable for companies to disclose in the MD&A section of Form 10-K, SASB facilitates comparable corporate reporting.
It is important to note that SASB standards do not relieve the CFO and CEO from their accountability for disclosure of material information in Form 10-K filings, as per Sarbanes-Oxley. (Section 302, “Corporate Responsibility for Financial Reports,” requires the CEO and CFO of publicly traded companies to certify the appropriateness of their financial statements and disclosures and to certify that they fairly present, in all material respects, the operations and financial condition of the company.) Companies are ultimately responsible for determining which information is material to their operations and are required to include such information in their Form 10-K, 20-F, and other periodic SEC filings.