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[This blog was originally written on the TruValue Labs’ website, at:

Part I of II:
In our last blog (December 2015), we raised the issue of materiality in relation to carbon asset risk, without addressing the controversies as to how materiality is defined legally and otherwise. As materiality is a core concept from at least three points of view (corporate, investor and society), this post and the one follow is a more detailed discussion of some of the problems and concerns in defining materiality and its legal status (mostly focusing on the U.S.). We will then look at what ‘materiality’ implies for developments in integrated reporting (IR). The argument I’ll make, in brief, is that:
Materiality is in some regards in the eye of the beholder, and thus somewhat of a moving target.
Law and regulation frequently play catch up to developments in markets’ views of materiality, as well as those of significant non-market actors.
IR’s view(s) of materiality needs to take account of development changes in tradable asset ownership patterns and institutions. More specifically, that the concept of universal owners about which I and others have written, and some very large institutional investors have adopted explicitly or implicitly, has the potential to clarify some existing ambiguities in the various discussions of IR in relation to materiality.
Part I of this theme discusses materiality in the eye of the beholder and (briefly) law and regulation playing catch up with markets’ views of materiality. Part II which will follow will begin with the role of non-market actors (stakeholders) and the significance of all these themes for integrated reporting.
Beginning with item one: materiality in the eye of the beholder. The basic notion of materiality common across time and jurisdictional regimes (e.g. UK, U.S., E.U.) is information that an investor’s needs to be informed about which would influence her or his decisions regarding the value of the investment and/or decisions regarding proxy voting and actions.
As two academic accountants have written: “The judicial definition of materiality has developed over time… with important variations … The following judicial definition of materiality, with its possible variations, is suggested: Would the reasonable (or speculative) investor (or layman) consider important (or be influenced by) this information in determining his course of action?” Courts, regulatory agencies, accountants, once upon a time defined as ‘self-regulatory agencies’ (that is, FASB) and others have changing and often conflicting definitions. Some such as FASB suggest that materiality is exclusively quantitative in nature; while others argue it may also include qualitative factors as relevant. Its origins in common law (clearly only for common law countries) is captured by the U.S. Restatements of Torts 2nd (1988):
“§ 538(2) The matter is material if (a) a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question; or (b) the maker of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action, although a reasonable man would not so regard it. (as quoted footnote 1.)”
Thus, materiality becomes a matter of judgment for the ‘reasonable man’ (read: person) on a case-by-case basis. As SASB writes:
“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.” (In TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).”
As an attorney long involved in ESG investor specialization wrote:
“An extremely important point is that courts have defined the “reasonable investor” in objective and hypothetical terms. For example, courts have attributed certain characteristics, such as being rational, focused on making a profit in her investments, knowledgeable about the risks of investing, etc. Thus, under the US Supreme Court definition of materiality, there is one reasonable investor, not multiple reasonable investors.”
What is significant about this is that while the hypothetical reasonable investor is a rational, profit oriented, informed and risk oriented, what the component elements of, for example, risk might be or what a profit time horizon is, varies among investors’ and change over time.
Thus a Wall Street Journal blog neatly summarized the materiality debate in its headline, ‘Definition of Materiality Depends Who You Ask’. Materiality in the U.K. is broadly similar to the U.S., as both have origins in common law, yet there are differences. Guidance by the Institute of Chartered Accountants in England and Wales, for example, states that:
“Materiality depends on an item’s size, nature and circumstances. Dependence on size means that materiality is quantifiable in financial terms. However, the nature and circumstances of an item are qualitative matters and so materiality is not capable of general mathematical definition. Because judgement is required to determine materiality, different people may have different views about whether an item is material. Materiality will often be indicated by a range of potential values with the eventual treatment of a particular item depending upon a full consideration of the information involved and how it will be used.”
Even restricted to court decisions and regulatory mandates, materiality is case/entity specific, reasonably defined to include a variety of considerations and may change over time. Thus, the SEC in 2010 reminded companies that where ‘materially relevant’ they must disclose risks from climate change as increasingly the (a) reasonable investor might see it as impacting the firm’s value and/or a proxy vote decision. As Robert Eccles and Birgit Spiesshofer summarize, materiality is company specific, ‘audience and timeframe dependent, and based on human judgment.’
If materiality is company specific, under U.S. law it is a firm’s Board of Directors that is ultimately responsible for the determination of what is material for that firm. This of course presents a huge contradiction: as neither regulators nor courts offers more than general guidance for such determination (absent particular circumstances, e.g. carbon), how could or should a board or its delegates make such determination of what is or might be relevant to the ‘reasonable investor’ (its ‘own’ reasonable investors)? Indeed, as in the climate risk disclosure guidance by the SEC, if carbon could in the eyes of a reasonable investor impact value or voting, then it must be disclosed. But of course the key element here is that while the board makes such determination it does so, or should do so, only in the context of judging (absent specific regulations) what is ‘material’ to the reasonable investor, actual and future ones, meaning all actual or potential investors. The role of public and expert opinion and the pressures of existing law (e.g. environmental law beginning in the 1970’s) and of stakeholder actions, are all explicitly taken into account and contribute to the SEC’s guidance actions.
And by definition, investors (overwhelmingly institutional investors in U.S. and in most other developed equity markets) do not have a uniform point of view. There is an ever-changing landscape of what the ‘market’ in whole or its endless parts considers reasonably material. So while the legal and functional decision rests with the board for determining entity specific ‘materiality’, it makes or should make such decisions with an eye to the moving parts that determine the reasonable investor’s views.
Therefore, from a somewhat higher-level perspective, we are forced to return to the age-old question of what moves markets? And in turn, this links materiality’s definition (both in general and in company specific cases) to the impact both information and knowledge have on actors which influence markets, as discussed in the last blog.
In sum, materiality’s determination is very much in the eye of the ever-changing beholder or beholders. Briefly regarding the first part of item two above (that law and regulation need to catch up to markets’ materiality dynamic), let it suffice to simply suggest that law and regulation probably never will in general ‘catch up’, although in specific elements it can and arguably must.
In our next blog, we will look at the discussion of materiality and its implications for stakeholders, including universal owners, and Integrated Reporting.
[1] For their suggestions and criticisms, thanks to: Hendrik Bartel, Sebastian Brinkmann, Graham Nelson, Doug Park, Yang Ruan, and Anna Young-Ferris
[2] LuAnn Bean and Deborah W. Thompson, ‘The development of the judicial definition of materiality’, at:
[4] See for example,, “Creating value: Integrating reporting and investor benefits”, p. 10.
[6] Private communication with Doug Park.
[7] See also, Doug Park, “Investor Interest in Nonfinancial Information: What Lawyers Need to Know”, at:, “Investor interest in non financial information: what lawyers need to know’, Doug Park. Park does a really nice view of summarizing how previously non material information becomes material in the U.S. since the 1970’s. I would add that ESG in my view is not ‘non financial’ information, but rather has in some cases been ‘not yet financial’ information since if in some cases ESG is material, it effects value. If impacting value, it is by definition financial.
[10] Robert Eccles and Birgit Spiesshofer, ‘Integrated reporting for a re-imagined capitalism’, Working paper 16–032, Harvard Business School, p. 9.