The Need for Sector‐Specific Materiality and Sustainability Reporting Standards

10 Pages Posted: 21 Jul 2012

See all articles by Robert G. Eccles

Robert G. Eccles

University of Oxford - Said Business School

Michael P. Krzus

Independent

Jean Rogers

Accounting Standards Board

George Serafeim

Harvard University - Harvard Business School

Date Written: Spring 2012

Abstract

The market continues to show growing interest in how well companies are performing across a broad range of environmental, social, and governance (ESG) dimensions. Partly as a result, the companies themselves are paying more attention to these performance dimensions, how they contribute to financial performance, and how to evaluate tradeoffs that arise. One of the greatest challenges facing both investors and companies in using ESG performance information is the absence of standards. Another challenge is knowing which of the many ESG dimensions are most material for a company in terms of creating value for shareholders and stakeholders over the long term. The authors argue that materiality and reporting standards must be developed on a sector‐by‐sector basis, and that failure to do so will result in inconsistent and even misleading disclosures. The authors illustrate this with the case of climate change. The SEC has already issued interpretive guidance on climate change disclosures, making it quite clear that existing regulations require companies to report on material effects of climate change, from both an upside and downside perspective. Based on an analysis of 10K filings in six industries, the authors show that, even within a given industry, there is substantial variation in reporting among companies that ranges from no disclosure, to boilerplate disclosure, industry‐specific interpretation, and the use of quantitative metrics. After providing further detail on this by looking at the airline and utilities industries, the authors conclude by offering a methodology for defining material ESG issues on a sector‐by‐sector basis that could provide the basis for developing key performance indicators.

Suggested Citation

Eccles, Robert G. and Krzus, Michael P. and Rogers, Jean and Serafeim, George, The Need for Sector‐Specific Materiality and Sustainability Reporting Standards (Spring 2012). Journal of Applied Corporate Finance, Vol. 24, Issue 2, pp. 65-71, 2012. Available at SSRN: https://ssrn.com/abstract=2114833 or http://dx.doi.org/10.1111/j.1745-6622.2012.00380.x

Robert G. Eccles (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Michael P. Krzus

Independent ( email )

No Address Available

Jean Rogers

Accounting Standards Board

United States

George Serafeim

Harvard University - Harvard Business School ( email )

381 Morgan Hall
Boston, MA 02163
United States

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