In the wake of the SEC’s ruling on climate change earlier this month and subsequent lawsuits against its constitutionality, it seems like a good time to review material information in general.

Although it sounds simple, the decision by companies to disclose information about their impact is anything but. It rests on the definition of material information. Historically, this has been confusing – for example, a manager must make a judgment based on information both in the past and the future. And, making a determination of what information is material is subjective by company, country, or both.

Many materiality standard setters used to prioritize only financial disclosures to assess impact, so-called single materiality – chief among them are the Securities and Exchange Commission and the Sustainability Accounting Standards Board, or SASB.  Both had stated an item is material if “a substantial likelihood that the … omitted fact would have been viewed by a reasonable investor as having significantly altered the total mix of information made available.” This generally involves a process of weighing all the known facts and circumstances in determining materiality.

In contrast, other standard setters – like the multi-country International Accounting Standards Board (IASB) – viewed the term more broadly: information (which includes sustainability-related financial information) is material if omitting, misstating, or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements.

So, you can see how companies had difficulty depending on where they were and who they considered to be the “users” of material information. In an article I wrote a couple years ago, I outlined the ethical implications of using differing standards for company stakeholders. Potential ethical implications exist because of the wording in these definitions. The word “could” indicates something is possible, whereas “would” means increased certainty, or even a guarantee. As a result, the threshold for omitting information can be quite different. But what is clear is that the market wants more than just financial information – sustainability-related information has become a key focus.

This became necessary as companies were being called upon to consider a wider set of stakeholders and along with it different types of information. According to a recent report from PWC nearly 60% of board directors agree that companies should prioritize stakeholders in making company decisions and not just shareholders.

How a company handles environmental concerns – or crises – are central what companies stand for and it’s becoming increasingly divisive.  Not surprisingly, it seems like every major country jurisdiction is focused on what and how to disclose environmental information to a firm’s stakeholders – with a specific focus on climate-related information. These disclosures are amongst the most prominent currently facing company boards and executives.

In a preview of this year’s proxy season by EY Center for Board Matters, 67% of respondents to its 2024 survey said that climate-related risks and opportunities are what investors will prioritize in their engagements with companies – the next most popular topic came in well below, at 38% (for workforce & board diversity).

Standard setters heard the call.

In 2021, to achieve a globally consistent baseline, which has been sorely needed, the International Sustainability Standards Board (ISSB) was created during the United Nations Climate Change Conference (COP26), in concert with the International Financial Reporting Standards (IFRS). In February 2023, ISSB voted to release global guidelines that attempt to harmonize environmental disclosures available for regulatory purposes, which went into effect in February 2024. Also at that time, the SASB decided to stand with ISSB, thus changing from a would to a could standard – far more encompassing.

The ISSB standards were built on or incorporate existing standards and frameworks. You may have heard of these standards –TCFD, SASB, CSRD, IASB.

ISSB fully incorporates the Task Force on Climate-Related Financial Disclosures (TCFD) and includes the Sustainability Accounting Standards Board’s (SASB) climate-related industry-based requirements. The Securities and Exchange Commission’s March 2022 proposed rule amendments are also aligned with the TCFD (and use the SEC’s definition of materiality, a “would” standard) and are focused on single materiality. The final rule was released in early March 2024 and focuses on the people, process, plans and progress of your climate program. Costs of mitigation, goals and plans and related effects on financial statements must be included in a company’s 10k report. However, in late March 2024, a U.S. appeals court granted a request for a temporary administrative stay on the SEC’s climate-related disclosures rules after two oil-field services companies filed a lawsuit challenging them as unconstitutional. While we will soon find out what court will hear this case, it’s unlikely that the rule will be completely overturned. So, companies will need to stay the course in order to be ready for FY 2025. If an aspect of the rule is altered, the SEC will issue guidance on changes.

Although we hear about this type of ESG pushback, there really isn’t much. Consider the recent report by KPMG, during the 2023 proxy season, shareholders submitted more than 800 proposals, with S&P 500 companies receiving 80 percent of those proposals. Of those 80%, 9 out of 10 were ESG proposals and ¼ were climate change related. A handful were what could be considered anti-ESG.

As you might guess, using one standard is rare. For example, in Europe companies use IFRS but also the Corporate Sustainability Reporting Directive (CSRD) which requires EU and non-EU companies with activities in the EU to file sustainability reports alongside their financial statements. This is called double materiality, for a multi stakeholder audience whereby financial materiality which is reporting on the company’s economic impact in terms of its financial performance and impact materiality which is reporting on the environmental and economic impact on employees, suppliers and local communities.

So that companies can better navigate the consolidation, ISSB puts out a useful table of these standards and their relationship to the ISSB.

Where are we now and what to do.

In terms of strategy, it’s rarely a question these days of should companies report on climate-related financial information but how. Boards and management, first and together, need to define their climate agenda. Think about questions like, “what areas are important to our business, our industry and our investors/employees/consumers”? To be sure, the reporting frameworks just discussed will dictate some of this; but there is room for firms to put their own stamp on it.

Companies, despite these unifying attempts, will likely still struggle with what to report – and there is little doubt that this question is industry, country and company specific still. I suggest starting with understanding your company’s environmental operations in terms of scope. Vital to this is risk assessments. Keep in mind that risks that are far into the future could affect investors today.

Here, reporting on scope 1 and 2 emissions serve as the minimum. Scope 1 is GHG emission directly from your company’s operations that are owned and controlled by it. Scope 2 is indirect GHG emissions from the generation of purchased or acquired electricity, stream, heating or cooling that is consumed by your company.

I recommend starting with ISSB, no matter where your business is. ISSB’s standards require companies to report on Scope 1 and 2 – but it will soon require reporting on energy purchases along with information from company value chains, including suppliers. It is these value chain emissions—known as Scope 3—that will need the extra time due to the challenge of gathering data from suppliers.

In the U.S., however, the SEC’s original proposal, the amended rules don’t require companies to report certain indirect emissions, including from their supply chains and customers’ use of their products, such as coal or crude oil—Scope 3 emissions. Companies have opposed the requirement, saying they would be overly burdensome and complex. But all of this loops back to materiality because much of the specifics in the SEC’s proposal has a materiality qualifier. It may be challenging for some firms to work with both a single materiality standard (in the U.S.) and double materiality standards (in Europe). So, without question, document your materiality assessments and judgments carefully – be clear about what threshold you used and how you arrived at a given decision.

Proper oversight flows from strategy. It’s important to have a dedicated management team accountable for the reporting to ensure a greater likelihood of information accuracy. Since eighty-eight percent of institutional investors subject ESG to the same scrutiny as operational and financial considerations, according to a recent Edelman Trust Barometer, it’s a C-suite and board level responsibility and not one to be taken lightly. Therefore, make sure the board is aware of the goals and targets of your climate plan because they will need to make resources available for achieving them.

Good luck.