Understanding the Materiality Component of the SEC Climate Disclosure Final Rule

By now, it’s well known that the U.S. Securities and Exchange Commission (SEC) adopted final rules requiring registrants to disclose certain climate-related information in registration statements and annual reports. While there are several notable changes between the proposal and the final rule, Sustas was most intrigued by the introduction of materiality to guide registrants in determining the information to include in the regulation S-K disclosure. As such, we decided to dig into what materiality really means in the context of the SEC rule and how it could impact the disclosure strategy of registrants.

Materiality Defined for SEC Reporting

When defining materiality, the SEC final rule refers to precedent established by the Supreme Court which states “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining to buy or sell securities or how to vote or such a reasonable investor would view omissions of the disclosure as having significantly altered the total mix of information available.” Said otherwise, information is material if it would change an investors decision to give or take back capital. 

Anecdotally, I find most conversations with clients around materiality start with a 5% threshold over a reported value. Even during my short stint in financial audit, materiality was calculated purely quantitatively using a percentage of a financial statement line item. However, the SEC final rule states “materiality definition is fact specific and one that requires both quantitative and qualitative considerations.”

The qualitative considerations when determining materiality are often overlooked as they require some form of judgement, and this is particularly true when considering whether climate-related information constitutes material information to be disclosed in a registration statement or annual report. In the case of climate-related information, it’s the opinion of Sustas that the qualitative considerations play a larger role in assessing materiality than the quantitative considerations.

Qualitative Materiality Considerations  

Since qualitative considerations are less frequently referenced when determining materiality of information, it can be difficult to know where to start or what to consider. So, Sustas prepared the following questions to help companies begin a qualitative assessment on whether climate-related information is material.

*Note, answering “yes” to any of the questions below does not mean that climate-related information is material for your company, but it does indicate a need to perform further investigation and analysis prior to concluding the information is not material.

1.        Do a significant number of peers, competitors, key suppliers, and/or key customers disclose climate-related information?

2.        Do ratings and rankings agencies (i.e., ISS, MSCI, Bloomberg) assess the company or industry as being susceptible to climate-related risks?

3.        Did the company respond to CDP, EcoVadis, or equivalent surveys and make the information publicly available? 

4.        Has the company voluntarily disclosed such information in public facing ESG, CSR, or Sustainability reports for more than 3 reporting periods?

5.        Has the company included responsibilities for climate-related risk oversight in a board committee and formalized the responsibilities in that committee’s charter?

6.        Does a cross-functional sustainability or climate committee exist at the senior management level that is responsible for assessing and managing climate-related risks?

When In Doubt, Disclose!

If there is any doubt regarding the materiality of your company’s climate-related information, we recommended giving serious consideration to disclosure. It’s the opinion of Sustas that a company will likely need to invest more time and resources in justifying that climate-related information is not material than preparing the disclosure itself. Unsure of where to begin in assessing your company’s readiness to comply with the SEC reporting requirements?  Reach out to our founder, Stu Block (stuart@sustasllc.com), to get started!