Expanding the Concept of Materiality-to ESG: Audit Issues and Implications

Abstract

The concept of materiality has long been a basic feature in the US securities laws and regulations. With the current global and US efforts to develop new disclosure standards for Environmental, Social, and Governance (ESG), a debate has emerged regarding expansion of the definition of materiality. An expanded definition would include not only financial materiality (i.e., how information affects an investor’s decision to buy or sell), but it would also include environmental and social materiality (i.e., how a company’s operations impact the climate, its employees, consumers, and society). This is referred to as “double materiality” (EU 2019). However, as discussed in this paper, the concept of materiality set forth in the US securities laws and court decisions are contrary to the concept of double materiality. This paper provides a brief history of materiality, expansion of the concept, and discusses audit issues and implications.