Home
/ Insights
/ Articles
/ Determining What Matters Most: A Practical Approach to Governing Materiality

Determining What Matters Most: A Practical Approach to Governing Materiality

Organizations today, however, also operate in a landscape where materiality is no longer a single, stable concept. Investor-focused financial materiality, stakeholder-focused impact and double materiality in sustainability reporting, and jurisdictional definitions all coexist—and often conflict—within the same enterprise. Moreover, different materiality criteria entail different ethical-economic rationales: entirely consequentialist, probabilistic and market-mediated criteria under U.S. securities regulation, for example, often contrasts and creates interoperability issues with intrinsic normative considerations on the environment, society and the economy. Consider, for example, the interoperability issues that have emerged on materiality under recent European standards and regulations.

Decisions about what matters, to whom, and when to report, can therefore become fragmented and inconsistent across functions, geographies and reporting regimes. This fragmentation introduces legal, regulatory and reputational uncertainty and complexity, undermining effective governance of material issues throughout the organization. Most organizations today have yet to adopt mechanisms to organize and define the heterogenous ways they currently use materiality, nor adopt formal mechanisms for selecting and filtering material information on issues that matter for board and senior management oversight and governance.

Two key governance enhancements can help organizations restabilize and reduce the uncertainty around materiality. First, organizations can develop a structured glossary or single source of truth—a “Materiality Reference Table”—that refines and strengthens the heterogenous ways it uses materiality (and their different rationales). The reference table serves as a cross-functional tool to help organizations better understand and articulate the plurality of ways they define and use materiality. It is a simple enhancement that most organizations can easily adopt at minimal cost. Second, organizations should develop and implement a meta-level mechanism—a “Composite Materiality Risk Governance Score”—to escalate, delegate and filter material information for board and senior executive oversight and governance (and the respective committee and subcommittee roles and responsibilities). Heterogenous information that is all considered material under some criteria or other is in desperate need of refinement and filtering. Organizations can adopt the risk governance score to incorporate the different rationales underlying materiality while providing the means for prudent resolution for purposes of oversight and governance. The reference table and composite score also offer numerous ancillary benefits, including: clearer, more consistent regulatory filings; fairer and more accurate external reporting; and greater understanding across different function roles at different horizontal and vertical levels. In our view, these enhancements will help organizations determine what matters, while providing a defensible rationale for strategic decisions and disclosures.

Why is This Necessary?

As shown in Table 1.1, materiality is incorporated, required and relied upon in an ever-expanding array of contexts.

Table 1.1. – Expanded Usage of Materiality
Frameworks/Regulation	Financial reporting standards – U.S. GAAP (FASB), IFRS (IASB), ISA 320 & 450 (IAASB) Securities regulation – SEC (U.S.), ESMA / EU prospectus regulation, IOSCO principles, U.S. Sarbanes-Oxley (SOX) Corporate governance & risk management – COSO ERM, ISO 3100, OECD Corporate Governance principles Banking & finance – Basel (Pillar 1, 2 risks, model risk, stress testing) Sustainability & ESG – CSRD/ESRS (EU), GRI, ISSB (IFRS S1&S2), SASB, TCFD Legal & assurance – U.S. Supreme Court (TSC v. Northway, Basic v. Levinson), IFAC/IAASB Assurance Standard
Users	Regulators / judges – disclosure and compliance Standard setters – normative considerations Investors / analysts – financial and market-driven material information Boards of directors – strategic and prudential oversight Management / executives – operational decision-making Auditors (internal and external) / assurance providers – validation (fairness and accuracy) of material statements Employees / customers / suppliers / partners Civil society / policy-makers
Purposes / Use Cases	Disclosure & reporting – identifying what must be communicated Risk management – prioritizing significant risks and controls Strategy & capital allocation – determining issues and initiatives that matter for long-term value Governance & oversight – focusing board attention on what’s most consequential Regulatory, legal & compliance – defining legal requirements, thresholds for liability and omission Stakeholder engagement – mapping relevance for affected parties in value chains
Skills/Professional Competencies	Accounting & auditing – CPAs, auditors (internal / external), controllers Legal & compliance – securities lawyers, compliance officers Risk management & operations – risk officers, CROs, internal audit Sustainability & ESG – ESG officers, sustainability professionals Strategy & corporate finance – CEOs/CFOs, management consultants, strategists Communications – investor relations, corporate communications, public affairs