Expanding the Concept of Materiality to Environmental, Social, and Governance: Audit Issues and Implications

SUMMARY: The concept of materiality has long been a basic feature in U.S. securities laws and regulations. With the current global and U.S. efforts to develop new disclosure standards for environmental, social, and governance, a debate has emerged regarding the 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 also 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” (European Union 2019). However, as discussed in this paper, the concept of materiality set forth in U.S. securities laws and court decisions are contrary to the concept of double materiality. This paper provides a brief history of materiality and expansion of the concept and discusses audit issues and implications.