Overview
Materiality is a fundamental principle of financial accounting from which a standardised solution of non-financial information can be based and provides an investment framework for investors.
Materiality recognises that nonfinancial information is important in assisting investors in making sustainable investment decisions, however the current disclosure environment poses significant challenges for both investors and firms, who need to identify the nonfinancial information that is material for investment analysis.
The disclosure of financial and nonfinancial information to shareholders and other stakeholders in the form of mandatory financial reports and voluntary communication is critical for the efficient functioning of capital markets.
Currently a disconnection exists between what ESG information companies disclose to their stakeholders and the data that actually drives management and investment decisions. Most agree that it is hard to know which information is business-critical for long term capital providers.
The Centre for Endowment Asset Management, in collaboration with the Bank of New York Mellon has supported research to enhance understanding of the disclosure needs of various stakeholders, and to identify commonalities and disparities in the supply of and demand for enhanced non-financial disclosure. The aim of this project is to uncover what constitutes material information for long-term investing.
Academic research is moving away from trying to answer whether nonfinancial information is material to long-term value, to identifying which nonfinancial information is material.
The evolving view of materiality
Rising demand for sustainability disclosures and the increasing investment value that follows responsible investment criteria prompted academic research into this field to help policy makers and market participants improve reporting and investment practice. The research project, conducted by Dr Amir Amel-Zadeh, Associate Professor of Accounting, Saïd Business School, University of Oxford, focuses on the materiality of nonfinancial disclosure from the perspective of stakeholders on environmental and social disclosures.
The objective of this ongoing research project is to understand how nonfinancial information features in the current investment decision-making environment and how asset managers and asset owners are similar or different in their use of that information.
The objective of the research is to assess how well issuers’ disclosure practices are aligned with the expectations and future needs of the investment community.
Working papers
Amel-Zadeh, A. (2016) The materiality of nonfinancial information: a review of theory and empirical evidence on sustainability disclosures, corporate social responsibility and responsible investing
Amel-Zadeh, A. and Serafeim, G. (2017) Why and how investors use ESG information: evidence from a global survey