A working paper published by the Harvard Business School Accounting and Management Unit proposes a framework of how sustainability issues become financially material based on their social context.
The authors argue that sustainability issues become financial material when: stakeholders receive actionable information about alignment between societal and business interests; media and NGOs have more power and politicians respond to this power; and companies have a higher capacity for innovation.
Scholars from the Harvard Business School released a working paper that illustrates how sustainability issues can become financially important for corporations and investors. The paper demonstrates that financial materiality is not a “state of being” but a “process of becoming,” based on the issues’ social context.
The authors of ‘Pathways to Materiality: How Sustainability Issues Become Financially Material to Corporations and Their Investors’ identify five stages for the pathway to materiality: the status quo, catalyst events, stakeholder reaction, company reaction, and regulatory reaction and innovation. In a status quo stage, there is typically misalignment between the interests of business and society, and businesses may take actions that negatively affect society, such as through producing greenhouse gas (GHG) emissions that promote climate change.
On the other hand, stakeholder reaction to an issue can result in companies taking action, such as when public attention focused on the environmental impacts of plastic straws. The paper explains that the dissemination of statistics about plastic straws and marine plastic pollution led to support for campaigns to ban plastic straws, as a “symbol of the wider push to reduce consumption of all single-use plastics.”
The authors suggest that the five stages can be used to predict when sustainability issues are more likely to become financially material. In particular, they argue that sustainability issues become financial material when:
Companies and investors can use this framework to allocated resources based on expectations about future materiality; the authors suggest that ultimately, materiality depends on current corporate behavior being misaligned with emerging social needs.
Jean Rogers and George Serafeim published the document as a Harvard Business School Accounting & Management Unit Working Paper. [Publication: Pathways to Materiality: How Sustainability Issues Become Financially Material to Corporations and Their Investors]