Unfortunately, I don't have good news. Everything indicates that sector standards will give us additional work, perhaps even more difficult than in the case of materiality testing in general standards. Such provisions are included in the latest version of the SEC1 draft standard, which we will discuss at the Sustainability Reporting TEG on Thursday, September 12, 2024. The draft will be available in the coming days at this page.
In the case of universal standards, we must examine the relevance of all sustainability issues. As a result of this examination, we determine, among other things, which thematic standards, as well as which disclosure requirements and data points contained therein, we must report on. If we do not have to report on some of them (because they concern immaterial issues), we do not have to explain this; the exception is the immateriality of climate change.
The proposed approach to materiality in sector standards assumes that all issues identified as most relevant to a given sector will have to be assessed for materiality. Lists of these issues will, of course, be included in individual sector standards and will differ from one another. We are therefore talking about hundreds of specific issues, several dozen for each industry. By examining materiality, we will of course determine which disclosure requirements and data points from a given sector standard we should apply in our report.
But that's not all. The SEC1 draft stipulates that it will be necessary to explain the facts and circumstances relating to our company that led to certain issues being considered material and others immaterial. In my opinion, this is an excessive and completely unjustified burden on companies. Let's imagine this. A company in the fuel industry explaining why greenhouse gas emissions from the combustion of the fuels it sells are important to it. A general contractor explaining why the use of building materials is an important issue for it. A clothing company proving why the working conditions of employees in its supply chain are important to it. How long should these explanations of issues that are obvious to everyone be? How detailed should they be for the auditor to consider them sufficient?
Why all this? I don't know. Why? Oh, I know that. Representatives of business associations, together with representatives of large consulting firms, opposed a simpler solution, arguing that everything should always be subject to a materiality test in the name of economic freedom. Unfortunately, this libertarianism will be implemented at the expense of thousands of companies, which will incur unjustified costs to prove that water is wet and ice is cold.
And yet there is a much simpler solution: a list of issues included in the standard for a given sector, which are, as a rule, always relevant to all companies in that industry. This should be combined with an obligation to provide an explanation only if any of these issues prove to be irrelevant to our company. If I operate in the clothing industry, but all my suppliers operate in countries with a high level of employee rights protection, I will probably determine in my materiality assessment that the issue of employee rights in the value chain is not material to me. Since this distinguishes me from the vast majority of companies in my industry, I should explain this fact if I do not report disclosure requirements and data points related to this issue.
This simpler, logical, and cost-effective solution fortunately also has some supporters within the Sustainability Reporting TEG. At the next TEG meeting, I will continue to argue for its adoption.
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