Читать книгу ESG Investing For Dummies - Brendan Bradley - Страница 39

Materiality is a concept within accounting that relates to the significance of an amount or discrepancy. The purpose of an audit of financial statements is to enable an auditor to state an opinion on whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework.

Likewise, financially material ESG factors represent a significant impact, either positive or negative, on a company’s business model, such as revenue growth, margins, and risk. The material factors differ from one sector to another, including supply chain management, environmental policy, worker health and safety, and corporate governance. For sustainability to translate into financial performance, it must have an influence on either the amount of cash flow generated or the cost of external financing to the company.

Many firms consider ESG factors such as renewable energy, community relations, and political contributions to be material indicators that they are being good corporate citizens and following an ESG strategy. However, there is a difference between “doing good” and “doing well.” From an investment perspective, these factors may not be financially material to the company’s bottom line, so they don’t score highly in terms of investment-grade aspects that will impact their share price. Therefore, a company needs to consider which ESG issues present real financial risk or opportunity. This analysis should include stakeholder engagement to agree on the priority issues that need to be addressed. For example, an airline company could focus on energy efficiency, customer satisfaction, and executive compensation as core ESG factors that make a difference, but there isn’t always consensus as to what constitutes financially material ESG factors.

It’s not surprising that a critical part of ESG scoring is determined by material factors that affect a company’s financial performance, but data providers typically take their own view on materiality issues. This proprietary approach doesn’t allow full transparency, and any differences add to the difficulty that asset owners and managers face in selecting an ESG data provider (find out more details later in this chapter).