About the Series
Materiality is a mindset that guides companies on what truly matters for resilience, credibility and long-term value – not just a reporting requirement. WBCSD’s Materiality Mindset series explores how companies are rethinking materiality across three connected dimensions: the legal and governance foundations that define accountability, the operational processes that embed materiality into decisions, and the strategic lens that uses materiality as a guide for long-term performance and investment.
As Boards navigate a more volatile geopolitical, commercial and physical operating environment, the question of what is “material” is more complex than ever.
The first insight looks at the point where compliance meets fiduciary duty and liability. It examines how evolving definitions of materiality are reshaping directors’ responsibilities, disclosure practices and stakeholder expectations. As legal interpretations develop, boards are being asked to show not just compliance, but good judgment and foresight in defining what is material.
Setting the Scene
Materiality is a critical component of managing a company and crucial to the processes of both periodic and ad hoc corporate disclosures. Unfortunately, when it comes to looking for a precise legal definition with percentages and thresholds, professionals are left wanting. Even in the context of the US capital markets where “materiality” is a foundational concept, Federal and State regulators, legislators and courts have long resisted guiding to bright line determinations of what may be material to avoid creating a situation where something that truly is material is overlooked.
The resulting formulation defines information as “material” if a reasonable investor would consider it relevant to a decision to buy, hold, or sell a given security — a test which, critically, can only be applied in hindsight and applies to both information disclosed and information omitted. If a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available (e.g. potentially including limitations on or increasing costs of insurance of physical hazards or related business interruption). This lack of a bright line definition relies on experience, precedent and business judgment to determine materiality. This determination is not entirely nebulous. Securities law, key court cases and industry guidance including industry guidance for auditors all help Director’s as they seek to define materiality.1
Materiality determinations have become more multifaceted over time. As the financial markets and wider civil society become more sophisticated in assessing the impact of environmental and social tensions, perspectives on corporate performance are expanding. Specifically, determinations of materiality are increasingly required to take account of how corporate performance may be impacted by, and perhaps also impacts, environmental and social criteria (often collectively known as “sustainability”). In addition, disclosures are expected to include more forward-looking information on how corporate strategy will be evolved to transition and adapt to this reality.
Companies that operate globally are also caught between potentially conflicting jurisdictional requirements and enforcement mechanisms. Differences of materiality can also occur within a company upon consolidation as items that are material at subsidiary level may or may not be material upon consolidation. And importantly, materiality must be assessed and determined over various time periods. But these challenges are not new; companies routinely deal with this kaleidoscope of considerations in their corporate strategy decisions and disclosure. And investors and market participants use and test companies boards’ disclosure through activity in the capital markets and in the courts.
Bringing this broad and expert legal and governance informed lens is critical to how companies assess materiality and avoid the risks of narrowing with a compliance ‘tunnel vision’. Such a lens broadens perspectives from what could be a compliance task — defined only by narrow standards and restrictive controls – into the basis of a strategic lens that protects value. By taking a view that considers fiduciary duties, liability risks, and time horizons in light of the latest information — boards and senior executives can safeguard credibility and position their companies for resilience in a changing world.
Evolving Legal Requirements
Law-making is a complicated process and requires some time to be developed, adopted and enforced. However, laws addressing the need to consider climate and nature in corporate performance are emerging or being clearly incorporated into existing legal frameworks. Those laws, like all law, reflect reality and also affect the framework within which companies operate. These in turn either directly or indirectly influence the determination of materiality either by influencing the current or future operating environment (i.e. Transition risks) or supplementing laws that regulate the information that must be made available to investors, consumers and other finance providers.
Globally, investors have been pushing for mandatory disclosure requirements on climate-related risks and opportunities, partly in response to prudential systemic regulation. Disclosure rules regarding carbon accounting are in place or being adopted in multiple jurisdictions.2 More recently, ISSB’s standards use financial materiality as the test of what information must be disclosed to investors and include a specific approach to enable to determine sustainability related risks and opportunities. By the middle of 2025, thirty-six jurisdictions had announced the intention to use, adopt or introduce the ISSB standards into their regulatory frameworks. The International Organization of Securities Commissions (IOSCO) has endorsed the standards, encouraging its 130 member jurisdictions to integrate them into their regulatory frameworks.3 With investors being increasingly sophisticated in their expectation of company’s disclosures and continued growth of sustainable finance instruments, it is clear that corporate sustainability performance is becoming more material to investors.4 This is a strong indication that it should also becoming more material to boards, especially of companies accessing the global capital markets.
In addition, under the EU’s CSRD/ESRS rulemaking, a double materiality assessment is the approach for companies considering materiality and determining disclosures. As set forth by the EU, this means that companies have to report not only on how sustainability issues might create financial risks for the company (financial materiality), but also on how the company considers and mitigates its own impacts on people and the environment (impact materiality).5
As these reporting standards are evolving, regulators, investors and stakeholders are scrutinizing not only what is reported, but whether companies are making reasonable and informed judgments about what is — or could be — material. As with purely financial performance frameworks, assessments regarding the reasonableness of a director’s actions will be made in light of what they knew or would be expected to know at the time of the decision. It is clear to see how reasonable directors can be expected to be aware of globally accepted peer-reviewed climate science. Courts tend to defer to a “reasonable person” standard when assessing previous actions which is why directors need to ensure they are challenging assumptions, asking the right questions and critically assessing the answers. Under the “Caremark doctrine”6, corporate directors have a duty to ensure that they are adequately informed about the key risks their companies face. Ignoring foreseeable climate and supply chain risks could be seen as a breach of that duty of oversight. In reality, the most immediate risk is not the prospect of expensive high-profile litigation or regulatory enforcement but the risk of losing trust and credibility with investors and partners; this is hard won and easily lost.
As these frameworks proliferate, the implications for directors are clear: materiality is no longer a static compliance task but a dynamic governance judgment.
Board and Management Considerations
In most jurisdictions, the legal responsibility for determining materiality sits with the board of Directors of the company on behalf of its owners and is determined in light of the facts and circumstances at the time. It considers what a reasonable investor would consider important in making an investment or voting decision, in light of the probability and magnitude of an event or circumstance. Companies must conduct materiality assessments to identify which disclosures are required. Differences between what is material at a subsidiary level and what is material at a consolidated level for a group have always been a challenge for boards of the consolidated entities. Given the system wide impacts of climate change, Directors may want to consider additional scrutiny of risks that may seem localized but are happening across multiple subsidiaries. In addition, listing rules, securities laws, and regulatory regimes create also create specific disclosure requirements and further obligations. While auditing standards require auditors to evaluate how management has considered such risks and to reflect this in their assessment of a true and fair view, the ultimate responsibility for identifying and disclosing these risks rests with the company.
Boards must also consider fiduciary duties of care and loyalty. For common law jurisdictions, those duties tend to focus on a standard of how a reasonable person in a similar circumstance and position would act. That duty is formulated in different ways in different jurisdictions, such as that directors act in the best interests of the corporate and its stockholders or that the directors exercise independent judgment, diligence and skills. The reasonableness of actions are by necessity viewed in light of the time they were made and to whom they were made. In many companies today, public shareholding is often disparate, liquid and widely held.
Rote compliance with standards does not necessarily protect a company or its board of directors. Boards and audit committees should resist the temptation to approach materiality determinations as a repeat of a previous process or a regulatory compliance exercise. By considering the company’s process of determining materiality and its approach to reporting in light of their fiduciary duties to the company and its shareholders, boards are better prepared for future events.
The Challenges of Forward Looking
The types of disclosure that regulators, market participants, stakeholders and investors are requesting is expanding. Companies are familiar with and have the processes in place to produce audited financial accounts which cover historical time periods, although it is fair to say that judgement determinations such as asset valuation and impairment decisions have always involved some amount of forward-looking considerations. Reporting standards based on the Taskforce for Climate-Related Disclosure such as the ISSB focus on risks and opportunities, including assessments based on possible future scenarios for the physical world. Transition plan disclosures would also necessitate not only forward-looking strategy and planning, something that companies have always done, with some amount of forward-looking disclosure.
Forward-looking information is a particular challenge for boards and senior management teams due to the uncertain nature of the assumptions and a long-held approach in disclosure to avoid uncertain disclosure. The uncertainty is compounded by system effects in climate change forecasts, scenario planning requires assumptions about the intensity of extreme weather, supply chain disruptions, value at risk and other effects of climate change. Companies are hesitant to incur potential liability for statements about future events that are uncertain at present and could happen in numerous different ways that they are unable to affect or control.
However, considering uncertain future scenarios is something that boards and senior management do engage in regularly. They routinely make judgements on potential mergers and acquisitions based on future scenarios. They assess liabilities based on sensitivity analysis that assumes different interest or exchange rates and extractive industries routinely assess reserves based on forward assumptions about costs and technical feasibility.
Indeed, it’s been 30 years since the Private Securities Litigation Reform Act (PSLRA) was enacted by the US Securities and Exchange Commission, recognizing the value of forward-looking information to investors. The PSLRA established a process for forward looking information safe harbor requiring clear on identification and meaningful cautionary language, knowledge of the false or misleading information and that the information was material. In addition, the “bespeaks caution” doctrine provides for a process for forward looking information under U.S. case law.7
“Providing a true representation of how climate change is affecting a company’s business is critical for the transition. Comprehensive financial statements that detail the material impacts of climate change — both good and bad and why that is the case — have the power to unlock investment in businesses and technologies that hasten the transition to net zero, yielding net benefits for individual companies, as well as people, the planet and the economy.” 8
As the information and data available to directors and senior executives from work done by their financial teams as well as their sustainability teams alters the total mix of information available to them, they need to ensure they are exercising their duties in light of updated information. That means understanding materiality as a part of ongoing and periodic governance issue — something that shapes agendas, risk registers, strategy and oversight practices. Prior to 2019, many boards had risk registers that included the possible effect of a global pandemic. Perhaps some considered what might happen if a quarantine was enacted or if supply chains were disrupted. But how many would have considered the impacts as far reaching as what actually occurred. For some companies COVID-19 was a material event that would likely have resulted in their bankruptcy, absent government intervention.
Separately, recent merger and acquisition outcomes have underscored how underestimating long-term environmental, product-related, or social risks during due-diligence processes can result in substantial post-acquisition liabilities. These examples highlight the importance of robust materiality assessments not only for disclosure purposes but also for strategic decision-making and value protection.
The Liability Spectrum
As well as the risks of missing key risks or opportunities, the litigation risk of getting it wrong is increasing. The number of climate change cases has increased year on year with a global total of 2,967 cases filed to date.9 Of the cases filed in 2024, 20% of them targeted companies, or their directors and officers, although those cases covered a number of different types of claims, including frameworks and misleading product advertising.
Companies that technically comply with standards may still face litigation or enforcement if stakeholders argue that material risks were ignored and harm followed as a result. Rigorous adherence to standards — supported by transparent disclosure of assumptions and judgments, and by strong governance, oversight, and assurance — serves as a critical risk mitigation tool. Such litigation, even if ultimately unsuccessful, is costly, time consuming and potentially damaging to reputation. Litigation can also come from different sources, plaintiffs that argue the company is doing too much or that it is not doing enough.10
While the policy focus on climate and broader sustainability issues may fluctuate, the transition toward more sustainable economic systems is ongoing and accelerating. It is likely that additional climate- and sustainability-related legislation will continue to emerge globally.11 Recent advisory opinions from international bodies have clarified the obligations under international law, and these government commitments will increasingly translate into regulatory requirements for companies. The International Court of Justice (ICJ) advisory opinion specifically addresses the need for domestic legislation to support the transition and signals the potential for holding companies accountable for their role in delivering it.
Time Horizons and Consolidation
Materiality requires boards to consider multiple timelines. A short-term focus on the next reporting cycle can distract boards from risks that can arise over the medium term such as litigation or enforcement, investor demands and changing regulations. These influences can affect competitiveness, merger opportunities and access to capital. Long-term issues, from biodiversity to demographic change, can fundamentally alter the company’s operating environment creating both opportunities and risk.
Governance structures must ensure that all three horizons are considered, not only the immediate compliance cycle.
A rigorous approach to materiality will also help identify trends across the company for further consideration. For example, testing whether the same or similar climate related issue is impacting multiple different product lines or processes which individually may not be considered to have a material impact when viewed on a consolidated basis should still be considered due to the multiple points of impact on a company.
What Decision-Makers Can Do Now
Boards and executives should ask whether their materiality process is focused narrowly on compliance, or whether it is designed for continuous improvement recognizing both opportunities and risks, enabling it to fully reflect ongoing legal requirements and liability risks. Critical to that approach is to ensure audit committees have the information necessary to avoid narrowing the scope of what is considered material and avoiding tunnel vision. For example, reviewing changes in insurance availability and affordability will inform the audit committee and the board that increasing impacts from in physical risk are not a “blip” that will return to “normal”. Decision makers should consider an approach that incorporates legal and governance responsibilities into strategic decisions as well as the reporting cycle.
Questions for Your Next Board Meeting
- To what extent is our thinking and approach influenced by the business-as-usual practices? Is that the right approach and do we have access to advice?
- Are we using yesterday’s assumptions regarding physical risk, technological advancements and legal requirements (e.g. regulatory changes, loss events, insurance quotes, extreme weather losses) or starting again in light of updated information we have around physical risk and resilience? What opportunities could we be missing? What data and expertise do we need to understand and evaluate risks and opportunities in the context of the business strategy and stakeholder expectations?
- How are we balancing the focus on compliance requirements with an understanding of potential liability risks?
- Does our board and audit committee have visibility of short-, medium-, and long-term material risks and did they challenge themselves to approach these assessments as a new exercise, in particular regarding asset useful life and impairment, not just an update from the last reporting period?
Closing Reflection
Assessing materiality is not simply about what a regulation requires, but about how boards and executives are best able to put themselves in the shoes of a reasonable investor today and ensure they are acting in the best interests of the company over time. These evolving requirements could be approached primarily from a compliance perspective, similar to anti-money laundering confirmations or checklists; follow the standards, meet the disclosure rules, and move on.
While compliance is necessary, failure to embrace the spirit of the regulations and instead focus on minimum requirements could leave companies under prepared. Materiality needs to be handled in a way that anticipates liability exposure across jurisdictions, over various time periods and including a broader range of considerations.
Companies that succeed are able are best able to adapt to a changing world. Those that fail risk reputational damage, investor mistrust, and costly litigation as well as missed opportunities in the transition to create a thriving resilient company.
This legal and governance lens sets the foundation — our next insight piece will look at how companies can bring it to life in practice, “Operationalizing Materiality: Turning Insight into Foresight” through strategy, governance, and disclosure processes.
The Materiality Mindset series is produced by WBCSD’s Corporate Performance & Accountability team, with this legal insight being prepared in collaboration with Anna-Marie Slot, Co-Founder of Transition Value Partners, board of directors, NZLA, and advisory board, Vested Impact and Carbonaires. For more information, please contact- cp-a@wbcsd.org.
Footnotes
- Key US cases include TSC Indus., Inc. v. Northway, Inc., 426 U.S. (1976), Basic, Inc. v. Levinson, 485 U.S. (1988). US rule making includes Rule 10b-5, § 240.10b-5 Employment of manipulative and deceptive devices includes (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. ↩︎
- Examples include Environmental reporting guidelines: including Streamlined Energy and Carbon Reporting requirements – GOV.UK and California Corporate Greenhouse Gas (GHG) Reporting and Climate Related Financial Risk Disclosure Programs. ↩︎
- See, e.g., Hong Kong Institute of Certified Public Accountants (HKICPA), HKFRS S1 — General Requirements for Disclosure of Sustainability-related Financial Information. ↩︎
- See, e.g. 2030 Climate action plan | Norges Bank Investment Management ↩︎
- Corporate Sustainability Reporting Directive – Finance ↩︎
- In re Caremark Int’l, 698 A.2d 959, 1996 ↩︎
- The “bespeaks caution” doctrine is a judicial principle developed in U.S. securities law holding that forward-looking statements accompanied by meaningful cautionary language are generally not actionable under anti-fraud provisions if the accompanying warnings adequately disclose the risks that may cause actual results to differ. See Polin v. Conductron Corp., 552 F.2d 797, 806 n.28 (8th Cir. 1977) (articulating the “bespeaks caution” doctrine). ↩︎
- Net Zero Lawyers Alliance, “Transitioning Laws: Accounting for the Impact of Climate-Related Laws” (2025), p. 8, available at https://www.netzerolawyers.com/publications/transitioning-laws-accounting-for-the-impact-of-climate-related-laws ↩︎
- According to the Grantham Institute 2025 Snapshot of Global Trends in Climate Change Litigation. https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2025/06/Global-Trends-in-Climate-Change-Litigation-2025-Snapshot.pdf ↩︎
- In the UK, there is a legal opinion that suggests Directors have a duty to consider sustainability in the financial statements. See, New legal opinion on true and fair shows company directors how to include sustainability in financial accounts — Social Value International ↩︎
- ICJ Advisory Opinion Obligations of States in respect of Climate Change, International Tribunal for Law of the Sea C31_Adv_Op_21.05.2024_orig.pdf, Inter-America Court of Human Rights seriea_32_en.pdf. ↩︎
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