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A review of ex ante and ex post materiality measures, and consequences and determinants of material disclosures in sustainability reporting

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Asif Huq at Dalarna University
Asif Huq
Mahsa Mohammadrezaei
Mahsa Mohammadrezaei
Mahsa Mohammadrezaei
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Abstract

Purpose: The purpose of the review is to synthesize the research on materiality measures of sustainability reporting and highlight how preparers, users, auditors, regulators, and other stakeholders assess or determine the materiality in sustainability reporting. The review further summarizes the findings on the consequences and determinants of material disclosures in sustainability reporting. Several directions for future research are also discussed. Design/methodology/approach: This study provides a systematic review of materiality measures developed in the context of sustainability reporting. This synthesis of the literature summarizes the existing methodologies of measuring materiality. It also evaluates the strength and limitations of existing methods and approaches for measuring materiality in sustainability disclosures. Findings: We find that the ex post materiality measures are simplistic and unidirectional in nature and ex ante materiality measures lack external validity and are generally narrow in focus - for example, focused on single firms or industries. Another major limitation in the current literature is the absence of robust empirical investigation of double materiality in sustainability reporting and a vast majority of the measures are developed without stakeholder engagement. Lastly, we document that the findings on determinants of material disclosure are fragmented and inconclusive, and along with the literature on the consequences of material disclosure is rather unexplored. Originality: The study explains the connections and differences between the various materiality measures. We document that materiality is measured in two distinct ways, ex ante and ex post and often times without stakeholder engagement. Moreover, given a vast majority of the measures rely on manual content analysis, they suffer from reproducibility and scalability.
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Version: April 2024
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A review of ex ante and ex post materiality measures, and
consequences and determinants of material disclosures in
sustainability reporting
Asif M Huqa and Mahsa Mohammadrezaeib
a Department of Business and Economic Studies, Gävle University, Sweden; Department of
Information and Engineering, Dalarna University, Sweden.
bTelfer School of Management, University of Ottawa, Ottawa, Canada.
Abstract
Purpose: The purpose of the review is to synthesize the research on materiality measures of
sustainability reporting and highlight how preparers, users, auditors, regulators, and other
stakeholders assess or determine the materiality in sustainability reporting. The review further
summarizes the findings on consequences and determinants of material disclosures in
sustainability reporting. Several directions for future research are also discussed.
Design/methodology/approach: This study provides a systematic review of materiality
measures developed in the context of sustainability reporting. This synthesis of the literature
summarizes the existing methodologies of measuring materiality. It also evaluates the strength
and limitations of existing methods and approaches of measuring materiality in sustainability
disclosures.
Findings: We find that the ex post materiality measures are simplistic and unidirectional in
nature and ex ante materiality measures lack external validity and are generally narrow in focus
– for example, focused on single firms or industries. Another major limitation in the current
literature is the absence of robust empirical investigation of double materiality in sustainability
reporting and a vast majority of the measures are developed without stakeholder engagement.
Lastly, we document that the findings on determinants of material disclosure are fragmented
and inconclusive and along with the literature on consequences of material disclosure is rather
un-explored.
Originality: The study explains the connections and differences between the various
materiality measures. We document that materiality is measured in two distinct ways, ex ante
and ex post and often times without stakeholder engagement. Moreover, given a vast majority
of the measures rely on manual content analysis, they suffer from reproducibility and
scalability.
Keywords: Literature review, materiality, sustainability, materiality determinants, materiality
consequences
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Introduction
Materiality in sustainability reporting has experienced a surge of interest from academics,
standard setters, and practitioners. The debate centers on the choice between a single- or double-
materiality approach to sustainability disclosure. North American standard setters, for example,
The International Sustainability Standards Board (ISSB), lean toward the single-materiality
approach. This methodology is anchored in its decision-usefulness for prospective investors,
emphasizing the financial ramifications of disclosed data. Furthermore, in the single-materiality
approach, an issue is considered material if it is likely to affect the financial performance of the
firm thus employing an outside-in perspective. In contrast, European Union (EU) regulators
advocate for a double materiality perspective. This approach obliges firms to evaluate both their
financial and broader societal impacts during corporate sustainability decision-making
processes (Abhayawansa, 2022; Jørgensen et al., 2022). Thus double-materiality approach also
takes an inside-out perspective where an issue is considered material not only based on its
impact on the firm but also taking into account the firm’s impact on the outside world.
Tracing back, the ethos of single materiality has its roots in the early phases of financial
accounting marketization (Frishkoff, 1970). Conversely, double materiality, although
conceptually intriguing, is relatively nascent in regulatory practice. A testament to its evolving
significance is the EU's recent legislative measure, the Corporate Sustainability Reporting
Directive (CSRD, EU 2022/2464), introduced in November 2022. This directive, planned for
phase-by-phase implementation from 2025 through 2029, distinctly underscores double
materiality approach to sustainability. Moreover, while the Nonfinancial Reporting Directive
(NFRD, EU 2014/95) of 2015 implicitly hinted at double materiality, it lacked the explicit rigor
and enforcement clarity that the CSRD promises.
Despite extensive research on sustainability, a specific focus on the materiality of
sustainability information remains rather under-explored (Fiandrino & Tonelli, 2021; Michelon
et al., 2022). The materiality concept in accounting predominantly revolves around three
groups: preparers, auditors, and users. Each group often has its own interpretation and
application, complicating the matter further (Hicks, 1964; Messier et al., 2005). For instance,
in sustainability reporting the decisions of preparers on what is materially significant can be
influenced by strategic objectives, sometimes obscuring the true essence of the report (Cho et
al., 2012). Firms may also define materiality differently based on whether they follow an
intrinsic, instrumental, or integrated corporate sustainability strategy, affecting how material
issues are identified and prioritized (Adolph & Beckmann, 2024). In fact, the transparency of
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sustainability reporting has been questioned, with critiques highlighting issues like irrelevant
data disclosures and over-generalized content (Boiral & Henri, 2015; Dubbink et al., 2008).
Moreover, recent studies documents that there are inconsistencies between firms' declarations
and their actual adherence to double materiality principles, highlighting a gap between policy
and practice (Correa-Mejía et al., 2024). This has led to the introduction of new measurement
techniques and sustainability reporting standards in an attempt to elevate the quality of
sustainability disclosures (Jørgensen et al., 2022). Several studies and surveys, such as those by
Ferrero-Ferrero et al. (2020) and Kitsikopoulos (2018), have pinpointed significant gaps in
current sustainability reporting practices. These gaps are rooted in three key challenges,
elaborated on in the following sections.
First, there is a growing body of research that emphasizes the subjective and general
nature of sustainability reporting and the potential for opportunistic use of sustainability reports
for greenwashing (Kim & Lyon, 2014; Laufer, 2003). Second, parallel to this, other critical
works that examine sustainability reports, demonstrated how irrelevant and lacking (too
general) the information is for stakeholders, highlighting the absence of specific, quantifiable
metrics and heterogeneous indicators (Dubbink et al., 2008; Kim & Lyon, 2014; Yilmaz et al.,
2008). It is argued that sustainability reports are primarily limited in their ability to determine
which issues to measure and how to respond to these issues (Whitehead, 2017). The third
important issue is the existing divergence between the domains of sustainability assessment,
reporting, accounting, and management control in both theory and practice among sustainability
standards. This is a major barrier to comprehending the integration and a common
understanding of sustainability at the firm level (Witjes et al., 2017).
These complexities inevitably affect the authenticity and quality of the contents in
sustainability reports (Hahn & Kühnen, 2013; Lock & Seele, 2016; Witjes et al., 2017).
Consequently, firms face a core challenge: their constrained ability to pinpoint material issues
for diverse stakeholders and subsequently prioritize these matters in line with stakeholder
expectations (Ferrero-Ferrero et al., 2020; Torelli et al., 2020). Experts, both from academia
and industry, advocate for comprehensive materiality assessments to refine sustainability
reporting and effective business strategies (Khan et al., 2016; Rogers & Serafeim, 2019;
Whitehead, 2017). As noted by Bartels et al.(2014), a materiality assessment transcends mere
reporting, serving as the foundation for sustainability strategy, stakeholder engagement, and
performance management. Indeed, a recent review of the scholarly work on materiality in
sustainability reporting by (Fiandrino et al., 2022) highlights, among other important issues, the
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exponential growth in materiality research in the last two decades along with the diversity in
how materiality is defined, measured and assessed.
Fiandrino et al. (2022) review offers a commendable initial synthesis of emerging
literature on materiality in nonfinancial reporting, emphasizing prevalent research methods and
theoretical foundations. Yet, our review endeavors to offer a more comprehensive
understanding of how materiality in the context of sustainability reporting is measured,
evaluated, and gauged by preparers, auditors, and users. Exploring these research dimensions
becomes even more pertinent against the backdrop of the ongoing discourse on single- versus
double-materiality approaches and regulatory reforms of sustainability reporting.
The remainder of the review is organized as follows: Section 2 outlines the review
methodology and sample descriptives, Section 3 summarizes the overall findings of the review,
Section 4 summarizes the various ex ante materiality measures, Section 5 summarizes the
various ex post materiality measures, Section 5 and 6 summarizes the findings on consequences
and determinants of materiality disclosures respectively, and Section 6 ends with concluding
remarks and suggestion for future research.
Review Methodology
The main objectives of the review are as follows: i) How is materiality measured in the context
of sustainability reporting and ii) What are the consequences and determinants of materiality
disclosures. To attain the objectives of the review we conducted a systemic review of the
academic literature based on the guideline outlined (Kitchenham et al., 2009). Specifically, we
use the following search query:
“materiality and (sustain* or csr or “non-financial” or nonfinancial or esg)’
We opted for Scopus as our primary search platform because of its expansive reach
covering a multitude of respected and well-established journals. To maintain the integrity and
quality of our review, we decided to include only peer-reviewed journal articles, thereby
excluding conference papers, book chapters, and other types of publications. Our search was
executed in April 2024, without setting any time frame limitations, enabling us to incorporate
both pioneering and recent research contributions.
In the initial phase of our systematic literature review, a thorough screening process was
conducted to filter out articles based on predefined inclusion and exclusion criteria, ensuring
replicability and thoroughness in our methodology. Our first step involved analyzing abstracts
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to pinpoint articles that directly correlated with our review's objectives. We looked for studies
that delve into the assessment, determination or measurement of materiality in sustainability
disclosures or issues and studies that document the consequences and determinants of material
disclosure. Following this, a comprehensive full-text screening of the shortlisted articles was
undertaken to finalize the selection of the papers for inclusion in our review. Table I below
summarizes the sample included in this review. It may be noted here that a vast majority of the
studies do not explicitly work with materiality in sustainability even though the term
“material*” appears in the title, abstract or author keywords of the studies. Such studies are
excluded from the review after reading the full text of those articles.
Table I: Summary of studies included in the review
Steps
Description
Articles
Step 1
Total search returns based on the keywords
125
Exclusion
criteria
Articles that do not relate to assessment or measurement or
determination of materiality in sustainability reporting or activities
9
Step 2
Excluded after screening abstract
21
Step 3
Excluded after screening full paper
53
Number of articles included in the review
40
Table II summarizes the sample distribution over the years and the main methodology used to
data collection.
Table II: Sample distribution across year and method employed.
Year (20...)/
Method
13
14
15
16
17
18
19
20
21
22
23
24
Total
Archival
1
1
1
2
4
3
4
2
4
4
3
2
31
Experiment
1
2
1
4
Survey
1
1
2
Interview
1
1
Case study
1
1
2
Overall Findings
From the review of 40 articles included in this study, four themes/patterns emerged among the
studies that worked with materiality in sustainability. The two dominant themes are ex post and
ex ante evaluations of materiality. For the scope of this review, we differentiate between ex post
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and ex ante evaluation of materiality in sustainability in the following manner. Ex post
evaluations gauge materiality in hindsight, scrutinizing which sustainability disclosures were
material after their release. Studies in this theme predominantly evaluate sustainability
disclosures or ESG ratings from various proprietary raters to assess or determine materiality. In
assessing materiality purely based on disclosures in the sustainability reports, most studies
generally rely on manual content analysis methods to capture the depth and breadth of
information provided across a particular sustainability issue. Thus, measures constructed to
evaluate materiality are often not validated against stakeholder expectations or prevailing
standards such as GRI, IR, or SASB. A handful of these studies engage with stakeholders
through surveys or interviews or any other means for external validation. While studies
evaluating materiality based on ESG ratings predominantly use SASB materiality map to seek
external validation of the materiality measures. On the other hand, ex ante evaluations aim to
forecast materiality, i.e., attempting to identify sustainability issues that are deemed to be
crucial for a specific firm or industry prior to their disclosure. Intriguingly, many ex ante
measures are often formulated based on ex post sustainability disclosures. Nonetheless, studies
of ex ante evaluations introduce many innovative ways of materiality evaluation.
Predominantly, it is generally the standard setters like IIRC, GRI, SASB, etc.1, that determine
materiality ex ante at macro-level, however, these studies bring more nuanced approaches to
evaluate materiality at micro-level. The next two themes are consequences and determinants of
material disclosure. It may be noted here that, most studies develop ex post materiality measure
also studies the determinants of material disclosure based on the materiality measure developed,
thus scholarly work grouped under the two themes greatly overlap. The main results across the
four themes are summarized in Table III.
1 For example, materiality definition of the three most recognized standard setters is: i) IIRC (International
Integrated Reporting Council): In the realm of ex ante materiality determination, IIRC focuses on the strategic
foresight. It encourages organizations to foresee which resources and relationships are most relevant to their future
success and their capacity to create value. This forward-looking approach allows for early identification of
potential risks and opportunities (IIRC, 2020); ii) GRI (Global Reporting Initiative): GRI's framework involves a
proactive stakeholder engagement process. Prior to reporting, organizations are encouraged to interact with
stakeholders to ascertain which sustainability topics are of utmost importance to them. This iterative dialogue
serves as an ex ante mechanism to shape the reporting content and prioritize issues (GRI, 2024); iii) SASB
(Sustainability Accounting Standards Board): SASB's ex ante materiality perspective is rooted in financial
materiality. The Board encourages firms to forecast how certain sustainability topics may have direct financial
implications in the future, even if they don’t currently. By analyzing future trends, market demands, and regulatory
landscapes, firms can make informed decisions on what topics are likely to be material in upcoming years (SASB,
2022).
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Ex Ante Materiality Evaluations
Studies on ex ante measures of materiality are rather limited. Some of these measures are
developed through deterministic modelling (Calabrese et al., 2016; Corazza, 2018; Della Volpi
& Paulino, 2018; Hsu et al., 2013; Whitehead, 2017; Z. Xu et al., 2019) while other studies
employ experiments to identify material issues for different groups (e.g., (Moroney & Trotman,
2016) for managers or preparers; (Green & Cheng, 2019) for auditors; (Reimsbach et al., 2020)
for employees and stock market participants. There are some studies that employ survey
methods to identify material issues – e.g., (Maama et al., 2022) from the perspective of minority
shareholders (Karim et al., 2013) and from the perspective of managers.
Deterministic and Archival Based
Hsu et al. (2013) developed a materiality analysis method based on risk priority numbers
(RPNs) for a failure modes and effects analysis (FMEA) and implement an analytic network
process (ANP) to identify material sustainability issues. First, they interview managers to assign
RPNs for sustainability issues for the FMEA model. The evaluation criteria for FMEA for
various sustainability issues are: i) the percentage of concerned stakeholders (Occurrence – O),
ii) the level of concern to stakeholders (Detected – D), and iii) the impact of issues to strategic
communication (Severity – S), where RPN = O x D x S. The criteria of occurrence and detection
were then launched based on the opinions of different stakeholders to translate stakeholder
interests into a series of decisions on what to include and exclude in the sustainability report.
Next, the decision makers assign a pair-wise importance value to any two criteria at a time for
a specific sustainability issue. Finally, the ANP method is employed to determine the relative
weight (i.e., stakeholders’ vs managers’ opinion) for the different sustainability issues to
identify the material sustainability issues.
Calabrese et al. (2016) developed a fuzzy analytical hierarchy process method for
materiality assessment in sustainability reporting purely from the perspective of the preparers.
The model is developed based on GRI guidelines where decision makers are asked to pair-wise
rank sustainability issues identified from GRI guidelines for their firm, the ranks are then
normalized and a fuzzy AHP modelling is applied to identify the material issues. They validate
their model by ex post analysis of sustainability reporting of an Italian SME operating in design,
manufacturing and consulting for water projects and hydraulic components. The corroborate
the validation through interviewing decision makers (e.g., CEO) of the firm. It may be noted
that the feedback is based on preparers and do not incorporate stakeholders’ perception of
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material issues. In similar vein, Della Volpi & Paulino (2018) suggests an input and output
model to identify material issues in the service industry. They adopt a three-stage modelling. In
the first stage, a literature review is undertaken to compile data related to the environmental
aspects of accommodation services. In the second stage, the concept of life cycle thinking is
applied in order to systematize data obtained from the literature review and classify it according
to inputs and outputs. In the third stage, a service triangle approach is applied in order to
incorporate the elementary stages of the service provision and the environmental aspects
associated with the materiality sources of accommodation.
Whitehead (2017) identifies material issues in the context of the wine industry in New
Zealand. They perform a meta-analysis on 13 source documents2 from stakeholder perspective
of five different groups: scientific, regulatory, consumer, societal and business/industry. They
find natural capital to be the most material issue for the wine industry. Using a similar
methodological approach, Corazza (2018) illustrate a tool (CSR4UTOOL) primarily developed
for SMEs to self-assess sustainability issues that can be considered material for their
stakeholders. As a priori, the material information is classified by benchmarking GRI model
(3.1 version and related sector supplements), GBS (national Italian sustainability reporting
standard), GRI INGO, AA1000 Stakeholder engagement, OECD guidelines, UN Global
Compact, Italian NPOs Agency reporting guidelines, SA8000, ISO 14001, ISO 26000 and the
EMAS scheme. The tool is developed as a web application that can ex ante facilitate SMEs to
identify material issues for their stakeholders while it can be also used ex post to evaluate
sustainability performance.
Xu et al. (2019) incorporate risk assessment in materiality analysis and develops a life
cycle assessment (LCA) model to prioritize resource allocation among supply chain stages from
two distinct perspectives (e.g., deep- versus broad-structure supply chain) for mitigating supply
chain sustainability risk. In the US context, they use the apparel sector as an example of deep-
structure supply chain where production at sub-stages takes place sequentially and the
automotive sector as the broad-structure supply chain where production at various lower-stage
is carried out simultaneously to meet a higher-stage production. The model evaluates supply
chain sustainability risk in three steps. In the first step, major stages of the supply chain is
2 Including UNEP yearbook of sustainability issues, OECD eco labels, a survey on perception of sustainability
issues by SustainAbility-GlobeScan, ITC standards map, report on wine sustainability by CEEV, research on
sustainability issues of NZ wine industry by NZSD, Deloitte Millennial Survey on perception of society on
sustainability, WWTG sustainability matrix, and Life cycle assessment of wine making based on the work of
Ardente et al. (2006).
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mapped, which requires a comprehensive understanding of the supply chain context. In the
second step, Supply chain sustainability risk is quantified using risk assessment space analysis
(i.e., risk based on three dimensions comprising operational, social, and environmental risks)
and materiality analysis (i.e., risk based on two dimensions comprising location-based risk that
is the potential risk relevant to the supplier's location and activity-based risk that is the potential
risk relevant to the manufacturing activity). The third step is not systematically articulated
rather business, depending on their priorities, improve on the risks quantified in step two by
(re)allocating resources to the various supply chain stages identified in the first step.
(Sanatkumar & Berka-Harnmeijer, 2024) use Multi Criteria Decision Analysis (MCDA)
to evaluate and prioritize environmental, social, and economic goals by integrating them into
the decision-making process across different corporate scenarios. Through action research,
MCDA was applied to three use cases within the corporations, where it facilitated the
development of decision models by collaborating with relevant staff. These models enabled the
ranking of sustainability issues based on a comprehensive set of criteria and measures, which
were tailored to reflect the unique goals and challenges of each scenario. The implementation
of MCDA proved effective in uncovering and weighing the potential impacts and trade-offs of
various sustainability initiatives. It also promoted a more inclusive stakeholder engagement
process, which was instrumental in challenging and refining the traditional focus on cost
minimization.
Experiment Based
Moroney & Trotman (2016) set up a 2 x 2 x 2 experimental design with two within-subjects
manipulation (i.e., materiality in financial and water disclosures). While risks of breaching a
contract and community impact were each manipulated at two levels between subjects.
Participants comprised of 82 auditors from three Big 4 accounting firms. Of whom 48 were
managers and 34 were seniors with an average audit experience of 5.2 years. They find that
auditors’ assessment of financial and non-financial (water) materiality are significantly
different. This difference is significantly greater when there is no risk of breaching a contract
than when there is a risk of breaching a contract.
Green & Chang (2019) also use auditors as participants with a 2 x 2 x (2) experimental
design where they manipulate two independent variables. The first independent variable is their
client firm's strategic focus and manipulated with strategic focus on supply chain management
versus customer service. Their second independent variable is the absence or presence of a
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strategy map. In their set-up, the within-subject independent variable manipulation relates the
materiality assessments on NFPI relevant to a customer service focus versus supply chain focus
strategy. 77 auditors from Big4 audit firms took part in the experiment with an average audit
experiment of 4.83 years. The results show that, while setting materiality thresholds, auditors
do not consistently distinguish strategically relevant versus irrelevant nonfinancial performance
information. They also find that the presence of a strategy map has a mediating effect. For
example, a misstated nonfinancial performance information of both high and low strategic
relevance is assessed to be more material than the low strategic relevance nonfinancial
performance information in the absence of a strategy map compared to the presence of a strategy
map NFPI.
Reimsbach et al. (2020) implement a 2 x 2 full-factorial between-subjects experimental
design. Participants comprised of 129 capital market participants and 121 potential employees
and were assigned randomly to one of the four experimental groups. They find that nonfinancial
information is more material for potential employees than for capital market participants.
Moreover, capital market participants assess nonfinancial information about energy to be more
material than nonfinancial information about biodiversity. While, for potential employees, the
perceived relevance of receiving nonfinancial information on the energy topic was statistically
indistinguishable from receiving information on the biodiversity topic. Finally, the differences
in materiality level of energy versus biodiversity are larger in the case of a strong change in
nonfinancial performance for capital market participants.
Survey Based
Karim et al. (2013) investigate how firm size and public/private affiliation affect voluntary
disclosure decisions concerning quantitatively immaterial nonfinancial information. They
employ a survey with 24 cues (equal number of positives and negatives) which are potentially
identified as material by SEC. 136 managers participated in the survey and were asked to decide
which of the 24 cues should be disclosed voluntarily. They find that, managers of larger firm
recommend disclosing more items than managers of smaller firm. They do not find any
significant difference in materiality thresholds of private versus public firm managers. and
public firm managers have statistically equivalent qualitative materiality thresholds. They argue
that private firm managers strategically disclose most cues as they imitate a legitimizing
behaviour due to SEC and financing concerns.
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Maama et al.(2022) employ a survey among minority stakeholders (e.g., small
shareholders, staff, students, and community members) and ascertain materiality in disclosures
by assessing if the information needs of the various stakeholders were fulfilled by the sample
firms. Specifically, they include 36 firms listed in the Ghana Stock Exchange and classify their
reports of 2017 and 2018 based on GRI guidelines. While the study is more descriptive in nature
but operationalizes a useful method of materiality determination based on information needs of
minority stakeholders.
Materiality at Aggregate Level
Materiality evaluations are as important at macro level as it at micro level if not more so. Not
many studies evaluate materiality at macro level (e.g., country, region, city, etc.) A handful of
studies that do include Hill Clarvis et al.(2014) and Berquier & Gibassier (2019).
Clarvis et al.(2014) develops a framework (E-RISC) to assess the materiality of
environmental risks for the sovereign bond market. The E-RISC focuses on country level across
four dimensions (e.g., resource balance, trade risk, degradation risk, and financial resilience)
and 20 indicators. The framework allows users to assign weights to the 20 indicators based on
relative importance and helps to identify and quantify linkages between tangible environmental
risks and macroeconomic factors that are deemed to affect sovereign credit risk. Therefore, the
framework allows users to make a deterministic assessment of how environmental risks to be
factored into investment decisions in the sovereign bond market and thus may be considered an
ex ante materiality measure.
Berquier & Gibassier (2019) focuses on city level using a longitudinal case study
approach to follow the process through which a city and its residents tackle climate change. It
is an observational study that highlights the importance of appropriate development and
execution of governance mechanisms needed in shaping policies for and behaviors of its
residents, knowledge creation, and use of information and communication to attain the stated
objectives. The study also identifies two important discourses, namely “model city” and “good
citizen.” Where the identity of “model city” was created through giving visibility to important
environmental factors and because of institutional actors’ resolve and motivation. While
identity of “good citizen” was created through inclusiveness and engagement. The study thus
identifies important ex ante factors that are conditional for obtaining material sustainable
actions.
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Ex post materiality evaluations
The majority of the studies that seek to determine materiality ex post and heavily rely on content
analysis method. The studies are generally archival in nature and often test the determinants of
materiality disclosures proxied by the materiality measure developed ex post. Within this broad
category, the depth and breadth of materiality-related information in sustainability disclosures
often serve as the basis for content analysis-based measures. There are three variations of the
materiality measures developed based on content analysis: i) studies that solely rely on the depth
and breadth of the disclosures in sustainability reporting and do not validate the measure
through stakeholder engagement, ii) studies explicitly include stakeholder perception through
direct engagement to validate the measures, and iii) studies that implicitly include stakeholder
perception, e.g., cross-matching with ESG ratings or materiality issues identified by standards
such as GRI, IR, SASB, etc.
Approaches without stakeholder engagement
Fasan & Mio (2017) are one of the first ones to propose such a content analysis-based measure
and many have built on their work albeit with minor modifications. Notably, these measures
hinge on manual content analysis, which inherently limits scalability. Fasan & Mio (2017) rely
on manual content analysis in developing the following materiality measures:
1. Word count of “material”/“materiality” in connection with non-financial reporting or to
materiality determination process.
2. Relevance of materiality disclosure: a categorical variable on a scale of 0 to 5 depending
on the depth and breadth of materiality information disclosed.3
Building on the groundwork of Fasan & Mio (2017) framework, several other studies
have introduced their own adaptations including (Farooq et al., 2021; Maama et al., 2022; Ngu
& Amran, 2021; Pigatto et al., 2023; Ruiz-Lozano et al., 2022; Torelli et al., 2020) followed
the second construct of materiality, “relevance of materiality disclosure” of Fasan & Mio
(2017), with some minor modifications. For example, scoring on scale of 1 to 6, reference to
stakeholder related information in materiality disclosures, etc. Gerwanski et al. (2019) also
build on Fasan & Mio (2017) with significant modifications to the measure. Their study offered
3 Where “0” if there is no reference to materiality; “1” if a report only states that a materiality principle was
followed; “2” if the report includes a brief discussion of what is considered to be material; “3” if the report
communicates what material issues emerged from the analysis, i.e., beyond the discussion of what is material; “4”
if the process of materiality determination and the results are described in a greater detail; and “5” if the report
devotes significant attention to the materiality issue – which is of course a very subjective judgement.
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a considerably altered approach. Their metric accounted for the presence of a distinct
materiality section, the comprehensiveness of the identification process description, details on
various materiality facets, time horizons, materiality matrices, and discussions around risks,
opportunities, and mitigation strategies.
Aras et al. (2017) complement the content analysis method of materiality evaluation with
two additional methods, namely entropy and TOPSIS. Specifically, they first set four
sustainability indicators – economic, environment, social, and governance. In the next step, they
apply the content analysis method to extract disclosures across the four sustainability indicators
(events) – they define it as the criteria values. A decision matrix is then applied based on entropy
to extract weights for different disclosures (categories) within each event in subsequent steps.
The assumption is that categories of event may have unequal frequencies or probabilities.
Finally, they apply the TOPSIS method, which is a multi-criteria decision-making method, to
rank the entropy weights. They primarily aim to measure sustainability performance; however,
an alternative interpretation can be material disclosure across the sustainability indicators. In a
similar vein, albeit using a different methodology, Morgan et al. (2017) analyzes publicly
available data from large UK retailers to systematically evaluate their initiatives designed to
minimize consumer emissions. Their assessment is rooted in understanding the material impact
of these initiatives in the context of sustainable consumer behavior. They sequentially use two
frameworks: a modified version of The Framework for Strategic Sustainable Development
(FSSD) to evaluate if retailers' initiatives were likely to be successful in meeting their
sustainability objectives and a modified version of Individual Social Material (ISM) to assess
what context of consumer behavior is targeted (e.g., individual, social or material). The FSSD
is operationalized at five levels: if the retailers define a clear scope (systems level) and desired
outcome (success level), and if it lines up with the strategy (strategic guidelines level). Finally,
the actions undertaken to achieve the objectives (actions level) and the monitoring and learning
while operationalizing the actions (tools level). While ISM evaluates if the firm initiatives are
targeted at individuals directly or the societal norms and conventions or products or
infrastructure.
Beske et al.(2020) also developed a disclosure index based on manual content analysis.
Their index has the following dimensions: (a) definition of the materiality analysis, (b) the
aspects/topics reported and (c) the methods used to identify (c1) stakeholders and (c2)
aspects/topics. Karagiannis et al. (2019) investigates the sustainability issues disclosed by
airports and builds their materiality measure in the following manner. For a sample of 33 reports
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from their initial sample of 55 airports, they first identify the total number of material issues
reported in all 33 reports and subsequently constructs a measure for each airport through relative
frequency, i.e., number of material issues reported by an individual airport relative to the total
number of material issues identified for the sample of 33 reports. Mio et al. (2020) also
implements a relative frequency-based measure to classify material issues for an Italian
insurance firm. They first use an auto code function in a proprietary software to autocode their
sample of firm specific documents that deal with nonfinancial topics and is not produced by a
single firm function into themes. Next, by investigating the keywords within those themes they
connect to 20 predefined material issues. This process essentially identifies the most frequently
used words under a predefined number of themes (in this case 20 material issues).
Hassan et al.(2019) builds on the IIRC framework and uses a content analysis method to
construct their materiality score while focusing on higher education institutions in the UK. They
construct the score based on the presence/absence and the depth of information provided across
eight IIRC issues, i.e., organizational overview and external environment, governance, business
model, risk and opportunities, strategy and resource allocation, performance, outlook and basis
of preparation and presentation. They weight the disclosure index across the eight issues as
follows: no disclosure = 0, descriptive disclosure without any link to strategy, governance,
performance and prospect = 1, descriptive disclosure and link with all strategy, governance,
performance and prospect compare with historic position = 2, descriptive disclosure linked with
all strategy, governance, performance and prospect compare with historic, present and future
position = 3. A higher total score indicates a better alignment with the IIRC framework. Along
similar lines, Tirado-Valencia et al. (2021) focus on public entities and uses content analysis
and construct a measure namely “integrated thinking” across five dimensions based on
sustainability disclosure – connectivity, external focus, integrated planning, effective
governance, and integrated communication. The five dimensions are motivated from the IIRC
reporting framework and are further divided and scored across 16 variables that essentially
measure the depth and breadth of disclosure across the five dimensions, and one variable that
considers length of the reports. In a similar vein, (Setia et al., 2024) developed an index to
differentiate between financial materiality and impact (or double) materiality by hand-mapping
GRI’s G4 Guidelines with the UN Sustainable Development Goals. Their sample consisted of
40 firms from the International Integrated Reporting Council’s Pilot Programme Business
Network, spanning the years 2015 to 2017. A distinguishing feature of (Setia et al., 2024) is
that their approach distinguishes between financially material and impact-material
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sustainability-related information. They find that despite the <IR> Framework’s emphasis on
financial materiality, impact-material disclosures, especially those related to environmental
aspects, were more prominently reported than those on financial aspects. This indicates a richer,
multi-dimensional approach to materiality, where industry sensitivity and national legal
frameworks influence the balance of disclosures.
Approaches with stakeholder engagement
The studies discussed hitherto do not engage with stakeholders to verify if the measured
material is indeed considered material by various stakeholders. One exception is Calabrese et
al. (2015) who incorporates customer feedback in the process of evaluating material disclosures
by firms. Specifically, they developed a 3-step model to evaluate materiality disclosure based
on customer feedback. In the first step, they measure CSR commitment based on firms’
disclosure in sustainability reporting. In the second step, they survey customer for feedback on
firms’ disclosed CSR commitments. In the third step, they propose that the materiality
dealignment is the gap between customer needs and firm commitments. Sepúlveda-Alzate et al.
(2021) also incorporates stakeholder feedback in their principal component analysis to build
their materiality measure. They first manually identify sustainability related issues disclosed by
firms in their reporting. In the next step, the independently ask firms and stakeholders to
rank/prioritize each of the sustainability issues identified in three levels: low (1), medium (2)
or of high (3) importance.
Pizzi et al. (2023) provides an alternative measure of materiality evaluation by including
stakeholders’ perception in the process of materiality determination which they frame as
dynamic materiality. Their proxy for material disclosure is the extent of stakeholder
engagement with a specific CSR disclosure. They measure the extent of stakeholder
engagement through “favorites” and “retweets” of firms’ tweets on X (formerly twitter). They
also move away from evaluating traditional dissemination of nonfinancial information in CSR
reports to nonfinancial disclosure through social media platforms, specifically Twitter, in the
context of the COVID-19 pandemic. The study also highlights how firms are adapting their
accountability practices and how they communicate with stakeholders in response to emerging
challenges such as COVID-19 pandemic.
ESG Ratings-Based Approaches
One of the first studies to use ESG ratings to evaluate materiality is Khan et al. (2016) who
construct the materiality measure based on the KLD rating. They define materiality as the
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difference between KLD strength and KLD concerns of a particular sustainability issue
identified as material by SASB for a particular industry. Therefore, whether a sustainability
issue is deemed material for a particular firm is determined by its industry classification. This
materiality measurement approach was also adopted by others, e.g., Busch et al.(2022) and
Maniora (2018). A rather intuitive approach materiality assessment from ESG ratings is
developed by Busch et al.(2022).They specifically zoom in on environmental scores provided
by ISS-oekom and MSCI ESG IVA. Their materiality measure is the continuous improvement
on the two ESG ratings on environment where the continuous improvement is measured in two
variants at aggregate and individual environmental factor level. The two variants are: i)
difference between the change in score between two years and the change in score between two
years plus a tally on cumulative improvement over the years, and ii) average change in score
over the years.
Consequences of Material Disclosures
In an archival setup, Xie et al. (2023) uses Refinitv- and SASB-based E score to test if pricing
anomalies exist based on the E scores and finds the presence of financial materiality risk and
that shareholders expects higher return if exposed to shareholder-related environmental risk. In
other words, investors consider firms not engaging in material environmental management a
significant risk and ask for compensation for their exposure to this environmental risk.
Pratoomsuwan & Chiaravutthi (2018) implement a 2 x 2 between-subject experiment with 136
participants who are finance-related professionals, with the largest proportion being financial
analysts, credit rating analysts and investment bankers. They test the influence of explicit
assessment and CSR materiality on professional investors’ investment decisions. They find that
investor’s willingness to invest is greater in material CSR compared to immaterial CSR. The
assessment of willingness to invest in a firm’s stock is not affected by the presence or absence
of explicit materiality assessment. However, explicit assessment significantly removes the
effect of CSR performance on the investor’s investment judgment when CSR issues are
immaterial. Finally, Busch et al.(2022) show that continuous improvement on environmental
ESG score is positively associated with future accounting and market based corporate financial
measures.
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Determinants of Material Disclosures
In this section, we summarize the findings on the determinants of materiality disclosure. These
studies investigate material disclosure determinants based on ex post measures, discourse of the
materiality determination process, or the quality of materiality disclosure. We group these
determinants into financial & accounting metrics, corporate governance & leadership, reporting
characteristics, market & investment factors, institutional & regulatory context, industry
specifics, and business strategy. The sample period of these studies covers the period from 1991
to 2017, across multiple countries, and encompasses both longitudinal and cross-sectional
analyses. A Summary of findings from seven studies is presented in Table IV. Among these,
Maniora (2018) uses an ESG based measure of materiality, five studies use a depth and breadth
of information-based measure, with four using the construction developed by Fasan & Mio
(2017), and Gerwanski et al.(2019) using a similar measure with substantial modifications. The
latter six studies use a content analysis of CSR reporting-based approach.
Financial & accounting metrics are often used as control variables in the literature and
include abnormal accruals, leverage, profitability, and firm size. These factors are mostly found
to be insignificant as determinants of material disclosures. For example,(Ruiz-Lozano et al.,
2022) firm size to positively affect material disclosures in the Spanish setting while six other
studies found size having no significant effect on material disclosure; Farooq et al.(2021) found
leverage to be negatively associated with material disclosure in the Gulf cooperation council
countries while three studies in other setting found leverage to be insignificant; Fasan & Mio
(2017) and Farooq et al.(2021) found profitability to be positively associated with material
disclosure in countries participating in IIRC pilot program and GULF cooperation council
respectively but five studies in other setting found profitability to be insignificant. The mixed
results thus indicate firm fundamentals do not consistently explain material disclosure and that
there are endogeneity concerns partly from the perspective of measurement errors. Similar
reasoning applies to other factors studied as determinants of material disclosure. For instance,
corporate governance & leadership factors studied in the literature (e.g., presence of audit
committee, board gender diversity, board independence, board size, frequency of board
meetings, Big4 audit, stakeholder engagement); reporting characteristics measured as assurance
of CSR reports, ESG rating, prior experience in reporting, and readability of reports;
institutional (e.g., GDP, governance quality, regulatory quality, voice & accountability index)
& regulatory context (e.g., GRI, IIRC Directive, NFRD Directive) also provide mixed results –
either insignificantly or positively related to material disclosure. Among market-based
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measures, shareholding dilution to be negatively associated with material disclosure while other
measures such as Dow Jones Sustainability Index, FTSE MIB Index, Market-to-book, Tobin’s
Q, and cost of financing showed an insignificant relationship. Maniora (2018) included business
strategy related factors for a sample of US firms and found that prospector firms have a negative
relationship and defender firms have an insignificant relationship with material disclosure,
however, at aggregate, business strategy have no significant relationship with material
disclosure. Finally, material disclosure does not vary significantly across industries or due to
industry competition, however, sensitive industries have mixed results – either insignificantly
or negatively related.
In addition to the studies presented above, Boiral et al. (2020) shows that the materiality
determination process and interpretation of materiality is not consistent across rating agencies.
Mio et al.(2020) shows Integrated Reporting and Sustainability Reporting results in different
material issues. Finally, Puroila & Mäkelä (2019) find that an important determinant of
sustainability issue is the type of stakeholder and not stakeholders as a single-entity and there
is a great divergence between the stakeholders and the business on the importance of various
sustainability issues. It is worth noting that the study of Puroila & Mäkelä (2019) highlights the
complex nature and the importance of the double-materiality approach in sustainability. We
summarize some of the important findings from their work in Table V to portray our
preposition.
We want to point out that the depiction of Table V is our best approximation of the
message conveyed in Figures 1 and 2 of Puroila & Mäkelä (2019) and our evaluation of the
relevant explanations. Table V first highlights that a particular sustainability issue is not of
importance to all stakeholders, that is why the number and type of stakeholders are not
consistent across each of the reported sustainability issues. Secondly, the importance of a
particular sustainability issue often varies distinctively for the stakeholders as a group and the
business. Puroila & Mäkelä (2019) do not explicitly investigate nor discuss double
materiality, however, the divergences and lack of univocality of sustainability issues explains
the complexity of materiality in sustainability.
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Table V: Summary of Figures 1 and 2 from Puroila & Mäkelä (2018) to highlight the
divergence among stakeholder and the business on importance of selected
sustainability issue.
Sustainability issues
Interested
stakeholders
Importance to
stakeholders
Importance to
business
Customer satisfaction
Media
Regulators
Very high
Very high
Diversity and inclusion
Government affairs
Media
NGOs
Suppliers
Low to very low
Low to very low
Human and labour rights
NGOs
Low to very low
Medium to low
Regulation
Media
NGOs
Low to very low
High to very high
Responsible lending
Media
Regulators
High to very high
Medium to high
Supporting economic
growth
Government affairs
NGOs
Medium
Low
Concluding Remarks and Suggestions for Future Research
Purpose and Scope of the Review
This review sought to distill and amplify our understanding of how materiality in nonfinancial
disclosures is gauged, defined, and executed by preparers, auditors, and users as documented
in the extant scholarly work. While materiality has recently emerged as a focal point of
discussions, particularly within the single- and double-materiality debates, its empirical
examination in sustainability reporting remains in its infancy, highlighting a significant gap in
current research. Furthermore, even if incorporated, empirical evidence suggests that the
adoption of double materiality principles is often superficial among European firms. A study of
firms indexed in the Dow Jones Sustainability Index revealed that many do not adhere to the
stringent requirements of double materiality, posing a risk to the credibility of sustainability
initiatives and the Sustainable Finance policy in Europe (Correa-Mejía et al., 2024). This
finding emphasizes the urgency for empirical research that can inform more robust regulatory
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frameworks and assurance practices, ensuring that firms move beyond mere compliance to
genuinely integrating sustainability into their core strategies.
In summary, this review further highlights that even though some advancement has been made
in the area of materiality analysis in sustainability, empirical investigation of double materiality
is almost non-existent. Moreover, empirical analysis of materiality in sustainability is rather
fragmented and provides an inconclusive view. Our subsequent discussions elucidate these
observations.
Predominant Finding, Emerging Concerns and Research Gaps
Most of the materiality measures developed in the literature are too simplistic and unidirectional
in nature. For instance, the prevalent ex post materiality measure as devised by Fasan & Mio
(2017) ,its subsequent adaptations (Beske et al., 2020; Farooq et al., 2021; Gerwanski et al.,
2019; Hassan et al., 2019; Maama et al., 2022; Ngu & Amran, 2021; Pigatto et al., 2023; Ruiz-
Lozano et al., 2022; Torelli et al., 2020) and word-frequency based measures implemented by
Karagiannis et al. (2019) and Mio et al. (2020) predominantly ignores the double materiality
perspective and often overlooks the diverse stakeholder expectations as highlighted by Puroila
& Mäkelä (2019) and others. While a few exceptions exist, such as Calabrese et al. (2016),
their purview remains limited to a singular stakeholder group. Measures grounded in ESG
ratings, like those by Khan et al. (2016) and others, tend to prioritize investors, sidelining other
stakeholders. Moreover, industry-specific material disclosure variations, the influence of firm
age, or the pervasive issue of 'greenwashing' are seldom incorporated into these measures. The
current measures' inherent limitations underscore the need for multi-faceted metrics that are
scalable, discerning, and takes a double materiality approach in a more nuanced sense. That is,
measures that do not solely rely on the depth and breadth of disclosure ignoring the real impacts
of firm’s sustainability efforts.
Compared to ex post measures, ex ante measures are more nuanced but lack robust
validation. For instance, both Hsu et al. (2013) and Whitehead (2017) incorporate stakeholder
perspectives within their devised materiality measures, albeit using distinct research
methodologies. In contrast, Calabrese (2016) prioritizes the viewpoint of preparers, and Volpi
& Paulino (2018) emphasizes the lifecycle perspective, sidestepping direct stakeholder
considerations. However, a notable limitation across these studies is the narrow focus of the
developed materiality measures; the methodologies established by Hsu et al. (2013), Calabrese
(2016), and Volpi & Paulino (2018) are each anchored to a singular firm, while Whitehead
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(2017) is concentrated on a specific industry. A more general model is proposed by Xu et al.
(2019) from a supply-chain perspective; however, their approach do not provide adequate
guidance on how to prioritize risk and materiality in various supply-chain stages. Given this,
it's imperative to test the applicability of the developed measures across varied settings,
potentially broadening the spectrum of stakeholders and accommodating diverse industry
nuances.
Our propositions and suggestions are well supported by the experimental studies that have
illuminated compelling insights into the nuances of (im)material classification. Notably,
Moroney & Trotman (2016) and Green & Cheng (2019) elucidated the dynamic shifts in
auditors' materiality judgments when juxtaposing financial with nonfinancial items, particularly
under the shadow of information asymmetry. Reimsbach et al. (2020) further delineate the
contrasting valuation of financial and non-financial materiality across distinct stakeholder
groups such as investors and employees. This thread is mirrored in survey-based research;
Maama et al. (2022) underscore the heterogeneity in materiality judgments across minority
shareholders, while Karim et al. (2013) emphasize that managerial disclosure recommendations
bear a relationship to firm size. On the other hand, Puroila & Mäkelä (2019) document that
specific sustainability issues are prioritized differently within stakeholder groups and further
highlights the mismatch of firm versus stakeholders’ importance of a particular sustainability
issue. To add to that, the materiality determination process and interpretation of materiality is
not consistent across rating agencies (Boiral et al., 2020) nor across different reporting
frameworks (Mio et al., 2020). Collating these insights, it becomes evident that materiality
thresholds exhibit profound variability across and within the domains of users, preparers,
auditors, and standard setters. This accentuates the imperative for a more granular exploration
into the informational needs of these diverse actors, enhancing our holistic comprehension of
materiality thresholds in nonfinancial reporting. The findings also underscore an increasing
need for sophisticated, multi-dimensional measures to gauge material disclosures more
effectively and consistently.
As a closing note, it’s pivotal to highlight the double materiality facet- one of the most
debated nuances in sustainability disclosure. As established in the preceding discussions,
current discourses emphasize the unidirectional nature of present materiality measures. This
poses a critical lacuna, as empirical endeavors delving into nonfinancial reporting from a double
materiality vantage remain scant, urging for further scholarly pursuit in this arena.
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Swimming against the tide: back to single materiality for sustainability reporting
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