Does COVID-19 pass the materiality test?

Every year companies need to decide what to disclose in their public-facing documents, with the ESG/sustainability report being one of them. Deciding what is “material” is part of this process. Materiality, in its simplest form, is a screening process that helps companies determine what to disclose.

The question I am getting now is: Is COVID-19 a material topic to our organization? Here’s my long-winded answer:

According to the GRI, a topic is material if it reflects the company’s most significant impacts on the economy, the environment or society, OR (this distinction is important for GRI) the topics represents the interests of stakeholders and can influence their decisions. Although COVID-19 or the effects or the pandemic are not impacts created by a company, I think we can agree that how a company handles COVID-19 (and how it continues to do so) is very relevant for investors providing capital, employees considering employment, customers buying products or companies looking to partner. Therefore, I would say if you use GRI, COVID-19 is a topic you need to include this year.

According to SASB, material issues are “issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors”. Whether it was negative (for most) or positive (pharmaceutical and tech companies, and essential retailers), financial impacts of the pandemic were virtually inescapable. For this reason, I think COVID-19 passes the materiality test for SASB.

According to the U.S. Supreme Court, “information is material if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information”. Would someone consider your report incomplete if it did not discuss the impacts of COVID-19? Most likely. Can they make a fully informed decision without COVID-19 information? Probably not.

If earnings calls are any indication of what we will see in annual and sustainability/ESG reports, COVID-19 discussions will play a leading role. The SEC even made a public statement in April 2020 before Q2 earnings calls and earnings press releases stating that companies should explain, along with their financial positions, their COVID response plan (protection measures) and the projected impacts on their operations.

In summary, I think it’s safe to say: YES, COVID-19 passes the materiality test and should be included in the sustainability/ESG report.

This only leads to more questions. In the next few posts, I will be answering “What risks does COVID reveal about your business? And how can companies frame the COVID-19 conversation?”