Making Non-Financial Information Count : Accountability and Materiality in Sustainability Reporting

National and international lawmakers are increasingly focusing on sustainability reporting as a way to foster socially and environmentally responsible corporate conduct. Within the European Union, Directive 2014/95/EU has introduced reporting obligations for certain large enterprises on a variety of non-financial issues. Non-Financial disclosure is, however, just one of the legal strategies that the European lawmaker has put in place to foster sustainability. The European regulatory framework aims, in fact, at using shareholders and their monitoring power as a way to stir corporate behavior. Since corporate boards are accountable to shareholders only, if investors and financial intermediaries start paying attention to social and environmental issues in their investment decisions, corporate conduct should adjust accordingly. The key tool that makes this mechanism work is non-financial disclosure, which provides investors and market operators with the data to make informed, socially and environmentally responsible decisions. The content of the disclosure is significantly shaped by the notion of materiality, which has been traditionally employed to determine which financial information companies should disclose. This paper argues, however, that the concept of materiality in non-financial disclosure cannot and should not be a mere duplication of materiality in accounting, auditing and financial markets regulation. The relevant benchmark to assess materiality remains the “reasonable investor”, but for the purposes of non-financial disclosure the reasonable investor pays attention to the long-term risks and opportunities of sustainability policies and issues. As a result, we advocate for a forward-looking and investor-based criterion in order to determine whether the disclosure enables to understand the impact of the company's activity on the environment, society and relevant stakeholders. This should lead to a more narrative and consequence-oriented reporting on the non-financial issues on which the company has, or is likely to have, the greatest impact