ESG Materiality Factors in the Fourth Industrial Revolution - Measuring Stakeholder Externalities via Dynamic Materiality

Abstract

Materiality is the notion in accounting that applies to information that is important for an investment decision and is central to the definition of fiduciary duty. Recently ESG (Environmental, Social and Governance) investors have coalesced around the concept of dynamic materiality, Dynamic Materiality™ is the concept that companies, industries, and sectors have unique materiality signatures that evolve over time, determined by factors such as shifts in business models, changing consumer preferences, emerging technologies and new regulations. Dynamic Materiality is driven by how stakeholders respond to events, behavior and externalities experienced in relation to a company or an industry. This stands in contrast to the view that materiality is relatively static and can be defined by a company. We expand on Dynamic Materiality to provide empirical evidence that materiality has distinct dimensions in addition to industry and sector: region, country, economic development, and company size. These dimensions underpin the Truvalue ESG Materiality Factors, the first holistic materiality approach. We examine how the Materiality Signatures evolves across these dimensions. Furthermore, we present evidence that conventional ESG research frameworks operating on a single global materiality model are no longer suitable in the age of the Fourth Industrial Revolution.