Shadows & Spotlight: Navigating the Materiality Divide in U.S. Corporate Reporting

Abstract

The increasing investor and stakeholder interest in the climate change risks of firms has prompted regulatory bodies like the Securities and Exchange Commission (SEC) in the US to propose mandatory climate-related disclosures. As the regulations are still under development, I analyze how the fundamental concept of materiality in reporting impacts the quality of disclosures. I create the first comprehensive index of corporate climate exposure to physical, regulatory, and stakeholder risks, and demonstrate that larger companies tend to underreport sustainability information under the current definition of materiality. I, then, show that the resulting blindspots have significant consequences as evidenced by the surge in climate litigation cases in the US. After analyzing the disclosure frameworks of the European Union (EU) and the most prominent non-governmental bodies, I conclude that while the SEC proposal is a step in the right direction, it could benefit from aligning more closely with the EU's double materiality principle to ensure that climate issues are fully addressed in US corporate disclosures.