Materiality in social and environmental disclosures in financial reports depends on what is relevant to the reporting organisation and /or to its stakeholders. Material issues here are those that can influence the decisions and action of all stakeholders, and they are more complex to apply than in traditional financial reporting. Once a company has a good understanding of how and why its environmental impacts are material to its business, it can establish clear objectives for minimising these impacts, measuring this environmental performance using KPIs, and setting targets to drive future action. Frameworks for identifying materiality are well established, and include those developed by AccountAbility and Trucost, as well as environmental management systems such as ISO14001 and EMAS.

Percentage based or precise quantitative materiality yardsticks are less relevant to environmental reporting where materiality is far more closely related to the nature and circumstances of an event or item, as well as its scale and magnitude. In order to determine what is environmentally material, the reporting organisation must have a clear understanding of its stakeholder needs and priorities, and these are often in a state of change or development.

Both the AMD and the UK Companies Act, 2006 have tentatively established a modest legal framework which should drive companies to combine successful enterprise with ethical and responsible corporate behaviour. Although the AMD and Companies Act require that the enhanced business review include social and environmental issues material to the company's business – these definitions of materiality are widening, so that what is material to the business must increasingly reflect that which is also material to society. Under the Companies Act, for the first time the fiduciary duty (the duty of directors to promote the success of the company in the collective best interests of it members or shareholders) is embedded in Statute, as well as in case law. In addition, both pieces of legislation encourage companies to follow the “precautionary principle” with regard to environmental impacts, so that where explicit environmental information is unavailable, the preservation of the environment should dominate decision making.

This is particularly relevant to emissions of greenhouse gases and climate change, and it is here that issues of environmental materiality and accountability coincide. While it is important for companies to adopt CSR in order to improve their image and lower their operational costs, it is also important to some sections of the financial community that all companies improve their performance on certain key issues, where the risks to investment can only be addressed by widespread action – such as with climate change. This is the rationale behind the Carbon Disclosure Project, in that “investors failing to take account of climate change in their asset allocations and equity valuations face serious investment repercussions over time”.

As in conventional accounting, where the legal status and boundaries of the reporting unit are vital for determining accountability and avoiding accusations of bias, so too in environmental reporting practice. Legal requirements and societal concerns are extending accountability for environmental impacts upstream and downstream of the reporting entity. This is typified by Hewlett Packard, whose sustainability strategy has evolved from pollution control and prevention to product stewardship and sustainable design. The company now takes responsibility for all stages of its product life cycle, from suppliers to final disposal and recycling.

In addition to extended accountability, companies need to be aware of their environmental performance in terms of both the direct and indirect influence it has on financial performance. For example, this influence may be direct in that it affects bottom line performance in terms of costs saved, or additional costs incurred, as well as indirect , in terms of affect on reputation or brand value. Environmental materiality has always had a secondary or proxy value in that it has long been regarded as indicative of consistently high standards of overall management and leadership. Now, the financial or tangible benefits from sustainability are growing as environmental cost structures are changing and the intangible benefits to reputation and brand equity are increasingly affecting competitive advantage.

The issue of changing environmental materiality is very well illustrated by UK food retailers, who currently seem to be falling over themselves and each other in order to demonstrate their sustainability credentials. Since the 1980's, these retailers have focused on the direct environmental impacts at the point of retail, which they can observe, take responsibility for, and control. Such impacts include store construction, waste generation and energy efficiency, impacts which fitted established information systems and decision making procedures, and for which solutions neatly enhanced their bottom line. However, more recently, retailers are taking responsibility for their upstream and downstream, indirect environmental impacts. They are doing this in response to the increasing recognition by their customers and regulators of the power they have in determining what they sell in their stores, how they can influence their suppliers' production conditions, how they can reduce their transportation impacts through distribution systems and how they may shape the amount and type of packaging supplied on the products they sell.

National UK food retailers have highly developed information systems which focus on energy use, waste generation and recycling practices which are metered for specific uses, as opposed to aggregated as part of operational costs. Such systems are designed to identify the environmental activities or impacts that the company has, and to assign revenues and costs to these impacts. By relating the costs of environmental damage to levels of output, companies are able to assess the relative materiality of their environmental impacts, and to assign values to their intangible environmental assets and liabilities.

UK food retailers are now extending their focus so as to consider how their supply chains generate indirect environmental impacts and market risks. They are increasing the attention they pay to transportation, distribution, processing, packaging, consumer use and end of life environmental issues. Companies such as Marks and Spencer and Tesco are examining the environmental impacts of product life cycles, at how the products they sell are designed, produced, sourced and disposed of. They are looking to influence producers and intermediaries through product specification, contracts, buying, supplier certification, collaboration and technical advice. They are looking to measure and label these impacts – particularly the carbon footprint of the items they stock. Because of their business nature, many retailers face highly complex intersections between differing environmental issues. Growing food alone can damage ecosystems, change the climate, consume vital energy sources and generate chemical pollution.

In future articles, I'll be looking in more detail at how retailers have developed information, transaction and management accountability systems which capture the necessary data in order to measure these impacts and set targets and actions for their reduction or elimination. I'll also be examining how retailers are assessing the business advantages of more advance accountability systems against their increased complexity and transaction costs, and how they are developing frameworks for the financial analysis of their sustainability actions using ratios and KPIs.

So what can be concluded about environmental materiality? We seem to be left with a number of uncertainties, including uncertainty over how far the proportion of environmental related benefit that accrues to a company's shareholders also accrues to society as a whole, and other stakeholders in particular. This is important as legislation such as the AMD and Companies UK is extending the responsibility that companies have towards their environmental impacts, and towards other stakeholders, in addition to financial shareholders.

Environmental materiality is growing ever more important to financial stakeholders as it enables organisations to make money with fewer negative externalities, the costs of which are increasingly being internalised. This generally means gains for other stakeholders by association, and may be the catalyst for transformational change in how some companies manage their environmental impacts and liabilities. However, how far such transformations may occur depends also on growing societal awareness and concern for these environmental impacts, the increased internalisation of environmental costs, and the extension of the long arm of the regulator.