Materiality
Whether an item is large or relevant enough to change a decision or a valuation. In ESG analysis, which issues are likely to affect a company's cash flows, risk or cost of capital in its particular industry.
Where you will meet it
Materiality appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain the ways ESG risks and ESG-driven investment opportunities can be found and assessed
“Start with materiality: which environmental, social and governance issues are likely to affect a company's cash flows, risk or cost of capital in its industry.”
- Explain how a proposed corporate restructuring is first assessed
“The trap is measuring materiality against the target rather than the issuer.”
Practise it
Practise materiality until it is automatic: questions that explain every wrong option.
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