When a company’s Chief Financial Officer hears the term “materiality,” what often comes to mind are quantitative financial thresholds, such as whether 1% to 5% threshold of revenue triggers a disclosure obligation. But when a Chief Sustainability Officer hears “materiality,” the focus may instead be on the extent of plastic waste’s impact on marine ecosystems. Why does the same concept of “materiality” take on such different meanings in financial statements and sustainability reports? And if a sustainability report contains inaccurate information, does the company face criminal liability risks comparable to those arising from false financial reporting?

To answer this question, the first thing we need to find out is whether misrepresentations in sustainability reports can give rise to criminal liability under the Securities and Exchange Act. At present, this remains an area without clear judicial precedent, though the potential risks are steadily increasing. False financial reporting is explicitly regulated under Articles 20 and 171 of the Securities and Exchange Act. Sustainability reports, however, are grounded in the “Rules Governing the Preparation and Filing of Sustainability Reports” issued by the Financial Supervisory Commission, which derive their legal authority from the “Operating Rules of the TWSE.” Therefore, whether such reports can be directly brought within the scope of the Securities and Exchange Act remains highly debatable.

That said, if courts in the future were to recognize sustainability reports as “business documents” under Article 20, Paragraph 2 of the Securities and Exchange Act, misrepresentations therein could likewise fall within the scope of Article 171, thereby significantly elevating criminal liability risks. As ESG information is increasingly incorporated into the sustainability sections of annual reports, any inaccuracies that materially affect investors’ decision-making could potentially trigger criminal responsibility.

However, even if criminal responsibility were to be implicated, courts would face considerable difficulty in determining “materiality” in the context of sustainability reporting. In financial reporting cases, courts assess whether the false information is sufficient to influence the investment decisions of a reasonable investor. However, determining materiality in sustainability reports is far more complex. Sustainability issues are often difficult to quantify, involve long-term and qualitative impacts, and lack the benefit of well-established judicial precedents comparable to those in financial reporting. Divergent definitions of materiality under different international standards further amplify the uncertainty of judicial assessment.

From the perspective of applicable standards, materiality in financial statements is relatively less disputable. It is primarily informed by “materiality in audit planning and execution” as prescribed in the Statement of Auditing Standards, the U.S. SEC’s Staff Accounting Bulletin No. 99, and Taiwanese judicial practice, focusing on both quantitative factors (such as the magnitude of amounts involved) and qualitative factors (such as fraud), as well as the impact on investor decision-making. Sustainability materiality, however, presents a more open question. While the competent authority’s “Rules Governing the Preparation and Filing of Sustainability Reports” require companies to prepare sustainability reports in accordance with GRI Standards, future judicial cases will still need to confront which framework should apply: GRI, or other standards such as SASB, TCFD, or IFRS S1/S2. After all, GRI emphasizes an entity’s material impacts on the external world (the concept of double materiality), whereas IFRS S1/S2 focus primarily on impacts on a company’s financial performance and enterprise value (the concept of single materiality). The divergence in standards complicates legal analysis.

From the perspective of report users, materiality in financial statements is concerned with a relatively clearly defined audience, which is investors. Sustainability reports, however, address a much broader range of stakeholders, including shareholders, suppliers, customers, consumers, employees, communities, and even non-governmental organizations, each with differing priorities. This raises a further question: from which stakeholder’s perspective should courts assess materiality?

While these challenges remain for future judicial resolution, companies should nonetheless take proactive steps to prepare. This includes clearly distinguishing between financial and sustainability concepts of materiality, establishing cross-departmental materiality assessment mechanisms, and explicitly disclosing the standards applied in sustainability reports. In addition, companies should implement robust internal control procedures with clearly defined accountability to avoid ambiguity regarding disclosure responsibility. Finally, introducing third-party assessment and internal audit processes can help translate qualitative risks into more measurable terms and ensure the accuracy and credibility of disclosed information, thereby reducing legal and reputational risks arising from greenwashing or misstatements.

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This article was published in the Expert’s Commentary Column of the Commercial Times. https://www.ctee.com.tw/news/20250806700104-439901