For nearly a decade, debates over ESG – environmental, social, and governance – disclosures have dominated corporate law and securities regulation. Should companies be required to disclose information about climate risk, workforce diversity, or governance practices? At first glance, this appears to be a policy question. In reality, it is a doctrinal one. The ESG debate turns on a single concept that sits at the core of securities law: materiality.

In a new article, I argue that the ESG controversy has exposed a deeper problem. We lack a clear framework for understanding what materiality actually means.

The Limits of the Traditional Materiality Framework

U.S. securities law is built on disclosure. Public companies must provide investors with information that is “material,” meaning information that would affect the “total mix” available to a reasonable investor. That formulation, derived from TSC Industries, Inc. v. Northway, Inc. and refined in Basic Inc. v. Levinson, has prevailed for decades.

In practice, however, materiality is often treated as synonymous with financial significance. Critics of ESG disclosures rely heavily on this assumption, arguing that ESG information is nonfinancial, values-driven, and therefore immaterial. From this perspective, requiring ESG disclosure represents a departure from the core mission of securities law.

But this framing is incomplete. Materiality has never been strictly limited to financial metrics. Courts have long recognized that certain nonfinancial facts – such as risks associated with key personnel or corporate misconduct – can be material if they would matter to investors. At the same time, not all information that might be socially or politically important belongs in securities disclosure.

The problem, then, is not simply whether ESG is material. It is that materiality itself is doing too much conceptual work without sufficient structure.

A Taxonomy of Materiality

To bring greater clarity to this debate, the article introduces a taxonomy that separates materiality into three distinct, but overlapping, categories: substantive, regulatory, and procedural.

Substantive materiality reflects the traditional understanding of the concept. It includes information that affects a firm’s financial performance, risk profile, or valuation. This category captures the core of what investors have historically cared about, but it is not limited to purely financial data. Nonfinancial information can also be substantively material if it affects economic outcomes.

Regulatory materiality refers to information that becomes material because the law requires its disclosure. Once disclosure is mandated, failure to comply creates legal and financial risk. In this way, regulation can transform information that might otherwise seem immaterial into something that has real economic consequences.

Procedural materiality – the article’s central contribution – captures information that investors themselves demand. Investors express these demands through shareholder proposals, engagement with management, and participation in the regulatory process. When investors consistently seek certain types of information, they are signaling that the information is important to their decision-making.

These three categories overlap, but they are not coextensive. Distinguishing among them helps explain how disclosure regimes develop and why some forms of disclosure are more controversial than others.

Conflict Minerals and ESG: A Tale of Two Disclosure Regimes

The article illustrates this taxonomy by comparing two prominent disclosure regimes: conflict minerals and ESG.

The conflict-minerals disclosure requirement, enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, required companies to disclose whether their products contained minerals from warring regions in the Democratic Republic of Congo. The purpose of the rule was humanitarian – to reduce violence and human rights abuses. At the time of its adoption, the requirement was not driven by investor demand and did not clearly affect firm value. It is best understood as an example of regulatory materiality without underlying substantive or procedural support. Over time, however, the requirement generated compliance costs, reputational pressures, and other financial consequences. In this way, regulatory materiality created downstream substantive effects.

ESG presents a stark contrast. Rather than originating with legislators, ESG emerged from investors themselves. Institutional investors, asset managers, and other market participants began demanding information about environmental risks, social practices, and governance structures. Regulators have, in many respects, responded to this demand.

As a result, ESG satisfies all three categories of materiality. First, many ESG factors are substantively material because they affect risk, cost of capital, and long-term value. Second, ESG disclosure requirements are increasingly mandated by jurisdictions around the world, creating regulatory materiality. Third, and most important, ESG is procedurally material because investors have consistently demanded this information.

This bottom-up origin distinguishes ESG from conflict minerals and helps explain why ESG disclosures are more plausibly grounded in the logic of securities law.

Why the Taxonomy Matters

The taxonomy offers several insights for debates about corporate disclosure.

First, it shows that the legitimacy of a disclosure regime depends not only on its content, but also on its origin. Disclosure mandates that arise from investor demand are more consistent with the investor-protection rationale of securities law than those imposed purely to serve external policy goals.

Second, it reframes the ESG debate. When viewed this way, the question is not whether ESG information is material. It is how different types of materiality interact and whether disclosure should be mandated.

Third, the taxonomy provides a framework for analyzing future disclosure controversies. As new issues emerge – ranging from cybersecurity to artificial intelligence to human capital – courts and regulators will confront questions about what information belongs in securities filings. Understanding the different types of materiality can help guide those decisions.

Moving Forward

The concept of materiality has always been flexible, evolving alongside markets and investor expectations. The ESG debate is simply the latest context in which its boundaries are being tested.

By disaggregating materiality into substantive, regulatory, and procedural components, my article offers a more precise way to understand that evolution. It highlights the role of investors – not just courts and regulators – in shaping what information matters.

Ultimately, if investors are demanding information to inform their investment decisions, that demand itself is strong evidence that the information belongs in the “total mix.” The challenge is not determining whether such information is material but deciding how the law should respond.

Karen E. Woody is a professor at Washington and Lee University School of Law. This post is based on her recent article, “A Taxonomy Of Materiality,” available here.