Quick Summary:
This article discusses the importance of materiality assessments within corporate sustainability strategies, and delves into the process of identifying and prioritizing issues that impact both the company and its stakeholders.
The piece explores various types of materiality assessments, including single, double, and triple materiality, and emphasizes the role of ESG reporting standards and frameworks in providing guidance for materiality.
It also underscores the need for periodic reassessment and introduces purpose-built software as a solution for managing materiality assessments effectively.
Materiality assessments play an important role in modern corporate sustainability strategies by identifying and prioritizing the most relevant issues that both impact and are impacted by a company’s operations, products, and services.
By engaging stakeholders and analyzing the significance of various topics, companies can identify their most important (material) issues and direct their actions accordingly.
This makes materiality and sustainability risk assessments key for businesses looking to take their long-term sustainability seriously, while also enhancing accountability, transparency, and trust with business stakeholders.
Let’s look at the various aspects of materiality assessments in a bit more detail.
Defining material topics
Identifying and defining material topics creates a roadmap to understand what really matters to a company and its stakeholders.
This process enables a business to identify the key issues that have a significant impact on its success and the well-being of those it interacts with, as well as highlighting areas to prioritize its efforts and resources.
To properly identify and define these topics, organizations need to conduct a process known as ‘stakeholder engagement’.
Stakeholder engagement
To conduct effective materiality assessments, businesses need to identify and consult relevant internal and external stakeholders, who can broadly be defined as individuals or groups who have an interest in or are affected by a company’s activities.
Internally these will include employees across a range of departments and business functions, while external stakeholders may include supply chain partners, local communities and organizations, investors, and even customers.
Stakeholder engagement forms a key part of the materiality assessment process as involving subject matter experts to provide their guidance helps form a holistic and defensible perspective of risks, controls, and processes for sustainability across the business.
The various interests, concerns, and priorities which engaged stakeholders have can highlight risks and material issues across a wide range of business areas, helping to eliminate blind spots which may not be visible to management and/or those conducting the materiality assessment.
For example, employees may be concerned with workplace health and safety, leave policies, and wellness initiatives. Investors are likely to prioritize financial stability and investment returns, while customers may care about quality, pricing, and ethical/sustainable products. By taking each viewpoint into account, organizations can build a well-rounded and holistic view of their material issues.
Involving stakeholders also builds trust between them and the organization. By consistently interacting with stakeholders and canvassing their opinions and concerns, companies can grow their reputations for accountability, transparency, and social responsibility.
Process-wise, organizations need to identify relevant stakeholders (often done via a process named ‘stakeholder mapping’), engage with them via an appropriate method (surveys, interviews, town halls, online), integrate their feedback, and adjust their risk matrices and priorities accordingly.
This also ties into business environmental, social, and governance (ESG) operations and strategy, as companies will usually disclose their stakeholder engagement processes and outcomes in annual ESG and sustainability reports.
Single, double, (and even triple) materiality
Various types of materiality exist, encompassing different levels of comprehensiveness. Single materiality, typically referred to as financial materiality, focuses predominantly on how ESG risks and opportunities impact a company’s financial performance. Single materiality looks inward and only considers those impacts which directly affect the business.
Double materiality is more comprehensive and takes a broader perspective, looking both inward (as in single materiality) and outward. As with single materiality, it is concerned with the ESG impacts which directly affect the business.
Additionally, however, it includes the organization’s influence on its surrounding environmental (notably the climate) and social landscapes. It acknowledges that a company’s activities and operations impact on the world around it, and that this impact can also affect the company’s own financial performance and reputation.
Triple materiality is less common than the other two but goes even further by adding context to materiality definitions along ecological, social, and economic conditions. It also accounts for and rationalizes local expectations and impacts along global value chains.
Materiality is sometimes also categorized by financial materiality (affect on financial performance) and impact materiality (affect on stakeholders and the environment). Organizations often start with more simplistic materiality assessments and work their way towards more comprehensive assessments as they mature in their own ESG and sustainability operations and strategy.
The role of ESG reporting standards and frameworks
Common practice for organizations performing materiality assessments is to follow guidance from one or multiple of the most common ESG standards and frameworks. Using the lists of topics as a questionnaire of sorts, businesses will review which are most relevant to their organizations.
The framework from the Taskforce on Climate-related Financial Disclosures (TCFD), along with IFRS S1 and S2 and the Sustainability Accounting Standards Boards (SASB) standards focus on financial materiality, whereas the Global Reporting Initiative (GRI) is the most common standard for providing guidance on impact materiality.
SASB and GRI look to simplify the materiality assessment and disclosure processes by separating their standards into sector-specific recommendations to help hone the focus for reporting organizations.
Materiality assessments with major regulations
Regulators also take material topics into account, and in some cases ask to see the results of a materiality assessment as part of compliance. This is a good thing overall, as this component allows businesses to omit irrelevant data from non-financial disclosures; regulators are just looking for the rationale for why the business considers certain topics to be irrelevant.
As of this writing, the SEC rule in the United States along with California’s SB 261, have companies disclose financial materiality as part of their regulatory requirements for climate risk reporting.
The Corporate Sustainability Reporting Directive (CSRD) as mandated by the European Union is the only wide-ranging regulation to require double materiality. The directions regulations currently provide for the exact format of materiality assessment submissions are vague, meaning businesses will have to consider how they balance expected compliance requirements with the amount of public disclosure appropriate to avoid providing too much detail to competitors.
Not ‘one and done’
Materiality assessments are not meant to be once-off exercises carried out at the kick-off of a broader ESG strategy and never seen again. Just as businesses and macroeconomic conditions change over time, so do companies’ sustainability standpoints. This means materiality assessments cannot be treated as once-off exercises – your business has changed since 2019.
Changes in business strategy, stakeholder expectations, and environmental factors necessitate periodic reassessment, and companies should review and update their assessments on a periodic basis (doing them annually is common).
By taking a continuous improvement approach to materiality, businesses can adapt to changes in their circumstances and foster sustainable growth by aligning their risks, opportunities, and strategies with evolving social, environmental, and economic concerns.
How technology helps
Businesses will often enlist the services of experts such as consultants to perform materiality assessments for their companies. This approach has merit since materiality assessments are often periodic undertakings rather than projects that will typically warrant dedicated full-time headcount. Moreover, the sustainability and auditing expertise sought after for professionals who perform the assessments is still relatively scarce, and therefore expensive.
While the final report should be comprehensive and include the raw data and materiality scoring methodologies, the unfortunate downside to this approach is the process and associated data will reside outside of your internal systems. This often leaves a gap for when your internal team attempts to pick up where the last assessment left off, making it more difficult to bring appropriate activities in-house.
Leveraging purpose-built technology to facilitate and manage stakeholder engagements, and which can also produce a visual materiality matrix is one way to retain control over the materiality assessment process, especially if you do eventually bring more specialized resources in-house.
IsoMetrix Lumina is an end-to-end carbon accounting and sustainability reporting solution that incudes digital materiality assessment capabilities, allowing clients to connect sustainability data with strategy and disclosures, all within a centralized system.
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