Sustainability is an increasingly important metric of corporate health, and materiality assessment is now an established tool for measuring it.
The sustainability materiality assessment process helps companies identify and categorize material issues that impact performance and regulatory compliance. By extension, the process helps companies define and implement critical Corporate Social Responsibility (CSR) and Environment, Social, and Governance (ESG) policies.
Materiality assessments are the backbone of sustainability reporting. The process involves engaging with stakeholders both inside and outside the company, gathering their input, and organizing that input into a comprehensive report which can contribute to strategic planning as well as satisfy corporate sustainability compliance objectives. The March 2022 SEC proposal to enhance and standardize climate-related disclosures for investors is an example of such requirements.
What is an ESG Materiality Assessment?
Materiality assessment (which may be referred to as “ESG materiality assessment” or “Sustainability material assessment”) is a process of identifying the relative impact of a range of environmental, social and governance (ESG) issues on the company’s performance and viability within the current market framework, and categorizing those issues into a hierarchy which can then be used to guide strategy and help the organization provide a complete and accurate accounting of its sustainability to investors.
Most of the world’s largest companies already use ESG materiality assessments to identify issues that could affect the business, its stakeholders, or its ecosystem and condensing them into a form that can be used to contribute to reporting and strategy objectives.
Properly planned and executed, an ESG sustainability materiality assessment:
- Ensures that business strategy takes significant social and environmental topics into account
- Identifies trends that may impact the company’s ability to create value in the long-term
- Identifies areas of primary interest to important stakeholders
- Enables different functions of the business to seize opportunities to stay ahead of competitors
- Prioritizes resources for sustainability issues that matter most to the business and stakeholders
- Highlights areas to manage and monitor issues that are important but not currently addressed
- Highlights areas where the company is increasing or decreasing value for society
Why Businesses Need a Materiality Assessment
Strategy and comprehensive reporting rely on investigation of material issues which may be understood by individual stakeholders located throughout the ecosystem but are not organized in a central repository. Many large companies understand the principles of materiality, but struggle to define and implement a robust process. As a result, many are looking to revise and update their materiality assessment processes.
The constant evolution of regulatory compliance requirements has made it essential to have an effective process in place for gathering, organizing, and reporting material factors that may impact a company’s health. In addition to U.S. rules such as the SEC disclosure proposal mentioned above, other regulations such as the European Directive on Non-Financial Reporting are leading companies to focus greater attention on uncovering and reporting on non-financial information that can impact a company’s performance and attractiveness to investors.
Investors make decisions based on information they can acquire, and if a company doesn’t provide information on its sustainability and ESG situation, then investors may turn to third-party ESG rating systems to fill in that lack of essential data. If they’re unable to make use of third-party ratings, they may assume the company puts little or no effort into its sustainability and ESG status, which may in turn lead them to leave that company out of their investment portfolios and take their business elsewhere.
Sustainability Materiality Assessment Challenges
Common challenges with the materiality process include incorporating and prioritizing stakeholder views, ensuring involvement of senior management, and extending the assessment beyond the company’s own internal operations.
The following are the most common hurdles to a successful materiality assessment:
- Stakeholder engagement is perceived to be too difficult to achieve
- Company leaders fail to engage in the process
- The business is perceived as being too complex for a meaningful assessment
- Stakeholders are unable to agree on which topics are “material”
- Failure to agree on the prioritization of There are too many material issues to manage
How to Conduct an ESG Materiality Assessment
In order to get the most value from an ESG materiality assessment, a company must start with a clear understanding of what information it’s looking for. This will allow the company to conduct a sustainability materiality assessment that asks the right questions, selects the right stakeholders, applies the appropriate methodology, and presents the information effectively to help inform decisions.
When designing any assessment, the questions should be crafted and stakeholders selected to get answers that genuinely help the business make decisions. Assessments should also align with accepted reporting frameworks such as the GRI G4 guidelines.
The Materiality Matrix
A materiality matrix helps an organization understand and present the findings of its materiality assessment in a comprehensible visual form. Variations exist to represent what’s important for reporting and strategy; this is due to a lack of consensus on the proper way to present materiality and efforts to customize the exercise to meet the needs of each company.
A materiality matrix presents sustainability issues in two dimensions. One dimension represents the importance of issues to the organization in terms of their expected influence on the organization’s success; the other dimension represents the attractiveness relevance of issues to stakeholders and the likely resulting influence on business success.
Key Steps in the Materiality Assessment Process
The following is a checklist to ensure that all necessary steps in a materiality assessment are taken:
- Identify stakeholders
- Conduct initial stakeholder outreach
- Identify and prioritize issues to be measured
- Design and launch survey
- Interview chosen stakeholders
- Ask stakeholders to rank ES topics in terms of importance
- Analyze insights gathered
- Benchmark results against peers and competitors
Benefits of an ESG Materiality Assessment
The Materiality assessment is a strategic business tool which can be used as an opportunity to apply a sustainability lens to business risk, opportunities, and risk management processes. Rather than creating a separate, isolated process, leading companies embed sustainability within these existing processes.
A materiality assessment provides a company with an opportunity to analyze risks and opportunities, and to make any adjustments necessary to improve its business strategy. The assessment helps the organization understand where it is creating or reducing value for society and represents a comprehensive business case to senior executives about why and how to report ESG data and manage ESG performance.
A materiality assessment also provides a consistent format to measure the performance of different functions within an organization—such as financial, social, and environmental—and improves the organization’s ability to anticipate and recognize emerging trends and issues that require attention. This could manifest as previously unidentified opportunities to stay ahead of competitors by developing new products or services.
A materiality assessment provides an organization with deeper insights into its operating environment and encourages more effective allocation of its resources. An assessment allows companies to satisfy the sustainability reporting expectations of stakeholders and increases their ability to satisfy stakeholder demands.
And finally, results and data from an ESG materiality assessment can be used to design content for corporate sustainability reports (CSR) or for communications with individual stakeholder groups like investors, partners, customers, or employees.
