materiality assessment

Understanding Materiality Assessment

A Practical Approach with Consultancy Expertise

Introduction to Materiality

A materiality assessment identifies and prioritizes the most relevant environmental, social, and governance (ESG) issues for a company and its stakeholders. By uncovering topics that significantly impact financial performance and societal influence, it guides the development of a focused sustainability strategy that aligns with stakeholder expectations and regulatory requirements. Starting with this assessment ensures that the organization’s sustainability or ESG program addresses the most critical risks and opportunities, optimizes resource allocation, and strengthens stakeholder trust, ultimately leading to improved long-term value creation.

Materiality assessment is the first foundational pillar in the CHS Sustainability as a Strategy (SaaS) framework (read the full post about the SaaS Framework here).

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Defining Materiality

Materiality, in the context of ESG or sustainability, refers to the significance of certain information with respect to stakeholders’ decision-making processes. This assessment helps determine which issues are critical to address, based on their potential to influence financial performance or stakeholder perceptions and behaviors. Understanding materiality is crucial because it ensures that resources are allocated to those aspects of sustainability that will provide the most benefit and require immediate attention.

Single vs Double Materiality

In materiality assessment, the concept of single vs. double materiality refers to the number of perspectives considered when determining which ESG issues are material to an organization.

  • Single materiality takes into account only the financial impact of ESG issues on the organization. While this approach is relatively straightforward, it has several limitations. It may overlook important ESG issues that have significant social or environmental impacts but do not directly affect the organization’s financial performance.
  • Double materiality, on the other hand, also evaluates these topics’ impact on a wider set of stakeholders – including the environment and society. It does so by assessing their impact on environmental and social factors (inside-out perspective), while also considering how these factors influence the organization (outside-in perspective).This approach provides a more holistic view of materiality and ensures that organizations address ESG issues that are important to their stakeholders and the communities in which they operate. Double materiality has fast-become the global standard, especially in regulated markets like the EU.

We always recommend using double materiality in materiality assessments. This approach aligns with the increasing recognition that ESG issues are not only important for financial performance but also for long-term sustainability and stakeholder trust. By considering both financial and societal/environmental impacts, organizations can develop a more comprehensive and effective sustainability strategy.

The Materiality Assessment Process

This process may vary based on your organization type and/or industry. For instance, investors face unique challenges when considering how to conduct a materiality assessment given the outsized impact generated through their investments – read our opinion and recommendations on this situation here. 
 

Step 1: Planning the Assessment

In the first step of planning a double materiality assessment, it is essential to establish clear objectives and scope. This involves defining why the assessment is being conducted, identifying the boundary (e.g., geographical, operational), and determining which stakeholders to include. Building a strong assessment team is crucial, and it should involve experts from various departments like sustainability, finance, compliance, and operations to ensure a comprehensive approach. After forming the team, it’s vital to allocate the necessary resources and develop a detailed timeline, ensuring that all team members are aligned and prepared for the subsequent stages.

Step 2: Identifying Relevant Topics

This step requires a thorough review of both internal and external factors to identify all relevant topics for the assessment. Internally, it involves reviewing company policies, risk assessments, and sustainability reports. Externally, it’s important to consider international standards such as GRI, SASB, and EU regulations, alongside analyzing industry and market trends, peer benchmarking, and stakeholder inputs. Stakeholder inputs may include customer or investor questionnaires received, feedback from employees, or other relevant discussions. The culmination of this internal and external analysis results in a preliminary list of relevant topics that reflect potential financial and impact-related material issues.

Step 3: Conducting Stakeholder Engagement

Engaging stakeholders is a critical step that ensures the assessment reflects diverse perspectives. Key stakeholder groups such as investors, employees, customers, suppliers, and community representatives should be identified and engaged through surveys, interviews, and workshops to gather their input on material topics. Once the input is collected, it should be consolidated and analyzed to identify stakeholder priorities and expectations, providing a comprehensive understanding of what matters most to those influenced by or influencing the organization.

Step 4: Assessing Double Materiality

The double materiality assessment itself involves evaluating both impact materiality and financial materiality. For impact materiality, it’s important to assess the severity and likelihood of each topic’s impact on the environment and society. This assessment requires prioritizing topics based on stakeholder feedback and expert judgment. The financial materiality assessment, on the other hand, examines how material topics affect the company’s financial position, performance, and cash flows, often through detailed financial analysis and risk assessment tools. After completing both assessments, a prioritization matrix is developed to visualize the importance of topics based on their impact and financial materiality.

Step 5: Validating the Results

Once the assessment is completed, it is crucial to validate the results both internally and externally. Internally, the senior management team and relevant departments should review the results to ensure they align with the company’s strategic objectives. Externally, public consultation can provide additional insights and ensure stakeholder expectations are met. Finally, the results are presented to the board or governing body for final review and approval, ensuring that all material topics are recognized and endorsed at the highest level.

Step 6: Integrating Findings into Reporting

With validated results in hand, it’s time to draft a materiality matrix that visually plots the prioritized material topics. The matrix serves as a clear representation of the relative importance of each topic. These findings should then be integrated into the company’s sustainability or integrated reporting, highlighting how the organization addresses each material topic and what strategies are in place for managing related risks and opportunities.

Step 7: Continuous Monitoring and Improvement

The final step involves developing a plan for ongoing monitoring and improvement. Regularly reviewing and updating the materiality assessment is essential to reflect evolving stakeholder expectations and emerging trends. Additionally, continuous evaluation and enhancement of the stakeholder engagement process will help improve future assessments, ensuring that the double materiality assessment remains relevant, accurate, and aligned with strategic objectives.

Integration into Business Strategy

Once material aspects are identified and prioritized, they are integrated into the business strategy. This involves setting targets and objectives related to each material aspect, developing action plans, and allocating resources. The integration is a critical step as it ensures that the sustainability strategy is not only aligned with the company’s business objectives but also addresses the most significant ESG issues.

From a disclosure and data standpoint, having a sound materiality assessment process allows an organization to make informed decisions about which topics to measure and report on, and which topics to exclude. This can be a significant time saver, as organizations can focus their efforts on the most relevant and impactful issues. Additionally, it can increase clarity and focus in strategy and disclosures, as organizations can tailor their reporting to the most important topics for their stakeholders.

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Below are some of the benefits of having a sound materiality assessment process:

  • Improved decision-making: A materiality assessment helps organizations to prioritize their sustainability efforts and make informed decisions about which issues to focus on. This can lead to more effective and efficient use of resources.
  • Increased stakeholder engagement: By reporting on the most material issues, organizations can better engage with their stakeholders and demonstrate their commitment to transparency and accountability.
  • Reduced risk exposure: By identifying and managing material ESG risks, organizations can reduce their exposure to financial, reputational, and operational risks.

Overall, having a sound materiality assessment process is essential for organizations that want to develop a sustainable business strategy, improve their ESG performance, and build a long-term competitive advantage.

Materiality Assessment Outcome – Materiality Matrix

The outcome of a materiality assessment is often visualized through a materiality matrix or map. This matrix illustrates the prioritization of various ESG issues by mapping their importance to stakeholders against their potential impact on the organization. The matrix provides a clear, visual representation of the topics that should guide strategic decision-making, with the most material topics occupying the highest-priority positions on the top right of the matrix. Organizations can use this output to refine their sustainability strategies, set specific goals, and align resources towards addressing the most relevant topics. Additionally, materiality matrices support transparent and targeted reporting by highlighting issues that resonate most with stakeholders. Ultimately, these assessments enable companies to focus on the most impactful ESG issues, thereby strengthening stakeholder trust, reducing risks, and enhancing long-term value creation.

Examples of Materiality Matrices

Below are a number of examples of materiality matrix outcomes from materiality assessments:

Managing and Refreshing Materiality

Materiality assessment is not a one-time activity but a continuous process. As the business environment and stakeholder expectations evolve, it is crucial to regularly review and update the materiality assessment – as stated in step 7. This ongoing process helps the company stay aligned with emerging trends and regulatory changes, ensuring that the sustainability strategy remains relevant and effective.

Conclusion

Understanding and managing materiality is crucial for any organization committed to improving its sustainability performance. By focusing on material ESG aspects, companies can not only enhance their operational and financial performance but also strengthen their relationships with stakeholders and improve their overall sustainability impact.

Interested in the SaaS Framework Strategic Roadmap TemplateClick here to download it for free

Continuing with the SaaS Framework

This discussion on Materiality is part of our comprehensive “Sustainability as a Strategy (SaaS)” approach. To gain a complete understanding of how these elements integrate and complement each other to fortify your organization’s sustainability initiatives, we encourage you to read the complete SaaS article. Explore the entire framework to discover how each component works synergistically to enhance your company’s sustainability practices and ensure long-term success in a rapidly evolving business environment.