Double materiality & stakeholder weighting: The case for even stakeholder weighting in ESG Materiality Assessments
Why do ESG Materiality Assessments use even stakeholder weightings to produce the Materiality Matrix?
By AnsaradaMon May 08 2023Environmental Social and Governance
Materiality Assessments are a critical strategic tool for companies to understand which environmental, social, and governance (ESG) issues matter most to their stakeholders. They help companies implement a strategy with clear priorities, actions and measures. The engagement and communication with their stakeholders builds more trust, credibility and advocacy which translates into driving business outcomes, like increased customer loyalty and revenue growth, more engaged and productive employees, increased valuation of their company and more.
The Materiality Assessment process involves engaging with all key stakeholders groups that the company impacts – including employees, customers, investors, and the community – to understand their perspectives on ESG issues. The output of this process is a materiality matrix, which ranks ESG issues based on their importance to stakeholders and the business.
The materiality matrix is typically weighted in terms of averages, with issues that are important to multiple stakeholder groups ranked higher than those that are important to only one group. All stakeholder groups are weighted evenly, regardless of whether they are a Board member or a customer.
A common question that arises is why certain stakeholder groups, such as the Board, investors, and executives, don’t carry more weight in the materiality assessment. After all, these groups tend to be much more invested in the company and its material outcomes. It can be argued as well that these stakeholders have a much greater knowledge of the company and deeper insight into what could materially impact the business.
The answer lies in the concept of double materiality, which requires organizations to disclose not only how sustainability issues may potentially impact them financially (the ‘outside-in’ perspective), but also how their activities might impact people and the planet (‘inside-out’).
This is a critical element of ESG; that issues not only impact the business, but also have an impact on society and the environment. To be compliant with sustainability reporting requirements like the EU’s Corporate Sustainability Reporting Directive (CSRD) which mandates double materiality, materiality assessments need to reflect the priorities of all stakeholders, not just those of the business. The number of companies that will be mandated to report on ESG disclosures under the new CSRD is over 300% greater than under the previous NFRD framework. It’s estimated that by 2026, the scope of the CSRD will expand from large European companies (and those operating in the region) to hold small and medium enterprises accountable as well. It’s expected to increase further to include all companies – including SMEs – by 2027.
Amid the wider global shift toward sustainability and growing scrutiny of ESG impacts, organizations will need to provide much more in-depth ESG reporting than they have ever done in the past.
A huge component of ESG is getting a complete stakeholder view. Undertaking a materiality assessment should be seen as a great opportunity for companies to align with their stakeholders and address issues of misalignment.
For example, if all your suppliers are telling you that modern slavery is highly material, but the leadership team hasn’t flagged it as an issue, then your ESG strategy could contain significant gaps. On the flip side, your leadership team could be wasting time and resources on issues that are not going to have a material impact or move the needle on real ESG objectives.
By engaging with stakeholders and getting visibility over what they want to hear and what actions they want to see from your business, companies can better meet their expectations, report on the key issues, and build trust.
Companies need to be prepared for changing regulatory requirements, including mandated double materiality. By weighting issues based on stakeholder perspectives and embracing the concept of double materiality, companies can better align with their stakeholders and drive positive change. Those that get started on materiality assessments now will be better equipped to adapt to these changes and demonstrate their commitment to sustainability.
The Materiality Assessment process involves engaging with all key stakeholders groups that the company impacts – including employees, customers, investors, and the community – to understand their perspectives on ESG issues. The output of this process is a materiality matrix, which ranks ESG issues based on their importance to stakeholders and the business.
The materiality matrix is typically weighted in terms of averages, with issues that are important to multiple stakeholder groups ranked higher than those that are important to only one group. All stakeholder groups are weighted evenly, regardless of whether they are a Board member or a customer.
Why don’t certain groups carry more weight?
A common question that arises is why certain stakeholder groups, such as the Board, investors, and executives, don’t carry more weight in the materiality assessment. After all, these groups tend to be much more invested in the company and its material outcomes. It can be argued as well that these stakeholders have a much greater knowledge of the company and deeper insight into what could materially impact the business.
The answer lies in the concept of double materiality, which requires organizations to disclose not only how sustainability issues may potentially impact them financially (the ‘outside-in’ perspective), but also how their activities might impact people and the planet (‘inside-out’).
This is a critical element of ESG; that issues not only impact the business, but also have an impact on society and the environment. To be compliant with sustainability reporting requirements like the EU’s Corporate Sustainability Reporting Directive (CSRD) which mandates double materiality, materiality assessments need to reflect the priorities of all stakeholders, not just those of the business. The number of companies that will be mandated to report on ESG disclosures under the new CSRD is over 300% greater than under the previous NFRD framework. It’s estimated that by 2026, the scope of the CSRD will expand from large European companies (and those operating in the region) to hold small and medium enterprises accountable as well. It’s expected to increase further to include all companies – including SMEs – by 2027.
Amid the wider global shift toward sustainability and growing scrutiny of ESG impacts, organizations will need to provide much more in-depth ESG reporting than they have ever done in the past.
ESG requires a 360° view from all stakeholder perspectives
A huge component of ESG is getting a complete stakeholder view. Undertaking a materiality assessment should be seen as a great opportunity for companies to align with their stakeholders and address issues of misalignment.
For example, if all your suppliers are telling you that modern slavery is highly material, but the leadership team hasn’t flagged it as an issue, then your ESG strategy could contain significant gaps. On the flip side, your leadership team could be wasting time and resources on issues that are not going to have a material impact or move the needle on real ESG objectives.
By engaging with stakeholders and getting visibility over what they want to hear and what actions they want to see from your business, companies can better meet their expectations, report on the key issues, and build trust.
Companies need to be prepared for changing regulatory requirements, including mandated double materiality. By weighting issues based on stakeholder perspectives and embracing the concept of double materiality, companies can better align with their stakeholders and drive positive change. Those that get started on materiality assessments now will be better equipped to adapt to these changes and demonstrate their commitment to sustainability.
Stay ahead of mandated sustainability reporting
Ansarada has released a state-of-the-art digital Materiality Assessment so that organizations can start their ESG journey at a fraction of the usual time and spend. Designed by ESG experts with leading practice structure and processes built in, the Materiality Assessment builds on recognized ESG frameworks and produces a comprehensive, Board-ready report and blueprint for an integrated ESG strategy moving forward.
