Mastering Materiality Part 1: What is a Materiality Assessment in six key insights

In the first of our Mastering Materiality series, we look at what a Materiality Assessment is, what it is used for, and the business benefits of undertaking the process.

By AnsaradaFri Mar 31 2023Environmental Social and Governance

By Andrea Spencer-Cooke and Anna Young-Ferris, One Stone Asia Pacific

Managing Environmental, Social and Governance (ESG) risks and opportunities is a growing focus for organizations. Increasingly, customers, investors and other stakeholders want confidence that the organization understands—and is adapting to—its evolving operating context and keeping pace with global developments. As well as mitigating negative impacts, sound ESG management can improve core business processes and relationships with stakeholders. Beyond meeting market expectations, managing ESG issues proactively can be a powerful force for good and for growth.
But how do organizations know which ESG issues to act, measure and report on? To identify their most important ESG issues, a wide range of potential topics need to be considered by the organization and validated by stakeholders. We call this a Materiality Assessment process.

1. What is materiality?

Materiality is a financial reporting concept that helps determine the threshold where information becomes relevant and influential in economic decision-making, particularly for investors using financial statements. The same concept can be applied to ESG issues. Material ESG issues include an organization’s most significant positive and negative impacts on the environment, the economy, and on people, including their human rights.
As defined by the Global Reporting Initiative (GRI), ‘materiality is the principle that determines which relevant topics are sufficiently important that it is essential to report on them.’
Material issues vary according to industry, location, corporate strategy, regulatory context and community expectations, but are framed by universal international norms and values. When identifying material issues, it is important to consider the organization’s ESG impacts holistically. Often, an organization’s most significant ESG impacts occur beyond its operational boundary, arising through its business relationships—for example in its upstream supply chain, or downstream during consumer use and disposal of its products and services. While these points of impact are beyond the organization’s direct control, it is important to identify them so the associated risks and opportunities can be collectively recognized and managed.
The concept of materiality is continuously evolving. Drawing on foundations established by GRI, new sustainability reporting requirements like the EU’s Corporate Sustainability Reporting Directive (CSRD) are now mandating ‘double materiality’. This approach requires organizations to disclose not only how sustainability issues may potentially impact them financially (the ‘outside-in’ perspective), but also how their activities potentially impact people and the environment (the ‘inside-out’ perspective). Double materiality goes beyond the more narrow focus of traditional financial materiality, which relates solely to the financial impacts on the organization itself, without taking into account the organization’s external impact on society and the environment. By adopting a double materiality lens and disclosing both types of impacts, organizations can better understand and manage risks and take advantage of opportunities, delivering a more comprehensive picture of their sustainability performance.

2. What is a Materiality Assessment?

A Materiality Assessment is a process used to identify and prioritize the sustainability issues that are most significant (or ‘material’) to an organization.
This process can be done in a number of ways, from desktop research, expert consultation and peer benchmarking to use of ‘big data’, but the most widely recognized and credible approach involves direct consultation and engagement with a range of relevant internal and external stakeholders. This is often done using a stakeholder survey to assess and validate a variety of ESG issues through two primary lenses:
  1. The significance of an issue for the organization
  2. The significance of the issue to stakeholders.
The aim is to determine which ESG risks and opportunities are most critical for the organization to address first, and to prioritize which issues it should monitor and prepare to address in future. It is an important first step in establishing a framework for managing ESG impacts moving forward.
The assessment involves identifying and evaluating the potential impacts of an organization's operations, products, and services on the environment, economy and society, as well as the potential impacts of external factors on the organization's operations. It involves engaging with a wide range of stakeholders to understand their concerns and priorities relating to sustainability issues.

Learn more about how the process works here.

3. Why is this important?

There are many reasons why an organization should put materiality at the heart of its ESG approach:
a. Regulation: amid a wider societal shift toward sustainability and growing scrutiny of ESG impacts, disclosure of double materiality is being demanded by regulators in jurisdictions such as Europe and Brazil. With the CSRD and Task Force on Climate-Related Financial Disclosures (TCFD) now in effect, there will be global implications and other countries are expected to follow suit.

b. Better strategy: undertaking a Materiality Assessment is a significant opportunity to identify emerging risks and opportunities, incorporate sustainability into core business strategy, and apply a longer time horizon.

c. Create more value: From enhanced reputation and brand, the creation of more secure long-term value, and increased employee engagement and retention, disclosing double materiality and prioritizing ESG is good for business, good for people, and good for the planet.

Learn more about why you should undertake a Materiality Assessment here.

4. Who is involved?

Stakeholder inclusiveness and balance are important principles in the materiality process. Hearing from a diverse range of stakeholders enables an organization to better understand the full spectrum of actual and potential impacts its activities have on others. This makes it better aligned with the expectations of its shareholders and investors, suppliers, customers, employees, local community and broader society.
Stakeholder engagement involves identifying and engaging with the organization’s key internal and external stakeholders and applying the outcomes from that consultation to improve management, reporting and performance on ESG issues. Done well, stakeholder engagement leads to learning and value creation, as well as improving accountability, trust and credibility.
Stakeholders typically involved in Materiality Assessments include:
  • Investors
  • Board
  • Senior Management
  • Employees
  • Suppliers
  • Channel Partners
  • Customers
  • Community
  • Academia
  • Media
  • Experts
  • Regulators
With such a large pool of potential stakeholders to draw from, it’s important to identify and involve those who can bring fresh and varied perspectives on the organization’s impacts and who represent a diverse range of relevant interests.

Learn how to narrow down your stakeholders for the assessment here.

5. What are the outcomes?

The output of a Materiality Assessment is a shortlist of relevant ESG issues, frequently presented as a materiality matrix. The matrix is a visual representation of the most significant sustainability issues as determined by their importance to the organization on the one hand, and their impact on and significance to stakeholders on the other. This matrix is used to inform an organization's sustainability strategy, management of performance and impacts, and reporting. By focusing on the issues that are most material, an organization can allocate resources and efforts more effectively towards creating positive impacts, realizing opportunities, and managing and mitigating sustainability risks.
Learn more about interpreting your materiality matrix here.

A Materiality Assessment report is a great tool to help put an ESG Strategic Plan into action. View a sample Materiality Assessment report here.

6. What are the benefits?

As governments, regulators, standard setters, and investors move to address urgent sustainability challenges, the global regulatory environment around materiality, ESG and sustainability is also maturing. Organizations that take a materiality-based approach to ESG management and sustainability reporting will be better positioned to comply with these regulations and new standards, and ‘bank’ the early-adopter benefits of proactive stakeholder engagement and improved sustainability performance.

Learn more about the benefits here.

Undertaking a Materiality Assessment can be a complex and challenging process for organizations. Due to the wide range of potential issues and the number and variety of stakeholders involved, materiality can be time-consuming and costly. Without robust and user-friendly tools to guide and streamline the process, it can take up to 6 months and cost anywhere between $30k to $100k.
In partnership with ESG experts One Stone Advisors, Ansarada has released a state-of-the-art digital Materiality Assessment, so organizations can start their ESG journey at a fraction of that time and cost outlay. Designed with leading practice structure and processes built in, the Materiality Assessment builds on recognized ESG frameworks. The output is a comprehensive, Board-ready report, with clear next steps to take and a blueprint for an integrated ESG strategy moving forward.

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Andrea Spencer-Cooke is Founder and CEO of One Stone Advisors Pty Ltd and specialises in helping senior management map and prioritise sustainability/ESG issues for better business planning and engagement. She has extensive knowledge of global sustainability leading practices, ESG frameworks and responsible business standards and is a recognised expert on the United Nations 2030 Agenda and Sustainable Development Goals. Formerly Head, Sustainability Reporting and Management at SustainAbility Ltd in the UK, Andrea was involved in pioneering early global efforts to improve corporate ESG reporting and helped co-develop the influential concept of the triple bottom line.
Dr Anna Young-Ferris is an Independent Expert at One Stone Advisors and an ESG, climate change and sustainability specialist with over 22 years of corporate and academic experience. She consults to industry leaders providing expert advice on integrating ESG issues into core business strategy. She is an established academic at the University of Sydney Business School and recipient of the 2022 Vice Chancellor's Award for Outstanding Contribution to Sustainability. Her research lies at the nexus of responsible investment and sustainability/carbon accounting, and she leads the integration of the SDGs into the School’s strategy. Previously, she helped build the climate change and sustainability team at Ernst & Young, Sydney.
One Stone Asia Pacific is a purpose-driven, women-owned sustainability advisory firm and certified B Corp specialising in impact measurement and leadership, ESG strategy, planning and engagement. Its mission is to help clients become more effective sustainability leaders, turn challenges into lasting value and create measurable positive impact. As well as working with government, not-for-profit and large and medium corporations to embed ESG leadership, One Stone provides B Consulting expertise to companies seeking certification.

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