Conducting a Materiality Assessment: A Comprehensive Guide

With the steep increase in corporate sustainability reporting, ESG regulations enforced worldwide, consumers’ demands for eco-friendly products and services, and investors that seek high ESG scores, materiality assessments are now the norm. They are an efficient way to take qualitative and quantitative data to determine how organizations can bring an ROI in the sustainable economy.

In this article we’ll define what materiality is and how materiality assessments can be done efficiently. We’ll also define the terms and concepts around the materiality scope as a whole.

The definition of materiality

Materiality is the relevance of how a certain issue affects a business entity, its success, and those potentially investing in it. Materiality changes amongst different sectors and businesses according to relevance.

Materiality is defined by considering quantitative and qualitative factors that come from business data of various types. Including or excluding certain factors with explanations is expected when doing a materiality assessment. 

In companies, materiality refers to any factor that is impactful enough to affect the operations, performance, finances, or corporate social and environmental status of an organization. 

What is a materiality assessment?

A materiality assessment enables reporting entities to evaluate the significance of certain ESG factors to stakeholders; those of which you’ll be including in the assessment. This also empowers potential investors to determine if investing in the company is going to bring back a fruitful ROI. They can do this by evaluating the qualitative and quantitative data that is provided as a result of the assessment.

A materiality assessment commonly involves gathering input from internal and external stakeholders, optionally, the community the company impacts, and NGOs. After determining what material topics to include, they can determine the significance of each topic to strategize for improvement later on.

What are the 3 types of materiality?

1. Financial materiality pertains to financial reporting and accounting and now ESG aspects are beginning to integrate itself there because of stakeholder demand. It involves assessing the impact and reasons for excluding something from a report and determining its impact on the financial status of a company as a whole. 

2. Legal materiality is tied to the relevance or importance of information in a legal context. This is commonly based on the regulations and laws in which the reporting company does business. 

3. Operational materiality includes the factors that would impact the operations, performance, or environmental and social reputation of an organization. It focuses on ESG factors and how the company would thrive based on the aspects of a certain material topic. 

Organizations should consider all three aspects of materiality when conducting their assessment.

Double materiality defined

Double materiality is defined as taking financial and ESG materiality into account for its reporting and decision-making processes. The combination of them both are now of higher importance than ever before and ESG investors are moving closer in a direction of sustainable investments at a speed that has only increased every year.

ESG materiality measures the ESG factors that affect the long-term sustainability and success of a company and this is best grounded when its foundation is based on ESG data. ESG materiality considers non-financial topics. 

The concept of double materiality combines financial and ESG factors because they are both important to various stakeholders. Companies that are adopting double materiality integrate ESG considerations into their sustainability strategies because it impacts their business’ financial, environmental, and social success in the long term.

Why are materiality assessments important for ESG reporting?

Companies see their sustainability measures make progress when taking a fair materiality assessment every year. Building a robust corporate sustainability strategy involves analyzing how to achieve ESG targets you’ve set while analyzing the data given in order to benchmark those targets and see progress over time. This is necessary to see where actions should be taken and how you can achieve them. A materiality assessment is an opportunity to spotlight the opportunities to do more. 

80% of Fortune 500 companies incorporate materiality assessments into their sustainability and ESG reporting.

ESG software makes reporting trustworthy since with Discloser companies can report on emissions using the AI-driven tool. After choosing a reporting framework that Discloser offers, the platform will guide the way.

What are examples of material factors for ESG?

Factors that you could incorporate in your assessment would vary by sector and company priority. Normally, factors are aligned with the UN’s Sustainable Development Goals (SDGs) and in addition, governance topics.

How to conduct an effective materiality assessment

1. Identify your key stakeholders - Examine what direction you want to go in and who should be involved internally and externally to give relative insights about that process. Sharing different perspectives will ensure having a broader yet more granular comprehension of what you need to develop your materiality assessment. 

2. Determine what your materiality issues are - The SASB offers a Materiality Finder where you can decide what topics that are relevant to your company based on the industry. This will lead you in making comparisons between topics and analyzing what are doable in the short- and long-term.

3. Conduct your materiality survey - Ask valuable questions to stakeholders with a 1-10 survey of how impactful a topic could be from their perspective. An example would be, How much do carbon emissions affect the environment, people, and finance of the company? Having intentional discussions with stakeholders about the key topics chosen to get a meaningful qualitative analysis.

4. Evaluate insights gathered from meetings with stakeholders - Analyze the risks and opportunities about how to make changes. Now you can create a materiality matrix which will show you the impact of each topic on your business. You may revisit these topics with your key stakeholders. This is when you can index and prioritize your material topics.

5. Strategize for corporate sustainability - Your organization may align its targets with the UN’s Sustainable Development Goals, or may incorporate targets into a broader organizational strategy. Integrate the information from the ESG materiality index into planning, decision-making, and sustainability reporting. Use the index to set goals, develop action plans, monitor changes and progress, and communicate with stakeholders about your ESG performance and achievements.

The ESG materiality matrix

A materiality assessment leads to a materiality matrix, which is a visual representation of what topics are significant for the company and the weight of those topics. The x-axis shows the level of impact of the topic on the business’ success and the y-axis states the topic’s level of significance to the stakeholders. The topics will be displayed on a high to low scale on the materiality matrix. 

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