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 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 organisations. Increasingly, customers, investors and other stakeholders want confidence that the organisation 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 organisations 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 organisation and validated by stakeholders. We call this a Stakeholder 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 organisation’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 organisation’s ESG impacts holistically. Often, an organisation’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 organisation’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 organisations 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 organisation itself, without taking into account the organisation’s external impact on society and the environment. By adopting a double materiality lens and disclosing both types of impacts, organisations can better understand and manage risks and take advantage of opportunities, delivering a more comprehensive picture of their sustainability performance.

2. What is a Stakeholder Materiality Assessment?

A Stakeholder Materiality Assessment is a process used to identify and prioritise the sustainability issues that are most significant (or ‘material’) to an organisation.

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:

• The significance of an issue for the organisation

• The significance of the issue to stakeholders.

The aim is to determine which ESG risks and opportunities are most critical for the organisation to address first, and to prioritise 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 organisation's operations, products, and services on the environment, economy and society, as well as the potential impacts of external factors on the organisation's operations. It involves engaging with a wide range of stakeholders to understand their concerns and priorities relating to sustainability issues. 

3. Why is this important?

There are many reasons why an organisation should put materiality at the heart of its ESG approach:

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.

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

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 prioritising ESG is good for business, good for people, and good for the planet.

4. Who is involved?

Stakeholder inclusiveness and balance are important principles in the materiality process. Hearing from a diverse range of stakeholders enables an organisation 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 organisation’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 Stakeholder 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 organisation’s impacts and who represent a diverse range of relevant interests.

5. What are the outcomes?

The output of a Stakeholder 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 organisation on the one hand, and their impact on and significance to stakeholders on the other. This matrix is used to inform an organisation's sustainability strategy, management of performance and impacts, and reporting. By focusing on the issues that are most material, an organisation can allocate resources and efforts more effectively towards creating positive impacts, realising opportunities, and managing and mitigating sustainability risks.

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

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. Organisations 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.

Undertaking a Stakeholder Materiality Assessment can be a complex and challenging process for organisations. 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, we have released a state-of-the-art digital Stakeholder Materiality Assessment, so organisations can start their ESG journey at a fraction of that time and cost outlay. Designed with leading practice structure and processes built in, the Stakeholder 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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