Materiality

DEFINITION: Materiality relates to the identification of the attributes or factors that are relevant and substantial to the overall performance, results and viability of a business. Materiality has evolved to account for economic, environmental and social impacts, all of which could influence business performance and the assessments and financial decisions of that company’s stakeholders and investors.

What are materiality assessments and why are they important?

A materiality assessment is when a firm looks at all of the issues that can affect it and identifies those that matter most or require the most attention. These assessments are then usually used to inform a company's sustainability report. In order for businesses and potential investors to understand where priorities lie so that time, resources and money can be invested accordingly, materiality assessments are crucial. With investors increasingly looking to climate-proof their portfolios, materiality assessments help to equip businesses with the understanding of where the highest risks lie, or could emerge, regarding sustainability practices.

Over the past few years, numerous reporting organisations – most notably the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) – have tailored their reporting guidelines to account for materiality.

The IIRC looks at materiality through six key 'capitals' of: financial, intellectual, manufactured, human, social and natural, and is similar to SASB in that it views materiality in relation to its impact on investors. However, GRI looks at the impact that materiality can have on other stakeholders as well as investors, and what impacts they can have on a business in both the short-term and the long-term.

Ultimately, each of the reporting guidelines help companies to use a materiality assessment to identify what should be included in a sustainability report. The information gathered during the process can also help businesses develop new products, services or projects that can mitigate environmental impact and enhance sustainable business growth.

How does the materiality assessment process work?

While the materiality assessment process will vary depending on the size and type of company, it is generally recommended process begins with a survey of stakeholders, to help with the ranking of material issues in terms of importance and impact. Deloitte outlined one such process for materiality assessments, placing an emphasis on the inclusion of a company’s chief financial officer in any decision making.

Ultimately, a materiality assessment should cast a wide-enough net to capture key impacts outside of traditional financial indicators. Of course, the ability to do so will rely on conversations with internal and external stakeholders of the company.

The materiality assessment process should identify significant economic, social, environmental, and governance issues; rank the level of stakeholder concern on each metric, and rank the impact that each metric could have on a company. Each metric could be highlighted as a potential risk, or as an opportunity to create value.

Once the process is complete, companies will be able to prioritise each metric. In this regard, a ‘materiality matrix’ that visually relays the importance of each issue to stakeholders can be a valuable step. This matrix could then be used to inform strategy, investment and reporting in order to ensure continual improvement on sustainability performance.

What are the key considerations when conducting a materiality assessment?

Primarily, companies need a broad understanding of the aspects that they deem to be material. Materiality guidelines are designed to ensure that time isn’t waste collecting and reporting on indicators that are, objectively, not that important to that company or sector. Any understanding of the key impacts of a business will help streamline data collection.

Companies should also be aware of what areas of an organisation each material aspect appears in. Certain metrics could appear upstream, whereas others, such as deforestation, are more commonly found in supply chains. An understanding of where each impact will occur will allow for greater management.

Materiality also decreases the likelihood that companies are issuing sustainability reports as a tick-box activity, as each report should be tailored to the materiality matrix. For example, GRI offers more than 400 metrics for companies to reflect on when examining materiality.

Concerns regarding materiality assessments usually impact external stakeholders and investors. Due to the tailored approach that each company uses, it is difficult to compare sustainability reports of different companies within the same sector. Ability to cross-examine firms could be hindered by one company choosing to omit a certain issue from its materiality matrix.

Changes in legislation and heightened media scrutiny on certain sustainability aspects will affect how often the materiality assessment needs to be revisited. Most companies will choose to re-evaluate the assessment annually.

What are the business benefits of materiality assessments?

A materiality assessment is an ideal piece of analysis for any company developing a new sustainability framework. It allows a company to recognise and assess sustainability issues across all areas of the value chain, before focusing on new business strategies in areas that pose the greatest risk or offer the highest opportunity.

A heightened focus on materiality issues also limits a company’s ability to promote sustainability achievements, when in reality they could report on a larger number of indicators to achieve the highest application levels for organisations such as GRI.

Materiality assessments also enable companies to create the business case for certain initiatives. If an area appears high-up on the matrix, sustainability professionals can use this as a basis for new initiatives.

Additionally, as previously touched upon, materiality explicitly applies to the financial officers and therefore can strengthen the communication between sustainability and finance departments. In turn, this can help to push sustainability into the heart of a corporate agenda.

More information

As with any sustainability report, the more time, effort and information that a business puts into its materiality assessment will strengthen its overall outcomes. However, even small steps can uncover substantive information that can strengthen a sustainability agenda. Even without higher levels of engagement from other areas of the company, materiality should be pursued to uncover benefits.

Organisations such as GRI offer materiality disclosure services to confirm that a materiality assessment falls in line with the GRI Standards or G4 Guidelines. Reviews can be complete within a week at a cost of around £2,200, although a fast-track option of three days is available at a cost of around £2,900.

Discounts can be offered to GRI GOLD community members, or by combining the materiality disclosures service with a content index service or SDG mapping service.

The UN Global Compact also offers tailored assistance for materiality assessments. The Global Compact Board Programme attempts to align support for boards of directors to oversee strategic approaches to sustainability. The Programme offers advice for high-level board members to align materiality in a way that can strengthen a company’s long-term prosperity.

See also: Sustainability report

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