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What is a Materiality Assessment?
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Environmental compliance experts recognise it can be difficult to remember all of the different assessments that can be made in order to ensure that your business is keeping up-to-date with the many tests that can be done to see how well your company is adhering to environmental measures – with one of those being by conducting a materiality assessment.
Materiality assessments can help companies to better understand their roadblocks towards achieving sustainability, as it can help companies seeking to improve upon their sustainability efforts.
In this article, we’ll examine materiality assessments through an evidence-based lens, evaluate their effectiveness for corporate sustainability initiatives, and provide actionable insights based on industry best practices.
What is a materiality assessment?
“ A materiality assessment is a test which can provide results to allow for better comprehension and prioritising of various sustainability issues, such as by implementing stakeholder views on the product or service being produced and provided by the company. ”
However, the main purpose of a materiality assessment is to define the social and environmental areas that are most valuable and pivotal to your company, investors, and stakeholders.
According to the Global Reporting Initiative (GRI), a leading authority in sustainability reporting standards, the term ‘materiality' refers to topics that have a significant direct or indirect impact on a company's ability to adhere to social and environmental needs, create or erode economic value, engage stakeholders, and enhance overall business value.
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Think of when you take an anonymous poll at school to vote for something in order to get the most accurate results and discover other viewpoints you may not have otherwise found if the poll wasn’t anonymous. A materiality assessment can help to reveal the same issues and discrepancies within a company’s sustainability model and business strategy.
Conducting assessments like materiality assessments are on the rise in the midst of the global movement towards greater transparency and sustainability. In fact, 96% of the world's top 250 companies has committed to reporting their sustainability issues in their environmental reports and disclosures.
However, just because materiality assessments are growing in popularity – doesn’t mean that they materiality assessment process can be completed easily.
The traditional way to conduct a materiality assessment is a long, drawn-out approach that doesn’t align with the fast-paced needs of many industries today: such as retail or fast-moving consumer goods – which face particular challenges due to extensive plastic usage and packaging concerns, creating significant sustainability hurdles that materiality assessments must address.
Why is a materiality assessment important?
A materiality assessment is important because it can serve as the first stepping stone to help companies develop a better sustainability strategy – something that is becoming more imperative as the world transitions to becoming more climate aware.
A materiality assessment is also important because:
- It can help to improve business performance through targeted sustainability initiatives
- It can facilitate better communication with both internal and external stakeholders and boost overall stakeholder engagement by creating clear priorities
- It can reveal the materiality matrix and help companies determine which actions are most worth their current investments and time based on quantifiable impact metrics
- It can help companies adhere to the double materiality asssesment required under the Corporate Sustainability Reporting Directive and other emerging regulatory frameworks
- It can aid in developing improved risk management, improve a company's financial performance long-term, and inspire other sustainability initiatives that align with stakeholder values
A materiality assessment is also often referred to as an “ESG materiality assessment” or a “sustainability materiality assessment” as it not only takes into account the sustainability models of the business, but the different environmental, social, and governance issues (ESG) that could be occurring throughout the company and keeping them from achieving economic and environmental success.
Not only is it becoming compulsory to adhere to sustainability protocols, but both peer-reviewed research and the GRI have shown that investors and companies are more likely to contribute to a product or service if they are dedicated towards environmental reform – such as by developing an ESG strategy, sharing sustainability goals, or even sharing a sustainability report.
“ The reality is that the impacts of an organisation over time. Without understanding these impacts, it won’t be possible to get a complete overview of financially material issues affecting the company, an exercise that GRI supports. – (The GRI Perspective). ”
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This is important as it gives anyone with a direct or indirect impact on a business such as people, employees, and stakeholders engaged in the business, organisation, or product a chance to re-calibrate and reorganise their models to be more sustainable and be in accordance with other ESG values.
Large companies around the world routinely implement materiality assessments in order to realise which issues are having the greatest impact on their business, relevant stakeholders, and even their surrounding ecosystem.
Information regarding a company's actions are growing in interest to the public eye, with new rules such as the SEC disclosure rule in the U.S. and the Corporate Sustainability Reporting Directive (CSRD) in Europe demonstrate how stricter regulations regarding transparency are coming into play. Mechanisms like a materiality assessment can help companies be more prepared for future environmental regulations.
The table below will demonstrate the differences between the SEC and CSRD disclosures and their requirements regarding materiality:
| Criteria | SEC Climate Disclosure Rule | CSRD (Corporate Sustainability Reporting Directive) |
|---|---|---|
| Entities Required | Public companies, registered with the SEC | Large companies and listed SMEs within the EU |
| Materiality Definition | Climate-related risks that could impact a company’s financial performance (financial materiality) | Impacts on financial performance and on society/environment (includes both financial and ESG materiality) |
| Focus | Risks that affect the financial performance of the company, including physical and transition risks | Risks to the business from ESG factors, and impacts the company has on the environment and society |
| Reporting Requirements | Mandatory for public companies under the SEC’s climate disclosure rule, with a focus on material financial impacts | Mandatory for EU companies under CSRD, covering a broader range of ESG topics (environmental, social, governance) |
| Metrics & Indicators | Disclosure of metrics related to climate risks, such as GHG emissions (Scope 1, 2, 3), governance, and financial impacts | A broad range of sustainability metrics, including GHG emissions, biodiversity, social impact, and governance standards |
| Time Frame | Current and future financial risks posed by climate change | Requires reporting on both past and future impacts of ESG factors |
| Report Format | Companies must disclose climate risks in SEC filings, such as 10-K, 20-F | Requires structured digital reporting via the ESAP platform in compliance with ESRS (European Sustainability Reporting Standards) |
| Enforcement | Enforced by the SEC, with fines for non-compliance | Enforced by EU regulators, with penalties for non-compliance |
A thorough materiality assessment can reduce the research that needs to be done on behalf of a future investors or customer, and ensure that the company is dedicated towards sustainability and overall improvement.
Ultimately, a materiality assessment is important as it can propel a business or entity towards greater sustainability and re-engage the viewpoints of their stakeholders. Many companies are looking to implement the right process to improve their ESG and sustainability factors, and a materiality assessment can serve as a good first step towards fighting against global warming.
What are the pros and cons of a materiality assessment?
There are multiple benefits and drawbacks to conducting a materiality assessment, such as helping companies to identify their most significant material issues, sources of greenhouse gas emissions and improve an organisation's ability to tackle their current environmental impact.
However, a materiality assessment (specifically financial materiality) requires careful thought on how a company's choices may influence stakeholder decisions.
Here are the pros and cons of a materiality assessment broken down:
Benefits of a Materiality Assessment
There are numerous benefits to conducting a materiality assessment, such as enhancing stakeholder engagement and drafting the ultimate visual representation of material topics and material ESG issues to focus on moving forward.
- Define Long-Term Emission Reduction Plans: Carrying out a materiality assessment can help companies to discover and define the appropriate long-term emissions reduction plan possible while systematically assessing risks and utilising the opportunities at hand.
- Engage Stakeholders: A materiality assessment also helps to engage stakeholders, as their viewpoint on how sustainability is being handled throughout the operations of the business provides critical insights throughout the process of conducting a materiality assessment.
- Boost Transparency: Conducting a materiality assessment can also help to improve a company’s transparency and overall reputation as making the effort to conduct a materiality assessment demonstrates a company’s commitment to improving upon their sustainability.
- Improved Sustainability Reporting: This can include improved CSR (Corporate Social Responsibility) reports, enhanced ability to measure and track sustainability progress and make data-driven adjustments to their sustainability plans accordingly, and allow for better distribution of resources.
Here's a table further depicting the benefits of a materiality assessment:
| Benefit | Description |
|---|---|
| Improve Stakeholder Communication | As a materiality test requires several surveys and communication efforts to determine how material risks may impact your business in the long-term, a materiality assessment can help to facilitate better communication with your stakeholders moving forward. |
| Better Brand Reputation | Companies that choose to conduct a materiality assessment can directly demonstrate their commitment to environmental reform and to protect both internal and external stakeholders such as the surrounding community. |
| Risk Management | Mitigating climate-related risks is challenging, but a materiality assessment can help to reveal which ESG risks or other social or environmental priorities should be at the top of your company’s “to-do” list. |
| Inspire New Sustainable Ideas | A materiality assessment could help your company to develop new eco-friendly initiatives that never would’ve come to fruition without an ESG materiality assessment. |
Drawbacks of a Materiality Assessment
A materiality assessment helps companies understand their environmental impacts, but a properly conducted materiality assessment will require businesses to go the extra mile to make their materiality assessment worth the effort.
However, on the flip side, while there are many benefits to be had for businesses that ensure to conduct a materiality assessment – moving forward with a materiality assessment can also present some challenges.
- For instance, a conducting a materiality assessment means taking all internal stakeholders' views into consideration and to even prioritise them as they help to support the business.
- In addition to this, in order to conduct a successful materiality assessment, it is often necessary to extend the materiality assessment outside of the company’s individual operations and assess their entire value chain or supply chain as well.
Case Studies of Companies that Have Conducted a Materiality Asssessment
More companies than you may realise, including big name companies, have already conducted a materiality assessment – take a look!
Microsoft conducted a materiality assessment to ensure their sustainability efforts align with stakeholder expectations and business priorities. Their process involved identifying and validating key ESG issues through internal and external feedback.
Read more about Microsoft's reporting governance
Nestlé conducts a materiality assessment every two years to understand their ecological impact and improve stakeholder communication. They created the "Creating Shared Value" sustainability report based on the results of their materiality assessments to enhance accountability.
Read more about Nestlé's CSV Materiality
COP15 Biodiversity Summit: What You Need to Know
Coca-Cola's materiality assessment involved business leaders making contact with over 1,000 stakeholder groups. They integrated ESG issues and social needs into their business strategy, leading to initiatives like "World Without Waste" to address packaging waste.
Coca-Cola Sustainability Report
World Without Waste 2021 Report
Is a materiality assessment a requirement?
Unlike other required regulations such as the SEC proposal rule, the CSRD, or the NFRD – a materiality assessment isn’t mandated to be completed by a company, and they will not face penalties for not completing a materiality assessment.
However, that being said – just because a materiality assessment has yet to become compulsory doesn't mean that companies should overlook their benefits.
According to sustainability reporting experts, companies that proactively conduct materiality assessments can benefit from competitive advantages such as:
Market Position
Conducting a materiality assessment ensures alignment with market expectations and helps position your company as a leader in sustainability.
Investor Relations
A materiality assessment helps build trust with investors by providing transparency into ESG risks and opportunities.
Regulatory Readiness
Stay compliant with evolving regulations by identifying key material risks and ensuring your business meets reporting standards.
Research from leading ESG rating agencies, such as MSCI, illustrates how businesses with comprehensive materiality processes typically score higher on sustainability metrics, potentially influencing investment decisions and customer loyalty.
In this sense, a materiality assessment is more comparable to other well-known environmental certifications such as an ISO certification or B Corp Certification – and while neither of these are required, they help to demonstrate that a company has high moral standards when it comes to their sustainability models and efforts to reduce their environmental impact.
What is the difference between a materiality assessment and a double materiality assessment?
The battle cards below will depict the differences between a materiality assessment and a double materiality assessment required under the CSRD:
Materiality
Focus: Single focus on how ESG factors impact the financial performance of a company.
Double Materiality
Focus: Focuses on both how ESG factors impact the company’s financial performance and how the company’s operations impact the environment and society.
How is a materiality assessment conducted?
A materiality assessment is conducted in a variety of ways, but one thing is pivotal and universal when it comes to a materiality assessment – and that’s getting a clear picture of what information the company conducting the materiality assessment is hoping to learn. This way, the materiality assessment can be conducted with the information the company is hoping to retrieve in mind.
Remember to ensure your senior management is involved in the materiality assessment process, as they can provide necessary resources beyond the basic steps needed such as internal data and financial impact to ensure all potential business units are covered in the materiality assessment.
After this imperative step, questions will be carefully drafted to adhere to the information the company is looking to learn. However, no matter how well drafted the questions are – the quality of information will be contingent on honest answers.
According to sustainability reporting standards like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), of the ways a materiality assessment can condense its findings is with a materiality matrix, which provides a comprehensive visual representation of the key learning points that were discovered from a materiality assessment. Ultimately, a materiality matrix allows for a concise report for all stakeholders and various people involved to decide how to move forward with the findings from the materiality assessment.
What is the materiality matrix?
Based on established best practices from sustainability consultants and corporate ESG leaders, materiality matrix does this by demonstrating two dimensions of sustainability issues:
- one dimension shows the hierarchy of issues;
- the other shows the issues that are most relevant to stakeholders or that could have an effect on overall business performance and success.
As a general rule of thumb, materiality assessments should strive to accomplish each of these steps:
- Take note of all relevant stakeholders;
- Seek contact with all stakeholders to understand their main values and sustainability goals for the company;
- Identify key issues that should be addressed in the materiality assessment;
- Create a carefully curated survey;
- Have stakeholders rank their values in order of importance;
- Analyze the information received from stakeholders;
- Compare results from the materiality assessment from competitors.
Should your company conduct a materiality assessment?
Your company almost always has more to gain than lose when conducting a materiality assessment.
Research from Forbes demonstrates that effectively engaging stakeholders during a materiality assessment can result in the following:
- Validation that a business strategy is making a substantial effort to incorporate social and environmental needs into a business model;
- Understand the strategies that can help propel the business or project towards further success in sustainability in the long run;
- Shed light on the material ESG issues most relevant and important to various stakeholder groups;
- Allow for improved ability to receive opportunities that will help the business to gain a competitive advantage;
- Create a hierarchy of important sustainability issues to tackle and achieve;
- Realise which elements of your company's sustainability strategy have been neglected;
- Help to understand how the company is becoming valuable or obsolete in a society transitioning to greater sustainability and the use of clean energy.
Ultimately, these reasons alone are what make a materiality assessment worth doing for any company. Even if your company isn’t sold yet on the benefits of sustainability, it’s becoming compulsory in order to build a successful business and comply with new regulations.
Therefore, a materiality assessment will never go to waste no matter what the goals of the company are – meaning that identifying material ESG issues through engaging stakeholder groups is undoubtedly beneficial from companies looking to develop a comprehensive sustainability strategy.
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What about Greenly?
If reading this article about a materiality assessment has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!
From materiality assessments, to B Corp, to deciphering which eco-friendly labels are real and which are subject to greenwashing – Greenly is here to help you and your business understand all of the different assessments and certifications that could help your company go green. Book a demo with one of our specialists to learn more.
Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.
Click here to learn more about Greenly and how we can help you reduce your carbon footprint.
Sources
Global Reporting Initiative https://www.globalreporting.org/media/r2oojx53/gri-perspective-the-materiality-madness.pdf
Deloitte https://dart.deloitte.com/USDART/home/publications/deloitte/heads-up/2024/csrd-esrs-double-materiality-assessment
KPMG https://kpmg.com/xx/en/our-insights/esg/survey-of-sustainability-reporting-2022/global-trends.html
Nature Based Insights https://www.naturebasedinsights.com/article/emerging-nature-regulatory-frameworks/
Science Direct https://www.sciencedirect.com/science/article/abs/pii/S154461232301259X and https://www.sciencedirect.com/science/article/pii/S095717872300067X
Microsoft https://www.microsoft.com/en-us/corporate-responsibility/reporting-governance and https://techcommunity.microsoft.com/blog/greentechblog/2020-the-year-of-sustainability/2045094 and https://blogs.microsoft.com/blog/2020/01/16/microsoft-will-be-carbon-negative-by-2030/
Nestlé https://www.nestle-cwa.com/en/csv/what-is-csv/materiality
Coca-Cola HBC https://cz.coca-colahellenic.com/en/a-more-sustainable-future/sustainable-development-report-2022/our-stakeholders-and-materialities
Glowacki Law Firm https://emissions-euets.com/materiality
MSCI https://www.msci.com/sustainable-investing/esg-ratings
LinkedIn https://www.linkedin.com/pulse/materiality-matrix-esg-compliances-subodh-khandekar-mox7c
Forbes https://www.forbes.com/sites/crowe/2022/11/01/the-benefits-of-an-esg-materiality-assessment/
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