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What is a Materiality Assessment?
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These days, 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, but are materiality assessments the only surefire way to do that?
In this article, we’ll talk about what a materiality assessment is and how useful it is for companies seeking to improve upon their sustainability.
What is a materiality assessment?
A materiality assessment is a test which can provide results to allow for better comprehension and prioritizing 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), the term ‘materiality' may pertain to any topic that has a direct or indirect impact on a company's ability to adhere to social and environmental needs, erode economic value, engaging stakeholders, and 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: with many large companies across the globe seeking to delineate 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 original 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 – seeing as both industries make use of a lot of plastic, which don’t give these companies any praises in the world of sustainability or materiality assessments.
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 a company's 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;
- It can facilitate better communication with both internal and external stakeholders and boost overall stakeholder engagement;
- It can reveal the materiality matrix and help companies determine which actions are most worth their current investments and time;
- It can help companies adhere to the double materiality asssesment required under the Corporate Sustainability Reporting Directive;
- It can aid in developing improved risk management, improve a company's financial performance long-term, and inspire other sustainability initiatives.
💡 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 studies 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.
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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, organization, or product a chance to re-calibrate and reorganize their models to be more sustainable and be in accordance with other ESG values.
Large companies around the world will make use of a materiality assessment in order to realize 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 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 the future environmental regulations that are likely to come.
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 help companies to identify their greatest material issues, sources of greenhouse gas emissions and improve an organization'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 by boosting stakeholder engagement and drafting the ultimate visual representation of material topics and material ESG issues to focus on moving forward.
For example, carrying out a materiality assessment can help companies to discover and define the appropriate long-term emissions reduction plan possible while assessing risks and utilizing the opportunities at hand.
A materiality assessment also helps to engage stakeholders, as their viewpoint on how sustainability is being handled throughout the operations of the business are essential throughout the process of conducting a materiality assessment.
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. Other benefits of a materiality assessment include improved sustainability reporting such as better CSR (Corporate Social Responsibility) report, improved ability to track their sustainability progress and make 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:
Benefits of Conducting 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 is helping in company's to 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 materiality assessment conducted means taking all internal stakeholders' views into consideration and to even prioritize 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 value chain or supply chain as well.
Case Studies of Companies that Have Conducted a Materiality Asssessment
More companies than you may realize, including big name companies, have already conducted a materiality assessment – take a look!
Microsoft
This well known tech company has conducted a materiality assessment to ensure their sustainability efforts adhere to their stakeholder expectations and business priorities.
Microsoft's materiality process involved 6 steps:
- Identify key issues
- Refine the list
- Understand both internal & external stakeholder POVs
- Rank issues
- Prioritize issues
- Validate materiality outcomes
👉 Ultimately, the materiality assessment helped Microsoft determine their emission reduction goals, such as working towards becoming carbon negative by 2030 and more depicted in their 2020 Environmental Sustainability Report.
Nestlé
This food and drink company's last materiality assessment was conducted in 2022, and focused on expanding their efforts to understand their ecological impact, how to protect biodiversity and surrounding ecosystems, and improve their communication with internal and external stakeholders.
As a result of conducting their materiality assessment, Nestlé created their "Creating Shared Value" strategy sustainability report to help take accountability and boost transparency regarding their actions in their ESG performance, waste management, and overall company's ESG impacts.
Coca-Cola
This popular soda company isn't only making strides in the marketing world, but in the world of materiality and stakeholder assessment, too.
Coca-Cola's materiality assessment involved business leaders making contact with hundreds of stakeholder groups (over 500, to be exact) to learn more on how human resources can work on their ESG issues and incorporate social needs moving forward.
As a result, one of their eco-friendly efforts called "World Without Waste" was born – which works to collect a bottle to be recycled for every can of Coca-Cola sold by 2030. In addition to this, the effort will help reduce water usage in the process.
👉 Overall, these various ESG materiality assessments reveal the worth-while benefits a business is bound to experience when choosing to commit to a materiality assessment – such as alligning with their stakeholder expectations, business goals, most relevant ESG topics, and boosting the productivity of their sustainability team.
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 oversee their benefits.
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.
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 involbed 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.
One 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.
A 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.
This is because when a materiality assessment is properly conducted, it 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 topics most relevant and important to stakeholders;
- 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;
- Realize which sustainability 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 – and it is something worth doing.
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 ones are 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.
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