Materiality is the principle of defining the social and environmental topics that matter most to your business and your stakeholders. It is an exercise that is conducted during the early stages of forming a sustainability strategy aimed at engaging stakeholders in order to understand how important social, environmental and governance (ESG) issues are to them. Insights derived from a materiality assessment are important in helping to shape a company’s sustainability story and communicating the long-term value of strategic decisions to the wellbeing of the firm.
Why do you need to do a materiality assessment?
In recent years, a number of new frameworks and reporting standards - such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and International Integrated Reporting (IR) - have been introduced placing greater pressure on private companies to report their environmental, social and governance risks. As a result, many companies are starting to evaluate - or re-evaluate - their corporate practices and adopt a more responsible approach to doing business.
Materiality assessments are an important business tools that are best used when embedded into a company’s broader corporate strategy. A holistic and inclusive material assessment can deliver significant corporate benefit including:
Managing corporate reputation by ensuring that ESG considerations are embedded in business strategy and operations and risks are mitigated;
Predicting how changes to the political, economic or social environment, such as water or changing weather patterns, may impact a company’s long-term ability to create value;
Identifying where a company is creating, or reducing, value for society;
Helping companies to stay competitive by identifying any opportunities that present as a result of evolving trends, including new products, services or business models;
Prioritising resources towards ESG opportunities or threats that matter the most in line with stakeholder priorities;
Identifying areas where consistent monitoring and data collection is required;
Matcha’s guide to materiality
1. Define the scope
The first step of any materiality assessment is being clear on what materiality means for your organisation’s unique characteristics. Key questions to consider include:
What regions or countries will be assessed in the materiality process? Will it take a global view or focus on specific geographies?
Which parts of the business will be assessed? Will certain business units be excluded? Or will it take a group view?
Which stakeholders will be included in the assessment? How will their voice be weighted?
How will you define the boundary of the materiality assessment across the value chain e.g., operations, upstream, downstream? Note: the most effective materiality assessments will have a broad boundary, taking into consideration the company’s impact beyond it’s own operations (e.g., downstream)
How will the outcome of the materiality process be reported - as a standalone report or integrated into overall the business performance?
Who is the audience of the materiality assessment and how will the information gathered be used?
For a materiality assessment to be taken seriously and used appropriately, it should be embedded as an integral part of the management cycle and used when planning the business strategy and setting performance objectives.
2. Develop the framework
Once your scope has been set, a framework needs to be set to guide the measurement and collection of data that will be gathered. Use a variety of sources to determine the indicators that are most relevant to your business. These may include:
Reviewing sector-specific or sector-agnostic regulations and standards, ratings and rankings;
Research of wider social and environmental challenges;
Discussions with internal and external stakeholders;
Your materiality framework should include economic (e.g., revenue, profit, company turnover), social (e.g., labor statistics, human rights, consumer issues, community impact) and environmental (e.g., water stewardship, greenhouse gas emissions, waste management) indicators. It should also lay out how the indicators will be measured and the individuals/ teams responsible for compiling the data.
As part of the process, set up long-term processes for continuously capturing this data, as well as a methodology for identifying trends and flagging risks. Where possible, it is worth investing in digital solutions to collect and store data in a consistent format.
3. Conduct stakeholder outreach
Materiality assessments are most valuable when you’re able to gather diverse insights from inside and outside company walls. Involving business functions and external stakeholders beyond the sustainability team will provide wider perspectives and more in-depth understanding of trends affecting the business.
To get the best results, we recommend using a combination of stakeholder interviews and online surveys. Questions should provide insight into the importance and impact of each indicator to the stakeholder, as well as how critical each topic is for the business in terms of executing strategy, identifying current and future risks, market opportunities and product innovations.
4. Analyse the results
Analyse the insights in detail to determine what issues are most important to stakeholders. Take note of any trends and observations that may be of interest to leadership. Map out the results in a matrix, plotting how each indicator ranks in significance relative to stakeholder influence.
5. Share your insights
Share the results and insights you have gathered with your stakeholders in the form of a sustainability or impact report. Sharing your observations can help to maintain accountability throughout your sustainability journey and is an effective way of communicating your sustainability story. Open dialogue with stakeholders demonstrates a willingness to engage and improve your company’s ESG performance.