What is materiality?
Information is deemed ‘material’ or significant to a company when it has the potential to impact the decision-making process of stakeholders. Materiality is not a clear-cut concept and is subject to interpretation.
Materiality relates to the significance of information within a company’s financial statements. Information on a company is material and should be disclosed if a reasonable person would consider it important.
Thanks to the work by the Taskforce For Nature-Related Financial Disclosures (TNFD), it is now widely accepted within financial markets that climate-related impacts on a company can be material and therefore require disclosure.
Double materiality extends upon the concept of materiality of financial information.
Single materiality vs. Double materiality
Single materiality
The financial (outside-in) perspective on materiality focuses on the impacts of external environment, social, and governance (ESG) factors on the company’s financial performance. This is the traditional method implemented by companies, specifically aimed at benefiting investors and shareholders.
An impact (inside-out) materiality perspective focuses on the company’s influence on the economy, the environment, and people, with the aim of benefiting various stakeholders, including investors, employees, customers, suppliers, and local communities.
Double materiality
This is the union of financial and impact materiality. It broadens the scope from the former investor-focus on how sustainability impacts a company’s financials, by balancing the impact on society and the environment.
Double materiality is the idea that impacts of an ESG concern could affect an organisation’s activities in a material way. It also means that impacts of an organisation’s activities can affect an ESG concern in a material way.
Double materiality factors in these climate-related impacts on the company and the impacts of a company on the climate – or any other dimension of sustainability. Double Materiality Assessments are complex and touch on much wider issues than Single Materiality Assessments as they extend beyond an organisation’s internal environment to include its influence on society, the environment, and the broader climate.
How to determine what is material to your business
To determine what is material to your business, a Materiality Assessment must be conducted. This is a comprehensive process of analysis that involves identifying and prioritising ESG issues that present substantial risks and/or opportunities for a business. It requires input from both internal and external stakeholders to gain a holistic viewpoint.
The process for conducting a Materiality Assessment is as follows:
Firstly, a review of the company across the entire value chain to gain a holistic understanding of the processes and impact areas of the company must be conducted. This will help determine what the objectives are for the assessment. Identification of internal and external stakeholders will also be required. Using industry standards, frameworks guidance and discussions with relevant stakeholders, a list of material topics must be developed. Through a variety of quantitative and qualitative methods, using the list of material topics, both internal and external stakeholders must be engaged to determine the material items that they place the most value on. This data is then reviewed to determine what stakeholders consider to be the most significant material issues. These results can then be plotted on a materiality matrix to highlight key material issues to focus on. A list of priority material topics can then be identified to focus attention and resources on.
Why conduct a materiality assessment?
Conducting a Materiality Assessment provides a multitude of advantages for companies.
This assessment considers the areas where the company exerts the most significant influence. This process not only fosters stakeholder engagement but also enables companies to enhance transparency, ultimately bolstering their reputation.
The insights gained from this analysis serve as a foundation for informed decision-making, progress tracking, ensures more effective resource allocation and enables the prioritisation of sustainability initiatives for implementation.
Therefore, companies use the Materiality Assessments to guide their sustainability strategic planning processes.
Materiality considerations
Despite their significance, Materiality Assessments pose challenges to businesses as deciding what is material to your company can be complex process.
Engagement with key internal and external stakeholders is key to integrate and prioritise a diverse range of stakeholder perspectives.
The application of industry framework guidance, such as the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) is also important. These frameworks list mandatory disclosures for companies along with guidance on recommendations.
Conducting a comprehensive Materiality Assessment involves analysing the entire value chain of a company, extending beyond operational aspects. Additionally, a substantial challenge lies in the considerable amount of time required to conduct a thorough Materiality Assessment.
What does an effective materiality assessment look like?
Businesses can successfully conduct Materiality Assessments through the following:
- Gain active involvement from the senior management team.
- Align the scope with the business and harness results to feed into the business strategy.
- Allow enough time to engage with stakeholders.
- Use a variety of methods to actively engage stakeholders and maximise your outreach potential.
