- Materiality assessments are a crucial step on the road toward becoming a sustainable company.
- Two outputs emerge from an assessment: material topics and a sustainability strategy.
- Challenges to developing an effective assessment include incorporating and prioritizing stakeholder opinions to determine what is material.
A materiality assessment is a key step toward developing meaningful sustainability targets and acting on them. It’s the process of deciding what issues an organization wants to prioritize and report on – the material environmental, social and corporate governance topics that matter most.
The current iteration of the Global Reporting Initiative Standards – one of several voluntary frameworks that companies can use to manage their sustainability disclosures – defines material issues as those that reflect the organization’s economic, environmental and social impacts or that influence the assessments and decisions of stakeholders. This places emphasis on material issues as impacts made by a company on its environment and workforce.
Meanwhile, the Sustainability Accounting Standards Board, a reporting framework that is financially focused, defines materiality as those issues “that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors.” This shifts the emphasis from impacts emanating from the company to impacts on the company.
Whether inward or outward facing, the way to understand what issues a company’s stakeholders think are material is the same.
There is an inbuilt financial and time cost to conducting materiality assessments on a yearly basis. Large corporates have more resources than smaller businesses, and so it’s important to set a realistic repeat rate commensurate with the size of the organization. There is no consensus on the frequency of re-assessing, since factors affecting a company’s sustainability evolve depending on the industry, size of the company, region and economic climate.
This raises a question: Can effective ESG reporting be done without a materiality assessment?
“The short answer is no,” Thomas Singer, principal researcher at The Conference Board, a U.S.-based business research non-profit, told Lubes’n’Greases. “Some form of materiality assessment or issue prioritization can help ensure a company’s ESG reporting is meaningful and effective. Otherwise, there is a risk that ESG reporting is more about window dressing or ticking boxes and less about communicating how the company is managing sustainability issues strategically.”
A materiality assessment can have two outputs. The first is helping to formulate a list of relevant ESG topics to disclose, the scope of these topics and the choice of framework. (See Disclosure.) The second to inform a sustainability strategy.
As sustainability consultant Mia Overall cautions, reporting and strategy are not the same. The difference being that material issues for disclosure in a sustainability report reference past performance whereas determining what issues to action in a strategy looks forward.
Corporate Citizen, a U.K.-based sustainable business consultancy, defines a sustainability strategy as “a prioritized set of actions. It provides an agreed framework to focus investment and drive performance, as well as engage internal and external stakeholders.”
The assessment process can be divided into a number of steps, ranging between four and eight since there is no consensus. For the sake of brevity, here they are condensed here into four:
- Identifying stakeholders – determining who are the stakeholders, both internal and external, and who should get a voice about which general topics;
- Categorization – creating a list of the topics to be measured and organizing them into groups;
- Information gathering – designing and conducting a stakeholder survey, examining corporate documents and assessments from other companies;
- Prioritizing – ranking responses about what stakeholders think are the highest-priority issues and weighting them.
Typical Stakeholders and Associated Issues of Interest
An effective materiality assessment engages internal and external stakeholders to gauge the importance they place on certain ESG issues. This data can be collated into disclosure documentation that can be used by external stakeholders and into an internal sustainability strategy.
Another option is self-assessment, especially for medium-sized companies in the chemicals industry, such as lubricant manufacturers. For example, the German Chemical Association, known as VCI, provides an avenue for self-assessment through its sustainability initiative. In this case, employees take on the role of external stakeholders.
Performing a materiality analysis then a materiality matrix based on the VIC’s sustainability checks compile areas for action with potential for improvement being identified.
“The self-assessment sustainability check allows small companies to carry out a first systematic materiality analysis to establish a materiality matrix in the area of sustainability. This can confirm the sustainability topics that a lube manufacturer and its external stakeholders consider important and a priority. It also allows to identify new areas for sustainable action,” Apu Gosalia, an independent sustainability consultant and academic, told Sustainability InSite.
ESG ratings agency Ecovadis points out that stakeholders play a crucial role in identifying risks and opportunities for organizations and that they therefore add depth to a materiality assessment. Different groups of stakeholders will have a range of priorities, and large corporates have larger numbers of stakeholders than smaller companies.
Internal stakeholders include the management team, sustainability officers and employees, while external stakeholders can be investors, suppliers, end-users, communities, regulators and non-governmental organizations. Where their expectations intersect creates a set of material targets.
“For a materiality assessment to be successful, it must be based on a clear understanding of what information the company is looking for,” explains sustainability consultant Mia Overall in an article published by Greenbiz.
“This enables you to ask the right questions, choose the right stakeholders, apply the appropriate methodology and visually present the information effectively to help inform decisions.”
Deciding what is material and to whom needn’t be an exercise in subjectivity but can easily become one. Every stakeholder has their own opinions about what materiality entails, and incorporating, weighting and prioritizing these opinions is central to the process.
The team on shop floor may be more concerned with career development, while management may focus on reducing the cost of energy. They may agree on carbon reduction measures. Each has its merits, and each has an impact on operations. Career development creates a deeper skills pool and morale; cutting energy use can mean more profit; and reducing carbon helps mitigate climate change. But does each one of them carry the same weight in guiding strategy?
This highlights a potential conflict in expectations among stakeholders that all opinions must be treated equally. In fact, they are not. To some, this can seem exclusionary, but the point is to limit the volume rather than the merit of their opinions.
Other sources of determining materiality can include codes of ethics and other HR documentation, year-end reports and CSR documentation, as well as what peers think is material.
For an assessment to be effective from the outset, it should have clearly defined objectives. When conducted for the first time the core objective will identifying what the material environmental, social and governance risks and opportunities actually are: reducing resource consumption, improving supply chain security, human resources development or preparation for being acquired.
Assessments may also be used as an opportunity to hone an existing sustainability or business strategy, engage with stakeholders in a formal way, or even as a way of anticipating disruptors. For example, a materiality assessment might help a lubricant company focus on the likelihood of a particular raw material becoming heavily against.
Companies should also consider all of the audiences for whom the assessment is intended. In the case of public corporate entities, that may include the investor community, while smaller, private enterprises might provide it to a customer trying to improve its own sustainability performance.
Gathering and Prioritizing Issues
A materiality assessment is in essence a survey that canvasses the opinions of as many stakeholders as is practical. Some sustainability professionals think that the best method is to use a traditional multiple-choice survey, while others think that the nature of the stakeholder group determines the format.
“To get the best results, materiality assessments should be formal, structured engagements with stakeholders — not informal Q&As or workshops … to make it easy for stakeholders to complete and easy for you to analyze results,” Overall writes.
A survey could be structured like this:
Rate how important you think each of the following issues are to the company’s sustainability.
- Transparency, compliance and management accountability
- Financial performance
- Employee development, diversity, inclusion
- Impact on society
- Climate change and the environment
Once opinions have been collected, issues can be prioritized to determine which are the most strategically important, or in other words material, to the company and what measures can be reasonably undertaken given the company’s size and resources. A small company may find it difficult to access funds to install solar panels, as was done by Shell in 2020 to its lubricants facilities in Asia and Europe, and may choose instead to focus on energy efficiency.
Judging an issue’s strategic importance includes taking into account who it affects, what impacts it has on the company and how it contributes to strategy. There are a variety of ways to numerically prioritize stakeholder views, but a simple one is ranking them from one to five and then adding the scores for each to get a rank.
Stakeholders can be advised to consider a number of factors in weighting topics, from how often they occur to the risk that they represent (in terms both of severity of risk and the likelihood of it occurring), legal obligations and the expense of certain undertakings.
A simple formula can weight topics higher than others. For example, if there are five criteria – A to E – and it is decided that A is two times more important than B, C and D, and that E is half as important as B, C and D, then the formula would be: B + C + D + (E x 0.5) + (A x 2)
Weighting and Prioritizing Topics
Source: Campus Carbon Management Initiative
The list of topics may grow each year if materiality assessments are repeated. But a wider net cast over operations and finer granularity of the assessment can lead to overload and confusion of what the priorities are for stakeholders. A solution to this, KPMG says, would be to raise the threshold of what is a priority.
At this point, it’s useful to be aware of overlap to reduce using resources to gather similar data. This can happen if the scope hasn’t been firmly defined at the start.
The next section will discuss how to present the feedback gathered in the assessment and how to translate it into a sustainability strategy.