Materiality assessment: A crucial factor in reporting
Oct 4, 2022
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In the last couple of years, sustainability reporting has seen some progress in achieving the goal of a consolidated reporting format. The potential benefit of a single reporting framework used across the world is evident as companies would now be able to compare and benchmark their performances over the year.
However, to be able to do this in the most effective manner, a larger percentage of companies the world over are conducting what is known as a materiality assessment.
What is materiality and materiality assessment?
‘Materiality’ is a term used regularly within sustainability circles nowadays. It refers to material information.
So, what is material information? As per the Value Reporting Foundation (previously the International Integrated Reporting Council), any information which is reasonably capable of making a difference to the conclusions stakeholders may draw when reviewing related information can be considered to be material.
Another definition, this time from the Global Reporting Initiative (GRI) states ‘Materiality are those topics that have a direct or indirect impact on an organization’s ability to create, preserve, or erode economic, environmental and social value for itself, its stakeholders and society at large’.
So, how does a company find out what is material to its value-generating potential risk or opportunities management? After all, material issues will differ from one company to another and change drastically across industries, regions, etc. For example, a large company that manufactures semiconductors uses a lot of electricity and water in its production processes, in addition to other infrastructure requirements. Therefore, a company like that may be more focused on energy efficiency or water conservation, which are material to their operations, as opposed to forest protection.
Companies can discover and analyze their material information through a process known as materiality assessment. Therefore, a materiality assessment or analysis is a method to identify or prioritize the issues that are most important to an organization and its stakeholders.
A part of this materiality assessment is to find out the potential of each issue and its potential impact (positive or negative) on the company’s growth, costs, or trust. Secondly, the assessment also helps organizations find out how important each issue is to stakeholders (internal or external).
Benefits of materiality assessment
There are numerous benefits to an organization conducting materiality assessments and reviewing and upgrading them regularly:
Present a more complete picture of the organization to stakeholders by integrating non-financial performances, such as ESG performances, into reports
Identify and act on business risks and opportunities that often become evident from an organization conducting a comprehensive materiality assessment.
Provide companies with a data-based in-depth view of the business and this presents an opportunity for the brand to enhance its sustainability activities by getting the involvement of people from across departments and the supply chain
Showcase to investors (current and potential) the ESG performances of a company, resulting in the improvement of investment decision-making
Enhancement in stakeholder engagement – while this has multiple pros as is, the company’s ability to get feedback from and provide results to stakeholders enhances trust, brand power, etc.
Help organizations stay ahead of many future issues that may crop up, such as changing stakeholder values or with regards to regulatory needs
There is a more recent approach for organizations looking to conduct a materiality assessment known as ‘double materiality’. While the definitions of materiality provided earlier still stand, double materiality can be defined as a deep dive into what was traditionally known as a materiality assessment.
Double materiality is the concept that a company should simultaneously report on the following sustainability matters:
Issues that are financially material and impact or influence business values
Sustainability matters that are material to the economy or market, the environment, and people or society in general
This concept is being discussed and debated amongst investors, stakeholders and companies after the realization that material factors are dynamic and continue to evolve as issues or expectations from stakeholders may change.
Therefore, issues that may impact the market or industry that may not currently be financially material to an organization today may become a become source of risk tomorrow. Therefore, there is a growing trend among companies looking into double materiality to find and report currently financially material sustainability matters and those that may not directly impact them but influence the market, environment, or society.
Some organizations may choose to delve even deeper into sustainability matters by using three categories. Each category may look into (a) People (b) Planet (c) Profit.
Why do you need it?
A company’s leadership, nowadays, may get questioned on multiple issues by stakeholders, even those that may not directly impact the business. For example, child labor or modern slavery are significant issues and stakeholders may be keen to know the company’s assessment and if there is a potential risk.
Double materiality can report on financial material issues and external sustainability matters or events and therefore keep the company’s leadership up to date and ready to deal with stakeholders and mitigate potential future risks.
Secondly, double materiality can assist your organization in developing effective management strategies as well as help in disclosing and reporting on internal and external matters to different relevant stakeholders.
With a little help from friends
Many organizations may find the entire process of materiality assessments a daunting task, especially for those attempting it for the first time. However, with the right level of experts (sustainability experts and those experienced in conducting material assessments), your company can also reap all the benefits of conducting material assessments and reporting them.
The actual act of reporting your organization’s material issues also requires a high level of expertise to transparently and clearly convey your performance data and the message you are trying to get across to all stakeholders. In this regard, Report Yak is at hand to help get your sustainability report and annual report conceptualized and designed along with compelling content. Our award-winning work is showcased here and we’d be happy to discuss strategies for your next report.