What is Materiality?

Dec 12, 2022

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Materiality, in the context of corporate reports or more specifically, integrated reports, is any factor that can impact an organization’s short, medium, or long-term ability to create value. The process of determining materiality is entity-specific and varies from one industry to the next. Additionally, materiality may also be affected by other factors such as multi-stakeholder perspectives.

In the last few years, sustainability reporting (whether ESG Reports or Integrated Reports with specific sustainability disclosures) has materiality as a significant aspect for reporting organizations looking to disclose their performances, both financial and non-financial.

As per the International Integrated Reporting Council (IIRC), material information is any that is reasonably capable of making a difference to the conclusions drawn by stakeholders when reviewing an organization’s annual or sustainability report.

The definition of materiality by the Global Reporting Initiative (GRI) is “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”.

The GRI’s definition gives a clearer picture of materiality with its elaboration on the type of impact, type of value, and who can potentially be affected.

Materiality Assessment

The logical next question is - now that we have an understanding of what materiality or material factors are - how does a company find out which factors are most important to it? After all, there are a variety of issues and any one organization may not be able to assign equitable resources to all of them. This is the point at which an organization will do a “materiality assessment”.

Materiality assessment is essentially the process for an organization to find out what factors are material to its value-generating potential and to evaluate its ability to manage risks and opportunities. These issues or factors will change and one can expect differences in what is considered “material” for companies within a particular industry or when comparing companies from different industries.

Examples

So, for example, in the oil and gas industry, material factors may be quite obvious such as the climate impact, energy use for operations, water, etc. Alternatively, let us take the insurance sector in which climate change is a material factor as this will likely increase the risk to the company. Additionally, responsible investment and the responsible use of financial capital for an insurance company can be considered material. After all, investors would like to know if the company is investing in industries that damage the environment or not. Further, it is significant that insurance companies are transparent about their investment decisions with regular engagement with stakeholders.

A materiality assessment is a process by which companies can identify and prioritize issues that are important and relevant to the business. In many cases, annual reports and integrated reports may include a materiality matrix that showcases, using a graph, the issues that are of the highest importance to the reporting company. As a part of this process, companies will engage with internal and external stakeholders to survey their interests, concerns, and thoughts on material issues to the company.

Benefits of Materiality Assessments

The next question would be, why? Why bother with this whole exercise and what are the benefits to the company in assessing material issues? The benefits are:

- Materiality assessments will allow organizations to present a holistic and complete picture to stakeholders as it integrates the company’s non-financial performance in their disclosures and reports. This will include the organization’s environmental, social, and governance factors and associated performance.

- An organization that conducts a materiality assessment would be able to identify risks and opportunities that could affect value. When found early, the company would then be able to take steps to mitigate risks or take advantage of other opportunities.

- Conducting a materiality assessment can itself present opportunities to organizations and brands. The assessment would provide your brand with data-led in-depth insights into the business which would allow the company to enhance or improve its sustainability activities and performance. This would necessitate involving multiple departments and getting the buy-in of management in addition to looking into the business's supply chain.

- Conducting a materiality assessment is an opportunity for a company to showcase the business to current and potential investors, thereby ensuring that investors make well-informed investment decision making. If the company is transparent and displays improvement in its ESG performances this can help them attract further investments and capital.

- Another major benefit is the enhanced stakeholder engagement that the process of materiality assessments provides. This can boost trust in the brand and improve brand power etc.

- The feedback and conversations held with stakeholders ensure that the company is aware of any potential issues that may arise. For example, stakeholder values and interests may evolve and regular stakeholder engagement ensures that the company is prepared.

Dynamic Materiality

The last term to consider and understand is known as ‘dynamic materiality’. Dynamic materiality essentially means that financial material issues may change and therefore are dynamic in nature. This may be due to unforeseen events such as COVID-19. It is important that companies monitor dynamic materiality and therefore enhance the value of materiality assessments while mitigating the risks the company is exposed to.

First introduced by the World Economic Forum in early 2020, dynamic materiality became popular as a concept and now 5 reporting standards – CDP, Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB) – have all acknowledged that materiality should be considered dynamic and that identified sustainability topics could potentially become financially material in the future.

Double Materiality

Recent advancements in the understanding of materiality have resulted in the concept now known as ‘double materiality’. As mentioned earlier, stakeholder values and expectations change, thereby impacting material factors. This led to discussions and debates which acknowledged the need for a deeper understanding of materiality assessments. Since material factors are dynamic and continue to evolve, double materiality is the concept that companies should report on issues that are financially material to the business and impact business value. Additionally, it also assesses sustainability matters that are material to the economy or market, the environment, people, and society in general. Other companies may take things a step further and decide to delve even deeper into sustainability matters by looking into the categories of people, planet, and profit.

Impact Materiality

This leads us to impact-based materiality or the concept of reporting/disclosing matters that affect the economy, environment, and people. It is pertinent to note that impact materiality covers both positive and negative impacts across all three dimensions – economic, environmental, and people. The salient aspect of impact materiality is that it determines material issues based not on whether it is of interest to stakeholders but rather if there is an impact on the economy, environment, and people.

Materiality assessments can be a complex, drawn-out process that would require the full and proactive support of the company’s upper management. Additionally, multiple departments and stakeholder groups would need to get involved to ensure a balanced assessment. This process is sometimes outsourced by brands to third-party organizations that conduct the assessment and this further ensures unbiased disclosures. This assessment would then need to be done periodically to ensure that material issues are monitored.

Conclusion

For more information on sustainability reports and integrated reports by major corporations and their approach to materiality, check out Report Yak’s showcase here. Report Yak is an agency that specializes in corporate reporting. From sustainability to integrated and impact reports, we design and write content for organizations to get their message across to stakeholders. Get in touch for well-designed, elegant reports by our team of highly skilled designers.