What is Materiality Assessment
The Global Reporting Initiative (GRI) defines ‘materiality’ as topics or issues that create an indirect or direct impact on any organization’s ability to manage its environmental, social, and economic value for itself, its stakeholders, and society. Within the context of sustainability, materiality assessment or materiality analysis plays a characteristic role in identifying and prioritizing ‘material’ or ‘most critical’ issues (primarily sustainability issues) that are essential for a company and its stakeholders to address. In recent times, key stakeholders such as consumers, business partners, and employees have shown high interest in corporate ESG (Environmental, Social, and Governance) initiatives, thereby making materiality assessments a foundation for a comprehensive enterprise ESG strategy.
Importance of Materiality Assessment within the Current Market Scenario
Materiality has existed as a notion since the 18th century within accounting circles to help shareholders assess risks involved in investing. Initially, these assessments were focused on the interests and needs of just a single group of stakeholders – investors and were used by them to leverage information. Gradually, materiality analysis has become a fundamental concept used by small and large businesses for assessing ESG impacts created by organizations and their stakeholders. Within the corporate responsibility or sustainability realm, it is exercised by professionals (both within a company and external to the company) to analyze the performance needs and information of both internal and external stakeholders.
In terms of ESG, companies create a direct impact on internal and external issues which they need to effectively investigate and reduce to achieve long-term survival. Greenhouse gas emissions and labor practices are a few critical, environmental, and social issues that are material for an organization to address, given the increasing awareness among consumers seeking transparency and authenticity from firms in these areas. Overall, an ESG or sustainability materiality assessment can help engage various stakeholders on both internal and external issues to develop an effective sustainability strategy. Materiality assessment is mostly the initial step for companies intending to develop, communicate, and implement an ESG strategy. While there may be different approaches to assessing material topics affecting the business across industries and companies, a successful materiality assessment is developed by following these key steps:
- Step 1: Identify key stakeholders (internal and external) for the business within the company’s area of operations.
- Step 2: Engage with stakeholders through an engagement process to identify ESG-related risks and opportunities through primary research.
- Step 3: Analyze, document, and interpret material issues that the organization considers as a risk/opportunity to its business operations and stakeholders.
- Step 4: Visualize ESG goals that the organization must achieve by developing a materiality matrix by ranking and clustering the core issues.
- Step 5: Informed decision-making about measuring and reporting ESG efforts of the firm.
Stakeholder groups and their feedback play a vital role in materiality assessments. As people who expect meaningful services and products from a brand, customers (champions of brands) are valuable stakeholders who can help companies build their competitive agility and make their existence relevant. In a 2018 survey that identified the buying choices of customers in the U.S., 62% of the consumers preferred buying from brands that take a stand on largely relevant issues such as fair employment practices, sustainability, and transparency which are key environmental, cultural, and social issues. Overall, developing an effective stakeholder engagement strategy also plays a key role in how companies build their materiality assessment.
How Materiality Assessment adds value to Your Company
While investors and large corporations are the primary consumers (target audience) for materiality assessment, other stakeholders such as regulators, government representatives, Non-governmental Organizations (NGOs), suppliers, and employees are keen on both being a part of the assessment and looking out for curated assessments regarding the ESG performance of companies, depending on the industries in which they operate. Some of our existing/potential clients gaining benefits from materiality assessments are listed below.
- Business owners and large corporations: Materiality assessment can help both large corporations and small corporations in realizing the issues with the greatest impact on their stakeholders, businesses, and ecosystem.
- NGOs: NGOs are critical of the operational impacts of a firm and provide vital third-party intelligence that can create an indirect impact on the decision-making process of other internal/external stakeholders. For an NGO representative of climate change, renewable energy transition might be a highly significant material topic in the mining/manufacturing industry. However, for a social NGO, fair labor practices would be a pressing issue.
- Investors: Investors are keen on investing in companies that outperform their peers in ESG reporting and management. Investors gain a better understanding of a firm’s value creation within ESG management through robust materiality assessments.
- Government organizations and regulators: ESG-related regulations are rapidly evolving across several key ESG indicators and frameworks and standards like ISSB, TCFD, and CRSD. These require companies to adopt strong ESG practices to analyze their sustainability performance. Also, governments expect companies to address urgent sustainability issues by setting policy frameworks and providing incentives for firms that create a positive sustainability impact. For instance, Novartis’ ESG materiality assessment for 2021 found that government representatives sought patient-centric innovation from Novartis to improve specific ESG requirements within innovation.
- Employees and suppliers: Employees and suppliers usually fall under impacts categorized as both dependencies and externalities. Employees are reshaping workplace transparency and environmental and social sustainability by choosing purpose-driven cultures. Through materiality assessments, companies and employees can understand their alignment with a firm’s priorities, values, and expectations and develop a combined roadmap for action. These assessments also benefit suppliers by enhancing their knowledge and training in ESG requirements and equipping them with standards/regulations that promote sustainability practices within the supply chain.
Above is a high-level depiction of a materiality matrix plotted for a firm that operates in the mining industry. Stakeholders in this industry would largely be concerned about a firm’s health and safety standards for workers and might give little preference to gender diversity (given the nature of the operations of the firm). Recent statistics (2022) suggest that only around 12-13% of the overall workforce in the mining industry is represented by women, while this is one of the industries posing high, on-field health risks to workers apart from the manufacturing and construction industries.
Materiality assessments may provide a range of benefits for firms in terms of ESG; not limited to the following, a few of these benefits are listed below:
- Helps identify the most crucial topics for stakeholders to address
- Facilitates businesses to achieve competitive advantage
- Validates the business strategy of a firm
- Helps companies understand sustainability factors that might otherwise be neglected
- Provides focus on a set of sustainability issues that need to be addressed
However, there are specific benefits provided to companies by these assessments, which are listed below:
- Identifying ESG issues that are crucial to the operations of a firm: Material issues affecting a business operation differ from firm to firm and identifying them is a key challenge. For instance, a mining corporation would have a very high impact on biodiversity compared to a software operator. A materiality assessment helps firms decide on issues that will have a consequence that requires in-depth analysis specific to the operations of the firm.
- Developing a business strategy for addressing ESG issues: As discussed earlier, materiality analysis is the fundamental backbone of a resilient business strategy for companies. Companies concentrate on environmental and social topics for managing operations to embed sustainability within their business processes.
- Quantifying the impacts of ESG using the right metrics: Before quantifying the impacts of the issues identified in the above two stages, companies are required to make sure that they select the right metrics for collecting and analyzing data. While this is mostly developed by internal stakeholders, engaging external stakeholders for collecting, analyzing, and validating the data is crucial at this stage. Once the right metrics are identified, the impacts to the business and stakeholders can be quantified and visualized.
Nonetheless, leveraging Information Technology (IT) is key to gaining futuristic insights into material issues and to also improve the sustainability of storing and reporting data. Automation of data analysis is key to improving stakeholder engagement which is identified as a challenge within materiality assessment. Also, by integrating technology in materiality assessments, companies can improve the effectiveness and accuracy of their sustainability reporting.
How NeoImpact can help
While a materiality assessment may initially sound simple, there are plenty of challenges that these can present for companies and stakeholders. Some of the most crucial challenges include the inability to identify the issues at hand or a failure to identify what topics are “material”. Also, the complexity of the nature of business presents a roadblock to identifying which topics are meaningful to address. Furthermore, despite ideating topics, some stakeholders find it challenging to narrow down pertinent topics as there are too many “material” topics at hand.
NeoImpact provides a robust platform to assess and interpret material topics that are crucial to the performance of a firm through comprehensive analysis, integration, representation, and visualization of key performance indicators across a broad range of ESG topics. NeoImpact’s range of consulting solves the following challenges with materiality analysis for global firms operating across any industry. NeoImpact can help in the following ways
Materiality assessment – topic ideation and categorization of material topics
- Conceptualize, analyze, and decide on “material” sustainability issues to focus on and invest in and offer Issues that can attract and highly influence stakeholders.
- Create long-term value for companies and promote business success.
Developing opportunity and risk insights
- NeoImpact’s dedicated ESG taxonomy collects, automates, and reports data through and identifying the right metrics for performing materiality assessment.
- Based on the metrics identified, NeoImpact’s consulting arm delivers Sustainability Reports in line with GRI, SASB, ISSB, and TCFD standards.
ESG strategy consulting
- Develop a robust sustainability strategy by building on the fundamental ESG data available across more than 300 KPIs on NeoImpact’s taxonomy.
- Create a hierarchy of sustainability issues to be tackled and achieved and prioritize them.
- Develop robust ESG strategies for business operation.
