Types of Materiality Assessment

Learn about the different types of Materiality Assessments and how they can help you establish a winning ESG strategy.

Andrew Lingley avatar
Written by Andrew Lingley
Updated over a week ago

Companies today need an ESG strategy

Sustainability is a major risk to manage, but it is also a significant opportunity.

With the climate crisis requiring urgent action, companies are directing their attention toward managing Environmental, Social, and Governance (ESG) risks and opportunities.

Stakeholders today – including customers, investors and community groups – are demanding action from companies. Business leaders need to demonstrate that they are taking steps to minimise their company’s negative impact. They also need to show that ESG performance is improving in line with global ESG reporting standards. To do this, they first need to get visibility and an understanding of their impacts - but where do you start?

One of the biggest challenges is determining which ESG issues you should prioritise for action. Looking at the ESG landscape, there are potentially hundreds of issues to consider. These issues range from biodiversity to cybersecurity, waste to carbon emissions, diversity and equality to health and safety.

All these issues will not be applicable to all companies. Their relevance will depend on factors such as industry and company size. Going through every possible ESG issue manually is not a realistic option for any business.

To identify and prioritise their most important sustainability issues, organisations must thoroughly examine a diverse range of potential topics, seeking validation from stakeholders. This process is a Materiality Assessment. This is how companies narrow down this topic list and determine where to focus their ESG strategies.

What is a Materiality Assessment?

ESG Materiality Assessments are a crucial step in developing a company’s sustainability strategy. They are an exercise in diagnosis, helping to narrow down the company’s most relevant and important sustainability issues.

The goal is to identify the most critical ESG risks and opportunities for immediate attention, prioritising ongoing monitoring and future addressing of specific issues. This initial step is crucial for establishing an effective framework to manage ESG impacts in the long run.

Materiality Assessments for ESG strategies help you evaluate the potential impacts of your organisation's operations, products, and services on the environment, economy, and society. It also involves assessing the potential impacts of external factors. Engaging with a diverse array of stakeholders helps grasp their concerns and priorities related to ESG factors.

How does the Materiality Assessment process work?

The Materiality Assessment process will differ depending on the type of assessment required (see ‘Types of Materiality Assessment’). It depends on the specific ESG reporting standard that needs meeting. The simplest version is a Stakeholder Materiality Assessment, which involves the following steps.

  1. Define the organisation's industry, boundary and location

  2. Internal stakeholders rate the significance of key topics for the organisation

  3. Engage relevant external stakeholders to rate the significance of key topics

  4. Analyse combined results in your materiality matrix and prioritise material topics

  5. Improve and report on ESG performance

Where does a Materiality Assessment fit into my sustainability strategy?

You should conduct a Materiality Assessment in the earliest stages of developing your sustainability strategy. With so many possible ESG issues to tackle, it’s important to narrow down your focus before taking action.

An effective ESG strategy not only mitigates risks and meets compliance mandates. It also enhances core business operations and fosters stronger stakeholder relationships. Proactive management of ESG issues can serve as a catalyst for positive impact and business growth, generating enormous value.

That’s why a comprehensive Materiality Assessment is so crucial for companies today. The Assessment is a critical starting point for integrating your sustainability strategy with your wider business strategy.

Types of Materiality Assessment

Stakeholder Engagement Materiality Assessment

A Stakeholder Engagement Materiality Assessment helps you narrow down your ESG priorities. You do this by engaging with internal and external stakeholder groups. Internal stakeholders include your employees, management, and the Board. External stakeholders include your suppliers, investors, and the wider community.

It involves sending your stakeholders a list of ESG issues based on a recognized ESG framework. Your stakeholders then rate each issue higher or lower priority based on:

  • The level of impact that your organisation has on each issue.

  • How important each issue is to them as a stakeholder of your organisation.

This process identifies the most significant ESG risks and opportunities in alignment with your stakeholders’ perspectives. This helps you focus your efforts and resources on the areas where you can make the most impact and create the most value. By better understanding your stakeholders’ expectations, you’ll strengthen alignment, build trust, and build stronger relationships.

Impact Materiality Assessment

An Impact Materiality Assessment helps you determine the impacts your business has on the environment and society. This is known as an ‘inside-out’ approach. Some ESG standards - including the Global Reporting Initiative (GRI) and the UN Sustainable Development Goals (SDGs) - recommend an Impact Materiality Assessment.

A key part of this process involves engaging with your stakeholders to rate their importance of ESG issues. This starts with your ‘top-down’ list of relevant material topics. You then evaluate each topic based on three key dimensions: Scale, scope and irremediability.

Examining each ESG topic through these lenses helps prioritise issues based on how likely they are to cause harm. This assessment directs your efforts toward the most pressing ESG areas. These are the areas where your actions can reduce risks and have the most meaningful and positive impact.

Financial Materiality Assessment

A Financial Materiality Assessment focuses on how external sustainability issues could impact your business financially. This is known as an ‘outside in’ approach. Standards like the International Financial Reporting Standards (IFRS) mandate a Financial Materiality Assessment.

The Financial Materiality Assessment measures and ranks potential economic effects of ESG issues on your company.

Financial materiality refers to the significance of an event, information, or issue in influencing the financial decisions of investors and stakeholders in a company. In the context of sustainability, it means identifying which ESG issues could potentially impact the company’s financial performance.

In a Financial Materiality Assessment, you’ll evaluate your preliminary material ESG issues using a risk framework. This evaluation allows you to prioritise these issues according to their residual risk and financial significance.

Through this process, you can strategically allocate resources to address the risks with the greatest financial impact. It helps in aligning sustainability initiatives with business goals, ensuring that efforts in sustainability are also managing financial risks and driving financial performance. This process also helps with adoption and change management.

Double Materiality Assessment

A Double Materiality Assessment is an approach that combines both an Impact Materiality Assessment and a Financial Materiality Assessment. Together, these two assessments help you understand your ESG stance from both sides of the coin. How does your business affect the world and society? And what are the financial implications of those effects?

With a Double Materiality Assessment, you can determine and rank all sustainability impacts, financial risks, and opportunities. You’ll overlay these with the priorities and views of your stakeholders. This is key for helping you develop an effective sustainability strategy.

Which type of Materiality Assessment is right for your company?

The best type of Materiality Assessment for your company will depend on several factors. These include your company size and industry, regulatory standards you need to comply with, and your sustainability goals.

We recommend a Double Materiality Assessment. As leading practice, it is already mandatory for the majority of European companies. A Double Materiality Assessment is the gold standard for those at the forefront of sustainability reporting. That’s why it’s increasingly a requirement from regulators and recommended by experts.

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