Materiality assessment in sustainability: An opportunity to drive business transformation
Materiality assessment is a crucial tool for organisations. It is a way of identifying and prioritising the sustainability topics that matter for a company, with the fundamental objectives of informing its sustainability strategy, informing decision-making, and driving the resilience and transformation of the business.
The Business Working Responsibly Mark certification, the standard for sustainability in Ireland, is based on a materiality approach as well, determining which matters considered under its EESG framework are material to the business.
Expectations of materiality assessment are evolving, and increasingly it is a tool for companies to more thoroughly consider their interdependencies and impacts on their social and natural environment through diverse perspectives.
The impending Corporate Sustainability Reporting Directive (CSRD) and its European Sustainability Reporting Standards (ESRS) are driving a more central role for materiality assessment. A “double materiality” assessment is mandatory and determines the topics that will be in scope for disclosure under the Directive.
Although the centrality of materiality assessment is increasing, this is not a new discipline and there are many practices in this space that companies can draw on to define a methodology that responds to their specific context.
What evolutions and trends are we seeing?
A new vision of materiality is emerging with a view to better understanding the company’s performance in all its dimensions, moving away from a siloed approach which focused on factors affecting the company and its financial value separately.
The perspectives against which impacts, risks and opportunities are assessed are evolving as businesses are now pushed to consider materiality through a double combined lens:
- Impact materiality, what matters from an impact perspective, i.e. the impact of the business activities on sustainability issues.
- Financial materiality, what matters from a financial perspective i.e. the impact of the sustainability issues on the business activities and value.
In other words, conducting a double materiality assessment helps companies identify and prioritise sustainability issues that are significant for their business and stakeholders from both financial and broader societal perspectives.
To complete the analysis and prioritisation, double materiality encourages the reading of impacts through multiple criteria: type of impact (potential or actual), direction of impact (positive or negative), impact level (low, medium, high), estimated occurrence time horizon (short, medium or long term), as well as mapping through the upstream and downstream value chain (stage in the value chain where impact may occur).
Ultimately, there is a greater emphasis on transparency, regarding the process on the one hand and the results and lessons learned for the business on the other.
How does the materiality assessment drive real-world sustainability?
- Integration of sustainability into core business practices
The depth at which the exercise is now expected to be conducted requires cooperation across a wide range of internal functions, from definition to the implementation of the methodology. It should also leverage and integrate existing systems or practices and the insights they provide, such as enterprise risk management or stakeholder engagement. Most companies are already capturing impacts, risks and opportunities and basing decision-making on them, but not always in a consistent company-wide way.
Done with genuine cross-functional engagement, materiality assessment contributes to a deeper and stronger integration of sustainability in the functioning of the organisation.
- Legitimisation of the sustainability action plan
The assessment findings provide the legitimacy needed to generate internal buy-in for an organisation’s sustainability agenda and clarify what priorities should be supported and resourced. The active involvement of the senior team throughout the process, with a good understanding of the needs and implications for the business, is a key success factor.
- Stakeholder engagement
It is also an opportunity for companies to carry out a state of play of their engagement with all stakeholders, assess whether if and how sustainability matters are addressed in this dialogue, and use the materiality exercise to establish or reinforce it.
While stakeholder engagement has always been a core informative component of the exercise, the parameters and objectives of this dialogue are being revisited to gain external and internal insights on both dimensions of materiality and build robust assessments.
How Business in the Community Ireland can help
As your trusted advisers, we provide guidance and operate as a sounding board when framing your materiality methodology. As companies take ownership of the exercise in its new dimensions, the BITCI corporate network will support you through the peer-to-peer sharing and learning we facilitate.
We also encourage companies to consult the final version of Efrag’s Implementation Guidance for the Materiality Assessment released in November 2023. This document provides answers to frequently asked questions and insights into why and how to perform the exercise.
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