Materiality – definitions, an assessment and the latest advancements
What is materiality and why it is a significant term? If you have been wondering those questions, you are not alone. This article provides a brief introduction to the topic.
About materiality
A company has to make sure that it recognizes all aspects of its operations to create a sustainable business model. Materiality is the concept of how a company considers the economic, environmental and social impacts of its operations. This concept is essential for sustainable reporting because it helps companies measure their value creation and stakeholder relationships. It also advises them to recognize what information they need to disclose to be transparent about their operations.
Definition of materiality
Materiality is a difficult concept to define. World Business Council for Sustainable Development (WBCSD) surveyed 551 sustainability reports and interviewed twenty companies for the ´The reality of materiality´ report. Not only have standard-setters their definitions, but also companies have their understandings of the concept. Below are four commonly known definitions:
Cambridge online dictionary: a measure of how important a piece of information is when making a decision
Global Reporting Initiative (GRI): material topics that represent the organization’s most significant impacts on the economy, environment, and people, including impacts on their human rights
European Commission's Non-Financial Reporting Directive has a double materiality perspective: The reference to the company’s “development, performance [and] position” indicates financial materiality, in the broad sense of affecting the value of the company. And, The reference to “impact of [the company’s] activities” indicates environmental and social materiality. Climate-related information should be reported if it is necessary for an understanding of the external impacts of the company.
Task Force on Climate-related Financial Disclosures (TFCD): Importantly, in determining whether information is material, the Task Force believes organizations should determine materiality for climate-related issues consistent with how they determine the materiality of other information included in their financial filings. In addition, the Task Force cautions organizations against prematurely concluding that climate-related risks and opportunities are not material based on perceptions of the longer-term nature of some climate-related risks.
Materiality assessment
Materiality assessment is a process of identifying, assessing and prioritizing material topics of the company. Unfortunately, there does not exist a universal standard for materiality assessment. Just like for a definition. However, the materiality assessment process is similar to the risk and opportunity assessment process. Thus, companies should take advance of the best practices, techniques and tools with which they are already familiar. Furthermore, there does exist some step-by-step guidance by various organisations. For example, WBCSD, GRI and KPMG have all provided their guidance. They are summoned below to illustrate the common steps of the assessment:
Understand the purpose, scope and context.
Do stakeholder analysis.
Brainstorm and identify potential material topics.
Collect data about impacts and significance.
Assess, map and prioritize topics with a materiality matrix
Engage with stakeholders for feedback.
Start with the most significant topics.
In each step, the company can use chosen techniques and tools. For example, Value Creation Foundation provides the Materiality Finder (here), which includes Material Topics and Material Map.
Latest advancements
If you are interested in following the development of the sustainability reporting standards and legislation, you might want to keep an eye on the following links: Value Creation Foundation (here) has published draft documents and has a co-operative initiative with Global Reporting Initiative (here), Taskforce for Nature-related Financial Disclosures (TFND) has published framework draft document (here) and European Union has published new draft directive (here).
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Disclaimer: I do not work in any of the organisations mentioned in this article and do not have any other connection to them either. I am GRI and TFCD certified and therefore interested in sharing best practices and sources.
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Sources:
Cambridge dictionary [Online]. Available at https://dictionary.cambridge.org/ (Accessed 7 April 2022)
Directive 2014/95/EU – Non-Financial Reporting Directive (NFRD), European Union [Online]. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014L0095 (Accessed 7 April 2022)
Environmental, social and governance (ESG) materiality assessment (2017), KPMG [Online]. Available at https://assets.kpmg/content/dam/kpmg/nz/pdf/September/esg-materiality-assessment-2017-kpmg-nz.pdf (Accessed 7 April 2022)
GRI Standards 2021, Global Reporting Initiative [Online]. Available at https://www.globalreporting.org/standards (Accessed 7 April 2022)
Guidelines on non-financial reporting: Supplement on reporting climate-related information, European Union, 2019 [Online]. Available at https://ec.europa.eu/finance/docs/policy/190618-climate-related-information-reporting-guidelines_en.pdf (Accessed 7 April 2022)
Recommendations of the Task Force on Climate-related Financial Disclosures, TFCD, (2017) [Online]. Available at https://www.fsb-tcfd.org/recommendations/ (Accessed 7 April 2022)
The Materiality Finder, Value Creation Foundation [Online]. Available at https://www.sasb.org/standards/materiality-map/ (Accessed 7 April 2022)
The reality of materiality - Insights from real-world applications of ESG materiality assessments, WBCSD (2021) [Online]. Available at https://www.wbcsd.org/Programs/Redefining-Value/Redesigning-capital-market-engagement/Resources/The-reality-of-materiality-insights-from-real-world-applications-of-ESG-materiality-assessments (Accessed 7 April 2022)
The TNFD Nature-Related Risk & Opportunity Management and Disclosure Framework Beta v0.1, Taskforce for Nature-related Financial Disclosures (TFND) [Online]. Available at https://tnfd.global/tnfd-framework/ (Accessed 7 April 2022)