Understanding the concept of materiality is an important part of a company’s strategic planning. Now, it is even more imperative with the growing focus on environmental, social, and governance issues. Materiality encompasses all the issues that a company needs to factor in when assessing its risks and opportunities. Therefore, they are relevant in many contexts, from legal to accounting. This post takes a closer look at materiality and ESG reporting to help you determine its importance and methods of assessing it.
What is Materiality?
The concept of materiality is at the heart of ESG sustainability reporting and largely builds on financial materiality, which defines decision-useful information. In ESG, it is one of the main guiding principles for controlling the process of reporting sustainability impacts. We must also indicate that every organization will have a bespoke set of criteria for the material issues within its context.
These issues will largely depend on the targeted stakeholders’ priority, the goals of an organization, and the product under consideration. With comprehensive materiality analysis, your company will be able to:
- Report on non-financial issues of its operations.
- Evaluate new business opportunities.
- Weigh the risks.
- Make informed decisions on the areas to invest in.
- Increase stakeholder engagement.
- Stay on top of the regulatory requirements for the company.
Importance of Materiality to ESG Reporting
Material ESG issues are those societal, sustainability, and governance factors that are likely to impact the company’s operating performance in a specific sector. Since not all ESG issues are created equally, you need to appreciate that their relative importance varies in any industry, business, or even region.
Therefore, you need to target the components of ESG that are crucial to how your firm’s operations. Here are the main benefits of materiality in ESG reporting:
- ESG investments have been shown to outdo the market, primarily being focused on scores that are higher on material ESG issues. According to Harvard University, the focus on material ESG factors is likely to enhance a company’s performance more compared to when it would have focused on immaterial sustainability issues.
- With a greater focus on materiality, you have a better chance of enjoying more benefits from adopting ESG reporting in your company. For example, it will be easier to draw key goals for sustainability and reimagine the company in the future. The process of sustainability reporting is also likely to be simpler.
- Although the main focus of materiality is financial, we must indicate that it is not just about the bottom line. Instead, it can also come in handy to help companies understand how effectively they are tracking other related targets. For example, depending on the set targets, a company focusing on promoting social equity is likely to easily gauge how it is enhancing diversity, decreasing the gender gap, and growing community engagement.
Assessing ESG Materiality
A business that targets to help investors predict their return on investment and ESG performance should correctly incorporate materiality into its ESG sustainability reporting. So, how do you perform materiality assessments correctly?
The first method is selecting a reporting framework that allows you to focus on materiality. A good example is the SASB framework. SASB materiality provides a sector-by-sector breakdown of how 26 major ESG issues affect various industries. So, you need is to follow what is listed for your industry.
For an individual company searching for additional details on ESG materiality and liability, it is good to go for solutions like ESG Intelligence that come with more precise scoring.
It evaluates the materiality of an issue by assessing the degree to which it is detracting or adding to the business’s ESG score in relation to the average. You can even compare it to competitors.
Tracking ESG materiality has provided an additional advantage by offering a new mechanism for addressing new issues that emerge in the sustainability journey. To be able to factor the principle of materiality more effectively, make sure to have the right sustainability reporting software. For example, a good program can help to add new parameters or issues, automate data collection, and generate more accurate reports.