IN THIS ARTICLE

esg materiality

Definition

Materiality refers to the principle of defining the issues that matter most to a company’s business and stakeholders (ie. the significance of a topic for a company and its stakeholders).

Materiality is key to sustainability reporting because companies have a limited amount of resources and must identify and prioritize the topics that are of greatest importance to their business.

Materiality definitions may vary slightly depending on the organization. The graphic below shows the definitions used by some of the most well-known frameworks in the ESG space.

Organization"Materiality" definition
Climate Disclosure Standards Board (CDSB)Environmental Information is material if: the environmental impacts or results it describes are, due to their size and nature, expected to have a significant positive or negative impact on the organization’s financial condition and operational results and its ability to execute its strategy: omitting, misstating or obscuring it could reasonably be expected to influence the decisions that users of main-stream reports make on the basis of that mainstream report, which provides information about a specific reporting organization.
Global Reporting Initiative (GRI)An organization is required to identify material topics by considering the two dimensions of the principle:
1) The significance of the organization’s economic, environmental and social impacts - that is, their significance for the economy, environment or society, as per the definition of “impact”- and
2) Their substantive influence on the assessments and decisions of stakeholders.
A topic can be material if it ranks highly for only one dimension of the Materiality principle.
International Integrated Reporting Council (IIRC)In Integrated Reporting, a matter is material if it could substantively affect the organization’s ability to create value in the short, medium and long term.
Sustainability Accounting Standards Board (SASB)For the purpose of SASB’s standard-setting process, information is financially material if omitting, misstating, or obscuring it could reasonably be expected to influence investment or lending decisions that users make on the basis of their assessments of short, medium and long-term financial performance and enterprise value.

Source: the Value Reporting Foundation

History

The concept of materiality in the sustainability field was brought into the mainstream by the Global Reporting Initiative (GRI) in 2006.

GRI then published the G3 Guidelines, a cornerstone of the GRI Sustainability Reporting Framework, which identified materiality as one of the four key components for defining sustainability report content.

Materiality has evolved in three clear stages since its introduction.

The first version of materiality emerged from financial environments (ie. the accounting and legal fields) and its purpose was to ensure that shareholders had access to important information about investment risk.

The second evolution of materiality came in concurrence with the newfound interest in CSR and sustainability in the late 20th to early 21st century. This new take on materiality expanded beyond considering the interests of investors—other groups of stakeholders, such as local communities and consumers, were considered as well. However, during the second wave, materiality was still used primarily as a tool for disclosure and transparency.

Most recently, materiality assessments have begun to be used for performance improvement and strategy setting. Stakeholders in search of more detailed information on issues identified as material have set an expectation for thorough materiality analyses in ESG impact assessment.

Recent developments

The definition of materiality (ie. financial, double, or dynamic) is constantly in development, and will likely continue to be debated as organizations seek standardization on sustainability data.

Many boards and frameworks, especially in the EU, have adopted a double materiality perspective, and the idea of dynamic materiality is becoming more widespread as well.

Overall, materiality assessments are becoming more commonplace, with a recent Datamaran study reporting that in 2018, 329 companies with a market capital above $20 billion were doing materiality assessments, compared to only 69 companies in 2011.

One last notable development is the use of automated processing technologies in materiality assessments.

Such technologies enable companies to quickly generate a list of material issues through natural language processing. This advancement, along with the SASB’s sector-specific materiality lists, may also play a role in the development of materiality assessment processes.

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