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Materiality: What is it and Why is it Important?

FigBytes

With the ever-increasing number of ESG data sources and reporting requirements organizations must track, the importance of materiality continues to grow. Limited time and resources mean organizations need to focus on the most impactful factors, which is where materiality comes in. As FigBytes Senior Director, Product, Zoë Frances put it, “Materiality acts as a north star for organizations in navigating what factors are the most important to a business and its stakeholders. Without it, your ESG program can become lost, tracking less impactful issues.”

What Is ESG Materiality?

ESG Materiality helps organizations determine which topics or issues are material or most relevant and essential to their ESG program. Businesses find which factors are material by conducting an ESG materiality assessment.

What Is a Materiality Assessment?

A materiality assessment is a process organizations undergo to identify how material or critical certain ESG topics or issues are to their business. The main idea of creating a materiality assessment is to identify the factors that are being impacted the most by an organization’s operations and which ones stakeholders care most about. This is done by taking input from all their internal and external stakeholders and developing a materiality matrix.

What is a Materiality Matrix?

A materiality matrix charts the findings of a materiality assessment in an easy-to-digest graph or visual. It takes into consideration the significance of the economic, environmental, or social impacts organizations have identified and plots them accordingly. A common method of plotting a material matrix includes:

  • Y-axis: Importance to External Stakeholders
  • X-axis: Impact on Business or Importance to the Business (Internal Stakeholders)

There are many forms a materiality matrix can take but it should be a visual representation of the initial list of material topics the organization has identified and the prioritization of each topic to the business and stakeholders.

Why Is Materiality Important?

Materiality is a process used to find what factors impact an organization most and which they can start to address based on their resources. Without first conducting a materiality assessment, organizations can easily waste resources on factors that have less impact or are of less importance to their stakeholders. A materiality assessment and accompanying matrix provide organizations with the necessary data to prioritize which of these factors to focus their resources on.

A materiality assessment enables an organization to develop a more accurate and meaningful sustainability story. You can’t develop a sustainability strategy without knowing what factors are most important to your stakeholders and most impactful to your business. There are too many factors to address them all, so knowing which ones are key for your organization is essential to a successful sustainability plan.

For some reporting frameworks like GRI, an organization’s materiality assessment becomes the outline for which topics to cover in their ESG or sustainability report. It also provides a backdrop for investors to determine how risky the business is and how the organization is being managed.

Materiality assessments also help organizations pave a better path forward with more realistic goals and provide a feedback loop which organizations can use to measure their progress. This allows organizations to plan and take meaningful actions to reduce and mitigate the factors that matter most to their business and their stakeholders.

“Materiality should be a mindset for sustainability managers that’s always on. They must be weighing what’s material because there are too many things to do. You can’t bottle the ocean. Determine the absolutely key issues that align with company strategy, and then boil them up to the top so they’re prioritized, and you can work on buy-in from across the organization.”  Ted Dhillon, FigBytes CEO and Co-Founder shared about the importance of materiality.

How to Conduct a Materiality Assessment 

To make informed decisions when dealing with ESG and sustainability planning, it’s important for organizations to be able to determine which items are considered material or most impactful to their business and stakeholders. Here are five steps on how to conduct a materiality assessment:

  1. Identify your stakeholders
    • A stakeholder is anybody who is directly or indirectly affected by the actions of the organization. Anybody or anything that gets affected by the actions of an organization must be taken into consideration.
    • Internal Stakeholders include people who are in a direct relationship (through employment/ownership) with the organization: 
      • Employees
      • Shareholders
      • Board of Directors
    • External Stakeholders include people who can be affected by the actions of the organization:
      • Customers
      • Investors
      • Regulatory Body/ Government
      • Communities
  2. Create a stakeholder engagement methodology
    • This is a document which is created once the key stakeholders have been identified. It outlines the methodology and steps on how an organization will interact with its stakeholders. The interaction can be through surveys, telephone interviews, in-person interviews, etc. The Stakeholder Engagement document also indicates the frequency at which the organization is communicating with the stakeholders.
  3. Identify your Material Topics
    • Organizations should do an initial identification of which factors they would like to assess so that they can prepare a proper structure to get insights into them. They can segregate them into Economic, Environmental, Social, or Governance factors for ease of understanding. Organizations can use previous data, insights from stakeholders, research, or resources readily available such as GRI frameworks and SASB standards
  4. Prepare and launch a survey of stakeholders on material topics
    • This survey is designed to help organizations determine which material topics matter most to their stakeholders. This helps organizations avoid guessing which factors its stakeholders care about and gives a clear direction on what topics they feel an organization should focus on.
  5. Collect survey data and begin analysis.
    • Once the results are in, organizations can begin analyzing the data and putting the results into their Materiality Matrix.

After an organization compiles a materiality assessment and matrix, the next step is to determine if the activities of the organization are having a positive or negative impact on each topic or issue in its assessment, the extent of the impacts, and the steps being taken to reduce the negative impacts and maximize the positive impacts.

What are the key challenges to conducting a materiality assessment?

As important as a materiality assessment is, many organizations opt to skip this process for many varied reasons. Some of these reasons include:

  • Lack of financial resources
  • Lack of human resources
  • Lack of organizational motivation

Sustainability leaders looking to overcome these challenges should consider technological solutions that can help automate part of or the entirety of the materiality assessment reporting process. Some of the steps that can be easily automated with the right software solution include:

  • Sending stakeholder engagement surveys
  • Collecting responses from stakeholders
  • Consolidating data from stakeholder responses
  • Setting strategy to reduce impacts and mitigate risks

Automating part of or the entire materiality assessment process can save sustainability managers the time, money, and effort normally involved in conducting an assessment manually.

With more demands for organizations to take action on reducing their negative impacts on the world, materiality provides organizations with an understanding of which factors are most important to their business, so they can focus their resources on the areas that will have the greatest impact.

Ready to build an ESG strategy and tackle your organization’s materiality assessment? The FigBytes ESG Insight Platform helps bring your strategy to life with interactive maps, integrated scorecards, and materiality assessments.


Research Credit: Urviya Hasan

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