With the rise in corporate sustainability reporting, regulations enforced worldwide, the sway of consumers towards eco-friendly products and services, and investors that seek companies that set net zero goals and expect climate-related data reporting, materiality assessments are now becoming the norm. They are an efficient way to take qualitative and quantitative data and determine how businesses can progress in the short- and long-term in order to thrive in the sustainable economy.
In this article we’ll define what materiality and its assessment actually are, we’ll include some examples of these, why it matters for ESG reporting, and cover what steps your organization can take to complete an efficient assessment.
Materiality is the significance and relevance of one factor to something else. Regarding finance and environmental, social, and governance (ESG), materiality is the relevance of how a certain issue affects the business entity and those potentially investing in it. That being said, materiality varies across sectors and businesses according to relevance.
Materiality is assessed by considering quantitative and qualitative factors. Quantitatively, excluding one factor affects the economic decisions of those making decisions based on financial statements. Qualitatively, if a factor affects the overall position, performance, or prospects of a company.
Regarding business, materiality can refer to any factor that is impactful enough to affect the operations, performance, or corporate social and environmental status of an organization. This includes ESG risks and opportunities that could impact the organization's long-term sustainability and financial performance.
A materiality assessment enables reporting entities to evaluate the significance of ESG factors to stakeholders. This empowers potential investors to determine the potential of the return on investment (ROI) the organization may achieve based on the qualitative and quantitative data that is provided as a result of the assessment.
A materiality assessment normally entails gathering input from stakeholders, internal and external sources, possibly the community the company impacts, and NGOs. After determining how these parameters affect the organization and its ability to profit and thrive from these factors, the entity would go through a process of assessing the data and input.
1. Financial materiality is concerned with financial reporting and accounting. It involves assessing the impact and reasons for excluding something from a report and determining its impact on the financial status of a company as a whole. It is becoming a necessary aspect of preparing ESG reports and submissions. It’s also becoming a demanded topic from environmentalists and consumers who support them in order to evaluate an entity’s level of transparency and its reputation in an eco-friendly economy.
2. Legal materiality pertains to the relevance or importance of information in a legal context. This mainly depends on the regulations and laws in which the company does business.
3. Operational materiality encompasses factors that would impact the operations, performance, or sustainability reputation of an organization. It focuses on ESG factors and how the company would thrive regarding the risks and opportunities that arise from a certain topic.
Organizations should consider all three aspects of materiality when performing their assessment.
Double materiality according to accounting and sustainability reporting means that the reporting company takes into account financial materiality and ESG materiality in its reporting and decision-making processes.
ESG materiality involves the ESG factors that affect the long-term sustainability and success of a company. ESG materiality considers non-financial aspects such as a company's carbon footprint, labor practices, supply chain management, diversity and inclusion policies, community engagement, and corporate governance practices. It is now becoming commonplace that it is included in financial materiality as it’s key for potential investors to make a decision.
The concept of double materiality recognizes that financial and ESG factors are important to various stakeholders. Organizations that are adopting double materiality focus on integrating ESG considerations into their core business processes because it impacts their business’ financial and environmental success in the long term.
Companies can see their sustainability efforts unfold when taking a fair materiality assessment every year, setting targets, and taking action on those in order to improve. Forming a viable corporate sustainability strategy involves analyzing how to achieve ESG parameters while analyzing the data given in order to benchmark those targets and see progress over time. Taking a look at the big picture is necessary to see where actions should be taken and what the best strategy is. A materiality assessment is an opportunity to highlight the places that need to be improved.
According to an IBM Institute for Business Value (IBV) 2022 study, “Own your impact: Practical pathways to transformational sustainability,” 80% of CEOs surveyed were convinced their sustainability investments would improve their companies’ results within the next five years.
What investments they are making is what other CEOs should be thinking about. Net0 provides two tools that are the perfect combination of what organizations need for a transparent materiality assessment in regards to their climate-related data.
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One of Net0’s most valuable features is its marginal abatement cost curve tool which maps out what profitable decarbonization opportunities are available to companies based on the carbon data they have collected for analysis.
Another feature that uses predictive AI is the simulator tool which shows companies what would happen if they took action on their carbon footprint in a variety of ways.
These two tools make it simple for businesses to not only track their carbon footprint, but to reduce it in a way that is robust, realistic, and profitable. These make it easy to take quantifiable data and evaluate it through a qualitative avenue. It gives a trusted aspect to reporting because it shows transparent recording, tracking, and predictions while showing businesses and stakeholders what the cost would be to take climate action.
Some of the factors that you could include in your report would vary by sector and priority. Commonly, factors are aligned with the UN’s Sustainable Development Goals (SDGs) and additionally, governance topics regarding leadership and business models.
An example of a materiality assessment that would be converted into a materiality matrix is below, which is a visual representation of what topics are significant for the reporting company and at what level of importance those topics are. On the x-axis are the level of impact on the business’ success and on the y-axis are the level of importance to the stakeholders. In a high to low range, the topics will be shown on the materiality matrix.
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Materiality assessments are an opportunity for your company to evaluate its sustainability goals and strategies while including the valuable insights of its stakeholders. With upcoming international regulations about carbon emissions being enforced and ESG reporting standards being raised about climate-related factors, it’s now necessary to incorporate proper carbon data management into your materiality assessment. Taking the time to measure and track emissions reduction strategies gives a quantifiable verification of your progress.
Book a demo with Net0 to learn more about how our AI-driven platform streamlines your carbon emission reduction strategy.
