Materiality Assessment: Tools and Building Blocks for ESG Reporting

Environmental, social, and governance (ESG) factors are becoming increasingly relevant for businesses across industries to pay attention to. In order for businesses to understand the ESG issues that are most important for them to identify, report on, and manage, they should conduct an ESG materiality assessment as one of the first steps in their ESG reporting process.

ESG materiality assessments poll a wide base of internal and external stakeholder groups to identify critical issues to the business and its long-term success, highlight sustainability-related risks and opportunities, and guide their reporting and disclosure topics. 

In this article, I’ll break down the essentials of ESG materiality assessments, including the materiality matrix, the value to the business, and managing assessment results.

What Is an ESG Materiality Assessment?

An ESG materiality assessment is the process of identifying, refining, and assessing the potential environmental, social, and governance issues that are most relevant and impactful to an organization and its various stakeholders. ESG materiality involves surveying and assessing the perspectives of a wide range of organizational stakeholders, including internal stakeholders such as the board of directors, employees, and suppliers, and external stakeholders such as community members, investors, and regulators. ESG materiality is essentially determining which ESG factors these stakeholders consider most critical to the business’s long-term success, resilience, and value. ESG materiality also helps guide organizations’ ESG reporting and strategy as well as strategic decision making and planning processes. 

With the increased emphasis on, and rapid rise in, ESG materiality, organizations are taking a wide range of approaches to performing these surveys, including but not limited to, workshops, interviews, true surveys, and using outside consultants. 

The scope of ESG materiality assessments can be broadly divided into environmental factors such as emissions, water use, and waste production; social factors such as labor practices, human rights, community investments, DEI issues and initiatives; and governance factors such as ethical business policies, board diversity and independence, and anti-corruption practices. ESG materiality assessments generally include the evaluation of future risks and opportunities related to these various ESG factors, with the disclosure of a forward-looking or Safe Harbor statement. 

ESG materiality assessments can be guided by ESG reporting frameworks, as it is a key piece of the ESG reporting process. These frameworks include the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-Related Financial Disclosures (TCFD). Sustainability frameworks provide information on how to identify, measure, and report on material topics. 

It is important to note that the concept of “materiality” exists in both the ESG and legal spaces, and there are key differences to recognize before starting the process of ESG materiality assessments or ESG reporting. Legal materiality refers to relevance and significance of topics in the context of legal and financial reporting disclosures. There is a strong investor focus with legal materiality, and the purpose is to disclose all information that could influence an investor’s decision-making in the context of a business’ legal and financial health. Financial stakeholders are the key group in legal materiality, whereas ESG materiality deals with a wide range of internal and external stakeholders to get a broader perspective from different areas of the business. Similarly to ESG materiality, legal materiality is governed by reporting frameworks, standards, and regulations, including the International Financial Reporting Standards (IFRS) and regulatory bodies such as the United States Securities and Exchange Commission (SEC). Legal materiality aims for compliance with financial reporting regulations through transparency and accuracy, while ESG materiality informs sustainability and ESG strategies and disclosure to enhance corporate responsibility and impact.

What Is a Materiality Matrix?

An ESG materiality matrix is a visual representation of the outcomes of the ESG materiality assessment. It is used as a tool to communicate highly relevant, important, and irrelevant environmental, social, and governance topics to the business and to stakeholders.

The materiality matrix is commonly found in an ESG and/or sustainability report. The x-axis (horizontal axis) identifies the significance of ESG topics to the business, such as the financial impact of these topics, strategic relevance to its operations or industry, and even the potential for risk or opportunity. The y-axis (vertical axis) represents the significance of the same ESG topics to the company’s stakeholder groups. All groups surveyed for the creation of the materiality assessment will be included on the y-axis for a more diverse perspective. Environmental, social, and governance topics that are positioned further to the right are more critical to the company’s success and performance; those that are higher up signify a greater concern to stakeholders, meaning these topics influence their decisions and perceptions of the company. 

The key features of the ESG materiality matrix are the identification, prioritization, and communication of ESG topics. The matrix plots these topics as points on a graph to visually depict significance to the business and stakeholders, which can help a company better prioritize the top right quadrant (most critical and significant to the business and stakeholders), and communicate their findings of the ESG materiality assessment to stakeholders through their ESG report. 

Why Is an ESG Materiality Assessment Needed?

ESG materiality assessments serve the purpose of informing sustainability strategy, reporting, and disclosure. They guide organizations to determine the most important environmental, social, and governance topics to the business’s long-term success. Beyond this, ESG materiality assessments are needed for a multitude of reasons, core the the success of the business:

1. Identifying key risks and opportunities: ESG risks are becoming more and more prevalent in just about every industry, due to the increasing uncertainty that climate change and consumer expectations bring to the market. ESG factors can present major risks to a business’s core operations and longevity. These risks include supply chain deterioration and financial instability. ESG materiality assessments help identify these risks early, so a business can begin to manage and plan for the future. Likewise, identifying areas of opportunity can offer avenues for product innovation, competitive advantage, and cost savings. 

1. Strengthening stakeholder relationships and engagement: ESG materiality assessments involve the participation of a wide range of internal and external stakeholders of the business. It offers an opportunity to understand the perspectives, concerns, and expectations in a consolidated approach to gathering information. This process can enhance credibility and trust with stakeholder groups. 
2. Enhancing resilience: Companies that understand, evaluate, and manage ESG risks and opportunities are readily able to adapt to changing market conditions, consumer expectations, and regulatory requirements. These businesses are better positioned for longer-term growth and value creation which can attract ESG-focused investors looking for smart investments in a rapidly evolving world.
3. Improving operational performance: ESG materiality helps benchmark key performance indicators (KPIs) for highly relevant ESG topics for a company to be able to manage and improve upon year-over-year. It helps highlight areas for improvement and focus, especially when compared among peers. Addressing material ESG issues can lead to improved operational efficiencies and cost reductions through reducing emissions consumption, waste, water use, and smarter supply chain management. Social and governance aspects of ESG materiality can improve employee retention and engagement through diversity initiatives and professional development programs. 

The Essentials of Materiality Assessments

ESG materiality assessments help companies focus on and manage the topics that are the most to their business. Approaching the assessment with a structured methodology will allow for better stakeholder engagement, data collection, and analysis. This process begins with the identification of ESG issues, involves stakeholders, prioritizes material topics, and utilizes reporting framework mechanisms for transparency and accountability. The materiallity assessment process can and should be repeated over time to ensure there are no major shifts in stakeholder perspectives, and if there are, the company will adapt to these new disclosure topics through research, management, and action-oriented solutions. 

1: Identification of ESG issues

The first step of the ESG materiality process involves identifying a comprehensive set of ESG issues that could potentially impact the organization and its stakeholders — either negatively or positively. This can include environmental concerns (such as climate change, water use, waste production, and emissions), social issues (like diversity, equity, and inclusion issues, labor practices, and community engagement and investments), and governance topics (like board diversity, ethical business practices, and management policies which incorporate sustainable business principles). In order to begin this step, it is wise to perform a peer analysis, where each disclosure is categorized and listed in relation to the company; this allows consultants and/or the ESG team to see which topics might be most likely “material” to the company based on peers, and also where the company stands in terms of disclosure leadership. 

2: Stakeholder Engagement

Engaging with a wide base of stakeholder groups and individuals is essential to understand their perspectives on the importance of various ESG issues. Stakeholders can include employees, customers, suppliers, investors, local community members, and regulators. Stakeholder engagement generally looks like a survey in which each individual can provide their feedback, then data can be compiled, analyzed, and presented for better guidance on overall sustainability strategy and reporting. Other methods of engagement include public forums, interviews, and focus groups to allow for better collection of data. 

3: Prioritization of Issues

After gathering insights from stakeholders and analyzing the potential impacts on the business, the next step in the ESG materiality assessment process is to prioritize the ESG issues by assessing the significance of each topic’s impact on the organization and its stakeholders. Assessing the impact of each topic can be an arduous process, however it is important to clearly see the potential risks and opportunities, as well as quantify impact wherever possible. Using data to measure the potential quantitative impact on finances, operations, and even reputation can provide a benchmark to work from. Understanding the qualitative insights of each issue can provide greater context and explain broader implications of each topic on the business. 

4: Transparency and Accountability

ESG reporting serves the purpose of communicating a business’ impact on critical sustainability issues through transparent and robust disclosures. This external-facing report holds the organization accountable to its stakeholders, its goals, and the broader public. Understanding industry trends, expectations, and regulations in the ESG reporting space is essential for success; with several reporting frameworks to choose from and evolving regulations impacting disclosures, it can be a very convoluted space for a non-ESG expert. 

5: Managing Disclosure Topics

Managing the material ESG topics is the most important step in this cyclical process; using insights from the materiality assessment, a company should begin to align their ESG priorities to the company’s strategic objectives and goals. The core business strategy should incorporate ESG-related goals, with incentives to meet them which work in tandem with operational goals. Action plans can help with outlining steps required to address and manage each issue, how to allocate resources, assigning responsibilities, and creating a timeline for progress. This process looks different at each organization, and it is important to understand how to best utilize the resources at hand, engage with employees on how to best incorporate sustainability, and continuously evolve as time goes on. 

How Do You Assess and Manage ESG Risks and Opportunities in Your Supply Chain?

Managing ESG risks and opportunities in the supply chain involves an achievable, but comprehensive, process by which suppliers are mapped, assessed, and managed. This process is closely linked with the ESG materiality assessment, in that the assessment results allow you to prioritize the most relevant ESG topics, in order to allocate resources wisely.

• Establishing a framework: By utilizing the selected sustainability reporting framework, the company can align supply chain management with the overall corporate sustainability strategy, goals, and objectives. This can serve as a reference point for a supplier screening process, which prioritizes the most material topics to the company. Supplier screening and selection can reduce and mitigate sustainability-related risks by narrowing the field of suppliers based on values, business practices, and labor practices. 
• Conducting supply chain mapping: Supply chain mapping involves identifying suppliers, mapping their locations, and assessing their ESG practices. Geographic mapping is an important step here; climate change affects areas disproportionately, and some suppliers may be in high-risk areas. It is wise to incorporate this risk potential into supply chain management, as it can pose an immediate and direct danger to consistent supply lines and revenue. This process can also highlight suppliers that can have a negative or positive impact on the company’s overall reputation, associated value chain labor practices, emissions, and more. With these types of disclosures growing to encompass upstream business activities, it is crucial to ensure the company’s values extend to who they hire and contract with for their supply chain. 
• Engaging with suppliers: Engaging with suppliers means involving them in the company’s sustainability initiatives and discussions. The company should communicate their supplier expectations and even their supplier code of conduct and evaluation criteria. They should also provide resources for improvement, training, and other development initiatives. This can help build strong relationships with suppliers, where company ESG commitments are respected and upheld throughout the value chain. 
• Monitoring: Regularly assessing the performance of material issues for suppliers is essential to maintaining sustainable business practices and risk management. Suppliers are subject to similar market pressures – reducing costs wherever possible, and prioritizing profit over people or planet. Conducting supplier audits or assessments regularly can create accountability and a plan for improvement over time. These audits can incorporate sustainability topics such as biodiversity, ecosystem impact, emissions management, and labor practices.

Trends in Materiality and ESG

The landscape of ESG materiality, and ESG in general, is rapidly evolving due to growing consumer pressures, regulatory efforts, investor prioritization, and growing climate risks. ESG assets and funds are becoming increasingly popular among investors of all sizes, due to the proven impact of climate and social risk on financial performance. Investors are actively engaging with companies to improve their ESG performance, and institutional investors are incorporating sustainability principles into their core voting and stewardship guidelines to help increase long-term business value. ESG assessment criteria is now an indicator of the health and viability of an investment, and this is only becoming stronger as regulations continue to evolve and demand more disclosure from companies. 

A notable regulatory development is the European Union’s Corporate Sustainability Reporting Directive (CSRD), which significantly impacts ESG reporting requirements for companies operating in Europe. The CSRD mandates the concept of double materiality, which involves assessing and reporting on two dimensions of materiality:

• Financial Materiality: This dimension focuses on the impact of environmental, social, and governance (ESG) issues on the company’s financial performance and position. It requires companies to disclose how sustainability matters affect their business, which is of primary interest to investors and financial stakeholders.
• Impact Materiality: This dimension considers the impact of the company’s activities on society and the environment. It requires companies to report on how their operations affect external stakeholders, including the community, environment, employees, and other relevant groups.

The CSRD expands the scope and detail of sustainability reporting, emphasizing the need for a comprehensive view that integrates both financial and impact materiality to provide a fuller picture of a company’s sustainability performance and its implications. This approach aligns with the broader EU goal of promoting sustainable development and transparency in corporate activities.

At the asset level, companies are achieving ESG-related certifications to signal compliance and performance above peers. The market for sustainable finance tools is rapidly growing in tandem with corporate ESG efforts and regulations; these tools include green bonds, social impact bonds, and responsible and impact investing and loans. ESG materiality assessments enable companies to navigate this world with more clarity on what topics to focus their energy and resources on, what investors will care most about, and which reporting frameworks to subscribe to. 

Ensuring the Future Through Proper ESG Practice

Managing ESG within an organization is no small task; it often requires dedicated teams and can strain resources. However, with the right software, coupled with the right people and support, transitioning to an ESG-focused company with a sustainable business model becomes much more manageable. 

AuditBoard’s ESG software helps companies streamline their ESG program management by facilitating data collection and management, leveraging materiality assessments, simplifying corporate sustainability reporting and compliance, and identifying key risks and opportunities. Our unique ESG materiality assessment feature makes stakeholder engagement easier by centralizing feedback through impact and importance data, and using a matrix to communicate assessment results. ESG is here to stay, and while program management can burden employees and resources, the right ESG management software can help your company capitalize on ESG opportunities, enhance stakeholder engagement, and simplify reporting. Schedule a demo with our support team today, and discover why we are top-rated among our customers.

Frequently Asked Questions About ESG Materiality Assessments

Why is an ESG materiality assessment needed?

ESG materiality assessments serve the purpose of informing sustainability strategy, reporting, and disclosure. It guides organizations to determine the most important environmental, social and governance topics to the business’ long term success. 

How do you assess and manage ESG risks and opportunities in your supply chain?

Managing ESG risks and opportunities in the supply chain involves an achievable, but comprehensive, process by which suppliers are mapped, assessed, and managed. This process is closely linked with the ESG materiality assessment, in that the assessment results allow you to prioritize the most relevant ESG topics, in order to allocate resources wisely.