The field of sustainability is vast and can be confusing. One of the biggest challenges is the question of where to start. Running off without a goal is rarely efficient and often even wastes valuable time. That is why it is so important to understand which sustainability dimensions are truly relevant for you and your stakeholders to then take targeted initiative. For this, the materiality assessment offers the solution. We cover what a materiality assessment is and why it serves as such an indispensable tool.
A materiality assessment is a method to identify and evaluate the importance of business-relevant topics and corresponding expectations of internal and external parties (stakeholders). It is no wonder that a double materiality assessment has been set up as a mandatory first step of reporting under the CSRD. Materiality assessments provide a great tool for obtaining material insights in a relatively simple and structured way. Aside from financial statements and annual reports, this makes materiality assessments particularly useful in evaluating environmental, social and governance (ESG) matters. These include metrics and activities ranging from environmental protection, emissions and fresh water use, to labor relations, corruption prevention and data security.
The exact approach to a materiality assessment is not formally defined, not even in the ESRS, but certain steps should be followed. For example, the CSRD mandates a double materiality assessment, meaning that companies have to look at both the impact they have on sustainability dimensions (the inside-out perspective) and at the effect these sustainability dimensions have on their business (the outside-in perspective). Moreover, it is crucial that the right parties are involved without losing sight of potentially arising conflicts of interest. Regardless, the result is straightforward: a materiality assessment provides a clear overview of impacts, risks and opportunities, expectations and material sustainability topics - both from an internal perspective and from the perspective of external stakeholders. Taken together, it provides a holistic picture of your company's materiality and can be presented in a materiality matrix (covered below).
A materiality assessment is a mandatory part of sustainability reporting under the CSRD, meaning that all companies that fall under the CSRD will have to perform a double materiality assessment to determine which of the ESRS standards they will have to report. Even if you are not required to report under the CSRD, the identification and evaluation of relevant business dimensions - financial or non-financial - are suitable and useful for companies of all sizes, origins and industries. Using a materiality assessment is indispensable for a better understanding of your company's relevant activities and risks. Moreover, it is also a powerful tool to convey a message - and thus an intention - in a straightforward and crisp way. International organizations such as the Sustainability Accounting Standards Board (SASB) have also adopted the methodology and offer industry-specific tools to identify material issues.
In terms of timing, there are different situations in which it makes sense to conduct a materiality assessment. When reporting under the CSRD, the double materiality assessment serves as the first step that helps you determine which topics your company should include in its annual sustainability report. Other appropriate moments for performing a materiality assessment in the context of sustainability may include the implementation of a new sustainability strategy, or the processes to deal with new legislation. Now in particular, new guidelines on sustainability reporting, legislation such as the German Supply Chain Act, and established impact reporting frameworks such as the GRI will increase the need for robust materiality assessments.
So far, however, a thorough materiality assessment is only mandatory for companies that report under the CSRD, and since the CSRD is being phased in based on company size, at the moment it is only mandatory for large enterprises. So why should smaller companies, or organizations that don't fall under the CSRD care? Companies of all sizes should expect that the frequency of individual audits on business-relevant sustainability dimensions will only increase in the coming months and years. And to add one more reason on top: it is all but certain that a company's materiality will play an increasingly important role in the context of ISO standards and certificates.
Put simply, the materiality assessment should answer the questions “How big is the company’s impact on a specific sustainability dimension?” and “ How big is the impact of a specific sustainability dimension on the financial performance and cash flow of the company?”. As previously mentioned, there is no formally established definition of how a materiality assessment must be done. Still, certain guidelines are provided by the CSRD and other organizations and best practice have manifested over the last few years which we utilized to arrive at the following:
Please have a look at our blog on the ESRS Double Materiality Assessment, if you want to dive deeper into how to actually perform such an assessment.
If at all and how deeply different stakeholders should be included depends on their direct influence on your business activities and, vice versa, the impact of your activities on them. The result can vary depending on the industry, the size of the company, the product or service, and the taken perspective. It is therefore all the more important to define and document the process well. Lastly, It is also recommended to classify topics according to the ESG categories (environmental, social, governance). Here are possible examples of such categories:
It is helpful to divide the topics into internal and external dimensions. For example, internal personnel can be asked specifically about topics such as production, working conditions and further training measures, while external parties may have a particular interest in the areas of climate protection, raw material consumption, corruption and data security.
The creation of a materiality matrix is actually quite simple. On a two-dimensional coordinate system, the different sustainability matters are placed according to their evaluation. The X-axis shows the impact materiality, i.e. the impact that the company has on the sustainability matter: the further a point, for example energy consumption, is to the right, the higher the effect or in other words the “impact” on the organization. The Y-axis shows the financial materiality, i.e. the (financial) risks and opportunities that the sustainability matters pose for the company, the higher a point is placed, the bigger the risk or opportunity is. This way, any defined sustainability matter can be positioned based on the chosen rating scheme. The result is a visual representation in which matters are ranked based on relevance - items in the upper, right quadrant are most relevant. So what does this mean? It means that factors and business-related activities affecting dimensions in the top right should be looked at first.
In short, the materiality matrix aims to quickly show which topics are most relevant, incorporating both an inside-out and an outside-in perspective. This also allows for the resolution of potential conflicts of interest before they may arise. Taking it one step further, a materiality matrix can also be a powerful tool over time: due to new legislation, pressure from the market or new demands from employees, dimensions will move and gain or lose relevance. A visual representation of these shifts is possible thanks to the matrix form and illustrates how your company and its surroundings evolve.
Whether it is for the next step in your sustainability strategy, ISO certification or ESG reporting, the materiality assessment is irreplaceable when considering relevant sustainability topics, their impact on your company and your company’s impact on them. While it is still a challenge to initiate sustainable actions in a targeted and efficient manner, the materiality assessment serves as a valuable tool for creating a common basis for discussion, making decisions and ultimately communicating results to your stakeholders. One more advantage: the joint exchange strengthens relationships with external parties and makes impactful ecological, social and economic decisions a win-win for everyone involved.
We are happy to support you in conducting a materiality analysis. Aside from individual workshops, we offer data-driven support for the intuitive evaluation of material topics with the help of our Codio Impact platform, combining both internal and external assessment criteria. If you would like to learn more, please contact us here.
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