Materiality Assessments: Expectations and Best Practices

Over the past decade, the business world has made significant strides in establishing standardized and methodical approaches for corporates developing their sustainability strategies and relevant disclosures. Today, a materiality assessment for identifying and prioritizing key issues has become a basic expectation among stakeholders, with certain jurisdictions beginning to require companies to conduct such assessments according to prescribed standards, including assurance requirements.

Through stakeholder engagement and data analysis, materiality assessments can be instrumental tools for companies to identify, manage, and communicate their impacts, risks, and opportunities. Several standards and regulations have established guidance or set expectations for companies to conduct materiality assessments, including the IFRS S1 and S2 (and the legacy TCFD and SASB standards) and GRI. Globally, regulations also set these expectations, with the EU’s European Sustainability Reporting Standards (ESRS) emerging as the preeminent standard for double materiality assessments.

ISS-Corporate reviewed corporate disclosure data on whether companies conduct an evaluation of material sustainability topics. As demonstrated in the graph below, companies in the Americas lag their counterparts in Asia Pacific and EMEA in terms of disclosing an evaluation of the materiality of sustainability-related topics across all market cap categories.

Given growing expectations around the disclosure and management of materiality assessments and the interconnectedness of regulatory requirements and disclosure standards, companies worldwide will be expected to focus on developing these processes as a foundation for their sustainability programs. For companies starting materiality assessments, here are some best practices to consider (informed by key concepts shared by the ESRS standards and relevant implementation guidance):

• Apply the double materiality principle, including both impact and financial materiality.
• Assess materiality across the value chain, starting with mapping potential impacts, risks and opportunities both upstream and downstream in relation to the organization’s business partnerships, operations, and products and services.
• Understand stakeholders’ perspectives, including both affected stakeholders and the key audience of the sustainability statements. This exercise involves both stakeholder mapping and a robust stakeholder engagement program.
• Consider both actual and potential impacts, including the scope of the impact, the level of severity.
• Factor in resource dependencies, including human, natural, and social resources, which may play an important role on determining impact and financial materiality.
• Leverage robust processes for conducting materiality assessments that allow for assurance-readiness as well as a regular and systematic review and evaluation of material issues.