Materiality is a concept with many definitions used in both finance and sustainability practices. A sustainability materiality assessment is the process of identifying material topics by their significance to stakeholders impacted by the business and/or the pre financial risk they pose to investors. Material topics influence goal setting, risk assessment and many other strategic matters.

7 min read | Last updated 5 March 2021

Materiality is commonly understood as a financial concept. Information is defined as financially material ‘if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity’ (IFRS, 2018). But there is also sustainability materiality.

Two perspectives are important in identifying sustainability information that is material:

  • the impact of the business, ie the effects a business has on the environment, society and the economy
  • the impact on the business (or pre financial risk), ie a business’s exposure and vulnerability to changes in the environment, society and the economy, primarily through its quality of governance

Double materiality is an approach that takes both these ideas into account. Single materiality relates only to pre financial risk.

There are several other ways in which approaches to sustainability materiality differ, such as whether it is defined at company or industry level and whether company disclosures are for multiple stakeholders or investors only.

Definitions of materiality from three major reporting standards/principles organisations – GRI, SASB and IIRC – are listed below below.

GRI | Double materiality | Company level | Multiple stakeholders
It is the responsibility of the reporting organisation’s management to determine material topics. This is done by considering both dimensions of the materiality principle: (i) the significance of the organisation’s economic, environmental, and social impacts1, and (ii) the topic’s substantive influence on the assessments and decisions of stakeholders2. A topic is material if it ranks highly on one or both dimensions.
1. An impact is the effect an organisation has on the economy, the environment, and/or society, which in turn can indicate its contribution (positive or negative) to sustainable development. It does not refer to an effect upon an organization, such as a change to its reputation.
2. Stakeholders are entities or individuals that can reasonably be expected to be significantly affected by the organisation’s activities or products and services, and whose actions can reasonably be expected to affect the ability of the organisation to successfully implement its strategies and achieve its objectives.
SASB | Single materiality | Industry level | Investors only
SASB identifies financially material issues, which are the issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors. Companies decide what is financially material and what information should be disclosed, taking legal requirements into account. Companies should follow the same boundaries and timing as for their financial reporting to ensure that financial and sustainability fundamentals can be analysed in a similar context and compared year on year.
IIRC | Single materiality | Company level | Investors only
The process of determining materiality is entity specific and based on industry and other factors, as well as multi-stakeholder perspectives. A matter is material if it could substantively affect the organisation’s ability to create value in the short, medium and long term. The scope of reporting is towards providers of financial capital.

More definitions are listed in the Statement of Common Principles of Materiality (Corporate Reporting Dialogue, 2016 (pdf)). Of NZX50 reports issued in 2020, 20% used GRI, 12% used IR and 16% used both (NZX/Wright Communications, 2020 (pdf)). SASB has no footing in New Zealand.

Businesses taking a double materiality approach report on more sustainability topics. The box below shows a comparison between the fifteen ranked topics disclosed by Heineken using a company level, double materiality approach per GRI standards, and the four unranked topics that a generic alcoholic beverages company would be required to disclose per SASB standards, which use an industry level, single materiality approach.

Material topics of Heineken, using a double materiality assessment (ranked)

  1. responsible consumption
  2. water
  3. sustainable sourcing
  4. energy and carbon
  5. human rights
  6. circular economy
  7. business conduct
  8. labour conditions
  9. community investment
  10. health and safety
  11. economic impact and tax
  12. biodiversity
  13. diversity
  14. gene technology
  15. remuneration

Material topics for a generic alcoholic beverages producer, according to SASB (unranked)

  • energy management
  • water management
  • responsible drinking
  • packaging lifecycle
  • ingredient supply chain

A sustainability materiality assessment is a process to produce a ranked list or matrix of a business’s most significant sustainability issues. It’s a strategic asset that helps integrate sustainability into business processes, including goal setting, risk and opportunity assessments, executive incentives and setting priorities for disclosure. Danone calls this ‘exploiting the materiality results’. Most companies do not exploit their materiality assessment. For instance, contributing effectively to the SDGs is a highly important measure of sustainability performance, but nine out of ten large businesses that know their material sustainability issues are not exploiting them in ways that contribute to the SDGs (Corporate Citizenship, 2018 (pdf)).

The image below is the double materiality matrix of alcoholic beverages producer Heineken.

There are seven steps:

  1. identify stakeholders
  2. identify issues
  3. assess outward impact
  4. assess inward impact
  5. interpret results and build a materiality matrix
  6. align materiality and risk assessments
  7. review
1. Identify Stakeholders

There are two types of key stakeholder: (i) those whose interests are significantly affected by a business’s effects (outputs, outcomes and impacts), and (ii) those whose actions can significantly affect the ability of a business to implement its strategy. Stakeholder groups may be weighted based on how key they are, ie how much a particular group is affected by, or how much it affects, the business.

Stakeholders are a very broad pool. Microsoft engages with customers, investors, employees, suppliers, civil society and NGOs, communities, industry coalitions and public-private partnerships, policymakers and international government organisations (eg the UN). L’Oréal maintains dialogue with associations, not-for-profit organisations and NGOs, the academic world and the scientific community, consumers, customers, suppliers, employees, shareholders, extra-financial rating agencies and investors. Nestlé’s stakeholder community includes academia, communities, consumers and the general public, customers. employees and their representatives, governments, industry and trade associations, intergovernmental organisations, NGOs, reporting agencies, shareholders and the financial community and suppliers (including farmers and smallholders). Teck’s stakeholders include its workforce, communities, civil society, NGOs and multinational organisations, academic institutions and researchers, governments, indigenous governments and communities, commercial interests and industry associations.

2. Identify Issues

This is a scanning exercise; the result is a long-list of relevant topics. Firmenich looks at the issues raised in its previous materiality exercise plus its internal and external communications over the previous 12 months, internal policies and risk processes, as well as its peers’ and customers’ communications. It also undertakes a scan of key issues raised in the media over the previous 12 months and reviews relevant legislation, reporting standards and frameworks (such as the SDGs). Unilever researches emerging sustainability trends, macro forces, competitor practices and global standards.

The EU Taxonomy, for instance, is a convenient classification system for environmental objectives, with just six topics:

  1. climate change mitigation
  2. climate change adaptation
  3. sustainable use and protection of water and marine reserves (see below)
  4. transition to the circular economy
  5. pollution prevention and control (see below)
  6. protection and restoration of biodiversity and ecosystems (see below)

Long-list topics can be organised under group headings for ease of comprehension. Unilever uses five headings: improving health and wellbeing, reducing environmental footprint, enhancing livelihoods, responsible business practices and wider sustainability issues. L’Oréal uses six headings: innovating sustainably, producing sustainably, living sustainably, developing sustainably with employees, developing sustainably with suppliers and communities and crosscutting issues.

3. Assess Outward Impact

There are many techniques for eliciting the importance of long-list topics to various external stakeholder groups, including:

  • desktop research
  • surveys
  • workshops
  • interviews
  • roundtable discussions
  • online forums
  • customer feedback
  • outreach to key individuals
  • participation on coalition panels
  • regular engagement

External assessment of the materiality methodology and independent assurance of the process are also recommended, to help ensure objectivity.

4. Assess Inward Impact

Assessing the potential of long-list topics to create consequences for the business should take into account operational, financial, reputational and legal implications. Danone involves its strategic planning, internal control, sustainability integration and strategy and risks departments.

Topics can be weighted in terms how far they extend across the value chain and into the future. Nestlé assesses the impacts of issues on its value chain, which comprises agriculture, tier 1 suppliers, operations, retailers and consumers (Nestlé, 2018 (pdf)). Firmenich assesses the impacts of issues on its value chain, which comprises research and development, sourcing, manufacturing, distribution and use (Firmenich, 2018 (pdf))

5. Interpret Results

Assessment data from all parties must be amalgamated, analysed and interpreted, requiring judgement and comparison to a baseline level of significance. Firmenich’s process is to prepare a draft matrix (see next step), which is reviewed and validated by the chief human resources officer, chief research & development officer, chief financial officer, president of flavors, chief supply chain officer, general counsel and secretary of the board, president of perfumery and ingredients and chief purchasing officer.

The output of the interpretation process will be two scores for each topic: one for its importance to multiple stakeholders, the other for its potential impact on the business/investors.

A materiality matrix plots the assessed strength of topics against two axes:

  • the X-axis is ‘importance to the business’
  • the Y-axis is ‘importance to stakeholders’

The resulting matrix will be a scatter graph revealing, along its diagonal, those issues that are doubly material, ie important to stakeholders and to the business. Results can be divided across the diagonal into bandwidths of low medium and high mutual materiality as in the Heineken example above, or simplified into a grid, as in the Ørsted example below.

6. Align Materiality and Risk Assessments

It is imperative to credibility that a business’s materiality assessment processes and risk assessment processes are aligned, with the results of the former among the inputs to the latter. Companies that create a material negative impact on, for instance, the environment (eg on climate or biodiversity) are exposed to transition risks (ie policy, legal, technology, market and reputational risks) as society and capital move away from supporting business activities that create damage at society’s cost. Transition risks may create a material financial impact on the business in the future on an uncertain timeline.

7. Review

The general rule is that a comprehensive materiality assessment should be repeated every three to five years or with greater frequency in times of uncertainty. We seem to be in uncertain times. New GRI Standards to be released by Q2 2021 will require a business to explain what changes have occurred in materiality since the prior reporting period.

A dynamic materiality approach considers the many triggers that can move an issue along the materiality continuum from being immaterial to being non-financially material and from there to being financially material. Such a change could be rapid, as businesses found with the consequences of Covid-19. The frequency of a dynamic review would be more frequent than a comprehensive materiality review., and would ask the following questions: