Organisations have to manage limited resources in the pursuit of their goals. This includes people and finances, to name a few. The limited nature of these resources puts a constraint on the number of things that an organisation should give priority to.
Therefore, identifying the most important environmental, social, and governance (ESG) issues is what a materiality assessment helps the organisation achieve.
An ESG materiality assessment enables an organisation to prioritise a limited number of issues that impact its strategy and long-term viability. It also helps an organisation to determine what information and disclosures to include in its sustainability report, stemming from the fact that the report is brief.
Organisations have to decide on what ESG risks and opportunities are discussed within their sustainability report based on the outcome of the materiality assessment process.
Financial materiality is an assessment of how specific ESG risks and opportunities impact an organisation’s future cash flows, while impact materiality is an assessment of the impact an organisation has on people, the environment, and the economy.
A financial and impact materiality assessment is termed a double materiality assessment. Critical steps to consider when performing a materiality assessment include the following:
First, identify and engage with stakeholders across the organisation’s value chain. It enables the organisation to understand the impacts across its value chain and how they affect its stakeholders.
The next step is identifying the ESG risks and opportunities resulting from the stakeholder engagement, and prioritising the relevant sustainability issues that have a significant impact (scale, scope, likelihood, and magnitude) on the organisation and its stakeholders.
The next step is to apply the outcome of the materiality assessment to the organisation’s strategy and reporting. This can be achieved by mapping sustainability issues to strategic aspects and identifying the reporting framework and disclosure requirements best suited for the organisation considering the material topic.
A final step is to ensure continuous monitoring and updating of the material topics.
Organisations must continually scan their operating environment using insights gained internally, externally, and from topical issues affecting stakeholders to refresh their materiality assessments. This ensures that the organisation responds to issues that matter to its stakeholders.
