Materiality Assessment Frequently Asked Questions:
Q1: What is a materiality assessment?
A materiality assessment is a process aimed at identifying the ESG factors that are most relevant – material – to a company and its stakeholders. Out of hundreds of ESG factors the assessment narrows down and puts focus on those most important to both internal and external stakeholders. These most important factors are plotted in a materiality matrix which can be used to inform risk management priorities, resource allocation and business strategies.
Q2: How long does a materiality assessment take?
It takes around 3 months to develop a materiality matrix. Following this, Third Economy supports clients by integrating the results of the materiality assessment into a strategic roadmap which helps prioritize efforts and allocate resources, as the company advances ESG capabilities and disclosures.
Q3: How do you conduct a materiality assessment?
The methodology of Third Economy helps a client identify what ESG factors are most relevant to the company’s long-term financial sustainability. In collaboration with each client, our analytical framework is used to narrow down hundreds of ESG factors to the 20-25 factors most relevant based on their particular business model and their industry. Through our in-house methodology, the importance of each ESG factor to both external and internal stakeholders is assessed incorporating:
- Leading frameworks and standards
- ESG rating agencies
- Industry norms and peer best practice
- Stakeholder surveys
The assessment provides insights about potential misalignments between internal and external priorities and demonstrates the company’s commitment to incorporate stakeholder input into its decision making process. The results are plotted in a matrix showing the importance of each ESG factor (see image below). The matrix can be used to inform risk management priorities, resource allocation and business strategies. Third Economy helps clients leverage the results of the materiality assessment into a strategic roadmap for advancing the company’s ESG capabilities and disclosures.
Q4: Where did the Materiality Matrix originate?
- The “materiality” concept first appeared in corporate sustainability reporting around 2005.
- In 2013, Global Reporting Initiative (GRI) began requiring a specific process for materiality assessments, which have since continued to gain traction.
- GRI’s most recent guidelines require organizations to identify material topics if they are relevant through either of two dimensions: “(1) the significance of the organization’s economic, environmental, and social impacts – that is, their significance for the economy, environment or society, as per the definition of ‘impact’ – and (2) their substantive influence on the assessments and decisions of stakeholders.”
- In 2018, the Sustainable Accounting and Standards Board (SASB) developed 77 Industry Standards which identify financially material sustainability topics for each industry. The Integrated Reporting Council (IIRC) also interpreted materiality through a financial lens, and considers factor material if there is a “substantive effect on the organization's ability to create value in the short, medium, and long term.” In 2021, these two organizations merged to become the Value Reporting Foundation (VRF).
- In 2019, the European Union (EU) Commission introduced the term “double materiality” when the Sustainable Financial Disclosure Regulation was adopted. The new reporting rules require companies to assess ESG issues that are material from both a financial and an impact perspective. The concept emphasizes the importance of how ESG factors can create business risks and opportunities, not just as they relate to the company’s financial performance, but also the company’s impact on society and the environment.