Materiality Assessment

What is Materiality?

Materiality determines which ESG topics deserve attention in strategy and reporting. Not all ESG issues are equally important for every organization. Materiality assessment identifies the topics that matter most.

Why Materiality Matters

Focus Resources

No organization can address every possible ESG topic equally. Materiality assessment helps prioritize:

Where to allocate sustainability resources
Which metrics to track and report
Which issues require strategic attention

Meet Stakeholder Expectations

Different stakeholders care about different issues:

Investors focus on financially material topics
Employees care about workplace issues
Communities focus on local impacts
Regulators require specific disclosures

Materiality assessment helps identify what matters to whom.

Improve Relevance

Reports covering everything superficially are less useful than focused reports covering material topics deeply. Materiality improves reporting relevance.

Types of Materiality

Financial Materiality

Definition: ESG topics that affect the company's financial performance, value, or risk

Perspective: Outside-in (how the world affects the company)

Primary audience: Investors, lenders

Focus: Topics that could materially affect revenues, costs, assets, liabilities, or risk exposure

Examples:

Climate regulation affecting operating costs
Data privacy affecting customer trust and revenue
Supply chain disruption affecting production

Impact Materiality

Definition: ESG topics where the company has significant impacts on economy, environment, or people

Perspective: Inside-out (how the company affects the world)

Primary audience: Broader stakeholders—employees, communities, civil society

Focus: Topics where company operations cause significant positive or negative impacts

Examples:

Carbon emissions contributing to climate change
Labor practices affecting workers
Products affecting customer health

Double Materiality

Definition: Considering both financial materiality and impact materiality

Required by: EU CSRD, European Sustainability Reporting Standards (ESRS)

Approach: A topic is material if it meets either financial or impact materiality thresholds

Implication: Companies must assess and report on a broader range of topics than financial materiality alone would require

The Materiality Assessment Process

Step 1: Identify Potential Topics

Sources for identifying topics:

ESG reporting frameworks (GRI, SASB)
Industry-specific standards and guidance
Peer company reports
Stakeholder feedback
Media and controversy analysis
Emerging regulatory trends
Internal risk assessments

Result: A long list of potentially relevant ESG topics

Step 2: Define Assessment Criteria

For financial materiality:

Magnitude of potential financial impact
Likelihood of occurrence
Time horizon

For impact materiality:

Scale of impact (how severe)
Scope of impact (how widespread)
Irremediable character (how reversible)
Likelihood

Step 3: Gather Input

Internal sources:

Interviews with executives and subject matter experts
Risk management data
Operational data
Strategic plans

External sources:

Stakeholder surveys and interviews
Industry research
Investor feedback
Regulatory analysis
Peer benchmarking

Step 4: Assess and Prioritize

Assessment approach:

Rate each topic against criteria
Consider both qualitative and quantitative factors
Document rationale for assessments

Prioritization:

Rank topics by materiality
Identify threshold for material vs. non-material
Consider different materiality levels (high, medium, low)

Step 5: Validate Results

Validation steps:

Review with senior management
Test with key stakeholders
Compare to peer assessments
Check against regulatory requirements

Step 6: Document and Communicate

Documentation:

Methodology description
Topics assessed
Stakeholder input gathered
Results and rationale

Communication:

Materiality matrix or list in sustainability report
Explanation of process
Connection to strategy and reporting

The Materiality Matrix

Traditional Approach

The classic materiality matrix plots topics on two axes:

X-axis: Importance to business (financial impact)
Y-axis: Importance to stakeholders

Topics in the upper-right quadrant are most material.

Limitations

The traditional matrix has limitations:

Oversimplifies complex topics
Creates false precision
May mask important nuances
Stakeholder axis conflates different stakeholders

Alternative Presentations

Tiered list: Topics grouped by materiality level

Topic clusters: Related topics grouped together

Narrative explanation: Qualitative discussion of material topics

Double materiality matrix: Separate axes for financial and impact materiality

Stakeholder Input in Materiality

Identifying Stakeholders

Key stakeholder groups typically include:

Investors and lenders
Employees
Customers
Suppliers
Communities
Regulators
NGOs and civil society

Gathering Input

Surveys: Structured questionnaires to large stakeholder groups

Interviews: In-depth conversations with key stakeholders

Focus groups: Facilitated discussions with stakeholder representatives

Existing feedback: Customer complaints, employee surveys, investor questions

Weighting Stakeholder Input

Not all stakeholder views carry equal weight:

Consider legitimacy and stake in the issue
Balance different stakeholder perspectives
Don't let one voice dominate
Document how input was weighted

Industry-Specific Materiality

SASB Materiality Map

SASB identified financially material topics by industry:

77 industry standards
26 sustainability topics
Industry-specific guidance on which topics are material

Sector Variations

Material topics vary significantly by sector:

Energy: Climate change, emissions, safety Financial services: Data security, financial inclusion, governance Technology: Privacy, supply chain labor, e-waste Consumer goods: Product safety, packaging, supply chain Healthcare: Access to medicines, product quality, pricing

Using Industry Guidance

Industry frameworks provide starting points, not final answers:

Review industry-specific standards
Consider company-specific factors
Validate with stakeholder input
Update as circumstances change

Dynamic Materiality

Topics Change Over Time

Materiality is not static:

Emerging issues rise in importance
Resolved issues may decline
Stakeholder expectations evolve
Business context changes

Triggers for Reassessment

External triggers:

Regulatory changes
Industry incidents
Social movements
Technological change
Scientific findings

Internal triggers:

Business model changes
Geographic expansion
Mergers and acquisitions
Strategy shifts

Reassessment Frequency

Best practice: Conduct full materiality assessment every 2-3 years, with annual review for emerging issues

Common Pitfalls

Confirmation Bias

Designing the process to confirm predetermined conclusions

Avoid by: Using independent facilitators, diverse input sources

Stakeholder Selection Bias

Only consulting friendly or accessible stakeholders

Avoid by: Systematic stakeholder mapping, including critical voices

Short-Term Focus

Prioritizing only near-term, obvious issues

Avoid by: Considering emerging trends, long-term scenarios

Superficial Assessment

Going through motions without genuine analysis

Avoid by: Allocating adequate time and resources, engaging senior leadership

Static Thinking

Treating materiality as fixed once determined

Avoid by: Regular reviews, monitoring emerging issues

Connecting Materiality to Action

Strategy Integration

Material topics should inform:

Strategic priorities
Resource allocation
Goal setting
Performance management

Reporting Alignment

Material topics should drive:

Report content and structure
Metrics selection
Narrative focus

Governance Connection

Material topics should connect to:

Board oversight
Management accountability
Risk management

Key Takeaways

Materiality identifies ESG topics most important to an organization and stakeholders
Financial materiality focuses on business impact; impact materiality focuses on external impact
Double materiality considers both dimensions (required by CSRD)
The assessment process involves identifying topics, gathering input, assessing, validating, and communicating
Stakeholder input is essential but must be systematically gathered and weighted
Materiality varies by industry and changes over time
Material topics should drive strategy, reporting, and governance

Next Module

Module 7 covers stakeholder engagement—how to identify, understand, and respond to the parties affected by your organization's activities.

Materiality Assessment

What is Materiality?

Why Materiality Matters

Focus Resources

No organization can address every possible ESG topic equally. Materiality assessment helps prioritize:

Where to allocate sustainability resources
Which metrics to track and report
Which issues require strategic attention

Meet Stakeholder Expectations

Different stakeholders care about different issues:

Investors focus on financially material topics
Employees care about workplace issues
Communities focus on local impacts
Regulators require specific disclosures

Materiality assessment helps identify what matters to whom.

Improve Relevance

Reports covering everything superficially are less useful than focused reports covering material topics deeply. Materiality improves reporting relevance.

Types of Materiality

Financial Materiality

Definition: ESG topics that affect the company's financial performance, value, or risk

Perspective: Outside-in (how the world affects the company)

Primary audience: Investors, lenders

Focus: Topics that could materially affect revenues, costs, assets, liabilities, or risk exposure

Examples:

Climate regulation affecting operating costs
Data privacy affecting customer trust and revenue
Supply chain disruption affecting production

Impact Materiality

Definition: ESG topics where the company has significant impacts on economy, environment, or people

Perspective: Inside-out (how the company affects the world)

Primary audience: Broader stakeholders—employees, communities, civil society

Focus: Topics where company operations cause significant positive or negative impacts

Examples:

Carbon emissions contributing to climate change
Labor practices affecting workers
Products affecting customer health

Double Materiality

Definition: Considering both financial materiality and impact materiality

Required by: EU CSRD, European Sustainability Reporting Standards (ESRS)

Approach: A topic is material if it meets either financial or impact materiality thresholds

Implication: Companies must assess and report on a broader range of topics than financial materiality alone would require

The Materiality Assessment Process

Step 1: Identify Potential Topics

Sources for identifying topics:

ESG reporting frameworks (GRI, SASB)
Industry-specific standards and guidance
Peer company reports
Stakeholder feedback
Media and controversy analysis
Emerging regulatory trends
Internal risk assessments

Result: A long list of potentially relevant ESG topics

Step 2: Define Assessment Criteria

For financial materiality:

Magnitude of potential financial impact
Likelihood of occurrence
Time horizon

For impact materiality:

Scale of impact (how severe)
Scope of impact (how widespread)
Irremediable character (how reversible)
Likelihood

Step 3: Gather Input

Internal sources:

Interviews with executives and subject matter experts
Risk management data
Operational data
Strategic plans

External sources:

Stakeholder surveys and interviews
Industry research
Investor feedback
Regulatory analysis
Peer benchmarking

Step 4: Assess and Prioritize

Assessment approach:

Rate each topic against criteria
Consider both qualitative and quantitative factors
Document rationale for assessments

Prioritization:

Rank topics by materiality
Identify threshold for material vs. non-material
Consider different materiality levels (high, medium, low)

Step 5: Validate Results

Validation steps:

Review with senior management
Test with key stakeholders
Compare to peer assessments
Check against regulatory requirements

Step 6: Document and Communicate

Documentation:

Methodology description
Topics assessed
Stakeholder input gathered
Results and rationale

Communication:

Materiality matrix or list in sustainability report
Explanation of process
Connection to strategy and reporting

The Materiality Matrix

Traditional Approach

The classic materiality matrix plots topics on two axes:

X-axis: Importance to business (financial impact)
Y-axis: Importance to stakeholders

Topics in the upper-right quadrant are most material.

Limitations

The traditional matrix has limitations:

Oversimplifies complex topics
Creates false precision
May mask important nuances
Stakeholder axis conflates different stakeholders

Alternative Presentations

Tiered list: Topics grouped by materiality level

Topic clusters: Related topics grouped together

Narrative explanation: Qualitative discussion of material topics

Double materiality matrix: Separate axes for financial and impact materiality

Stakeholder Input in Materiality

Identifying Stakeholders

Key stakeholder groups typically include:

Investors and lenders
Employees
Customers
Suppliers
Communities
Regulators
NGOs and civil society

Gathering Input

Surveys: Structured questionnaires to large stakeholder groups

Interviews: In-depth conversations with key stakeholders

Focus groups: Facilitated discussions with stakeholder representatives

Existing feedback: Customer complaints, employee surveys, investor questions

Weighting Stakeholder Input

Not all stakeholder views carry equal weight:

Consider legitimacy and stake in the issue
Balance different stakeholder perspectives
Don't let one voice dominate
Document how input was weighted

Industry-Specific Materiality

SASB Materiality Map

SASB identified financially material topics by industry:

77 industry standards
26 sustainability topics
Industry-specific guidance on which topics are material

Sector Variations

Material topics vary significantly by sector:

Using Industry Guidance

Industry frameworks provide starting points, not final answers:

Review industry-specific standards
Consider company-specific factors
Validate with stakeholder input
Update as circumstances change

Dynamic Materiality

Topics Change Over Time

Materiality is not static:

Emerging issues rise in importance
Resolved issues may decline
Stakeholder expectations evolve
Business context changes

Triggers for Reassessment

External triggers:

Regulatory changes
Industry incidents
Social movements
Technological change
Scientific findings

Internal triggers:

Business model changes
Geographic expansion
Mergers and acquisitions
Strategy shifts

Reassessment Frequency

Best practice: Conduct full materiality assessment every 2-3 years, with annual review for emerging issues

Common Pitfalls

Confirmation Bias

Designing the process to confirm predetermined conclusions

Avoid by: Using independent facilitators, diverse input sources

Stakeholder Selection Bias

Only consulting friendly or accessible stakeholders

Avoid by: Systematic stakeholder mapping, including critical voices

Short-Term Focus

Prioritizing only near-term, obvious issues

Avoid by: Considering emerging trends, long-term scenarios

Superficial Assessment

Going through motions without genuine analysis

Avoid by: Allocating adequate time and resources, engaging senior leadership

Static Thinking

Treating materiality as fixed once determined

Avoid by: Regular reviews, monitoring emerging issues

Connecting Materiality to Action

Strategy Integration

Material topics should inform:

Strategic priorities
Resource allocation
Goal setting
Performance management

Reporting Alignment

Material topics should drive:

Report content and structure
Metrics selection
Narrative focus

Governance Connection

Material topics should connect to:

Board oversight
Management accountability
Risk management

Key Takeaways

Materiality identifies ESG topics most important to an organization and stakeholders
Financial materiality focuses on business impact; impact materiality focuses on external impact
Double materiality considers both dimensions (required by CSRD)
The assessment process involves identifying topics, gathering input, assessing, validating, and communicating
Stakeholder input is essential but must be systematically gathered and weighted
Materiality varies by industry and changes over time
Material topics should drive strategy, reporting, and governance

Next Module

Module 7 covers stakeholder engagement—how to identify, understand, and respond to the parties affected by your organization's activities.