Ultimate guide to materiality assessments for businesses. (original) (raw)

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Published Nov 6, 2024

Key Takeaways

Sustainability is becoming a key priority as new regulations set higher reporting standards.
Materiality assessments are essential tools for identifying key ESG issues, aligning with stakeholder expectations and regulatory needs.
A strong sustainability profile can bring tangible benefits such as enhanced trust and loyalty from stakeholders, reduced costs, and improved resource management.
Conducting a materiality assessment involves identifying stakeholders, gathering data, determining material issues, and implementing action plans while remaining open to updates and changes.
Best practices for successful materiality assessments include establishing a cross-functional team, using advanced technology, verifying assessments through third-party audits, integrating findings into business strategy and culture, and being transparent.

In an era of escalating environmental and social impacts, many businesses are moving beyond simply reacting to the challenges and actively embracing their commitment to sustainability. Forward-thinking companies realize that having a strong environmental, social, and governance (ESG) profile can yield several benefits that positively impact the bottom line. Moreover, sustainable brands tend to be more resilient and agile in staying ahead of operational and legal risks.

This is particularly important now, with new regulations such as the EU Corporate Sustainability Reporting Directive (CSRD) and the forthcoming SEC Climate Disclosure Rule, setting higher reporting standards. As a result, the way companies report on sustainability is changing. What used to be mostly a voluntary practice is now becoming a key priority as businesses strive to keep up with current and future legal requirements.

A recent Workiva survey underscores this trend—it found that 81% of companies not currently subject to the CSRD still intend to comply. This points to a broader market shift toward more trustworthy and clear data that conforms to stakeholder expectations and the latest policies. In this guide, we’ll explore how materiality assessments are becoming an essential tool for businesses to identify key ESG issues for stakeholders, compliance, and lasting success. We’ll also delve into how to perform a materiality assessment and how companies can successfully apply them.

What is a materiality assessment?

A materiality assessment is a way to map out major ESG concerns that can affect a company’s financial performance, as well as its impact on people and the planet. By looking at materiality from both angles, businesses can better align their sustainability priorities with stakeholder expectations, regulatory needs, and risk management goals. Keep in mind that regulations such as the CSRD now require this double materiality approach.

Financial materiality (“outside-in”): ESG issues that can impact a company's bottom line, such as energy management.

Non-financial materiality (“inside-out”): How a company affects the environment and society, such as health impacts on local communities.

Double materiality: Takes into account both financial and non-financial materiality.

It’s worth noting that materiality assessments can vary widely by industry. For example, manufacturers may focus heavily on waste management and energy use because these factors have a direct impact on costs and environmental compliance. By contrast, material issues for financial services providers are more likely to be data security and ethical governance, which are critical for maintaining customer trust and loyalty. These variations underscore the need for each business to carefully evaluate its unique context and the specific ESG aspects that are most pressing and relevant to its operations.

Strategic advantages of sustainable business practices

Materiality assessments can provide a structured path for embedding sustainable business practices into an organization’s DNA. But why does that matter? Beyond legal and ethical considerations, having a strong sustainability profile can provide tangible financial and competitive benefits. Companies that embrace ESG principles often gain enhanced stakeholder trust and loyalty, directly influencing their market position.

As a case in point, Capgemini discovered that 77% of sustainable consumer products and retail organizations experienced stronger customer loyalty, and 63% saw revenue growth. Better stakeholder engagement also leads to a reduction in capital costs, employee churn, and supply chain efficiency. Moreover, nurturing a workplace culture of sustainability can improve team morale and drive innovative thinking, contributing to a better brand reputation.

Additional benefits of a proactive ESG strategy include better compliance, enhanced risk management, and cost savings. Companies that anticipate and adapt to new regulations and risks can avoid pitfalls and penalties before they occur. This forward-thinking view minimizes surprises and enhances operational resilience.

Meeting ESG targets also correlates to improved resource management, which lowers operational costs. For example, modernized U.S. federal buildings showed significant reductions after only three years compared to legacy buildings, including 23% less energy usage and 23% lower operational costs. In short, integrating sustainable practices isn’t just about doing good—it’s a smart strategy for any business looking to succeed in today’s market.

How to conduct a materiality assessment in 4 steps

Here’s a practical guide to help you get started:

Know your stakeholders: Identify which stakeholders have a stake in your business outcomes. This could include investors, partners, management, employees, communities, industry groups, nonprofits, and the media. Document the information in a spreadsheet that includes stakeholder type (internal or external), contact details, and how you intend to engage them (survey, interview, focus group). See how Eastman identifies and engages its stakeholders.
Gather data: Use tools like the SASB or MSCI materiality maps to pinpoint industry-specific ESG concerns. Collect data from stakeholder feedback, internal audits, and industry research to create a holistic view of potential material risks and opportunities. Example stakeholder survey questions are available at Applied Corporate Governance, Survey Monkey, and Evergreen Marine Corp.
Decide what is material: Evaluate the gathered data to determine the most critical issues based on their impact, your company's ability to influence outcomes, and senior leadership consensus. Use visual tools, such as risk maps or materiality matrices, to organize the information. Remember to consider any legal requirements and reporting frameworks you plan to align with. Explore example materiality analyses at Cisco, Unilever, KPMG, and Eastman (p. 15). A scoring template is also available in the Workiva materiality assessment guide.
Act and communicate: Develop and implement action plans to address these issues in ways that align with broader business values and goals. Maintain open lines of communication with stakeholders about your progress, and engage with them regularly to reconsider material issues and update strategies as necessary.

Leveraging a systematic approach like this empowers businesses to build trust while remaining relevant and responsive to new opportunities and challenges.

Case study: By focusing on improving the sustainability profile of its products in its materiality assessment, Eastman (p. 9) was able to open new market opportunities and reduce its environmental impact.

Best practices for successful materiality assessments

A materiality assessment needs to be dynamic and integrated to be effective. Here are a few tips: Establish a cross-functional team composed of individuals from different demographic backgrounds and departments, such as Finance, Marketing, Operations, and HR. Bringing together diverse perspectives and collaborating with internal and external stakeholders will position the team to capture a broad view of potential impacts.

Next, apply advanced analytics and technology to evaluate the data and create actionable outcomes. Software platforms such as Workiva, Datamaran, or Novisto can help streamline the process. To increase objectivity and credibility, verify assessments through a third-party audit. Work with senior management to integrate the insights into business strategy and workplace culture, and update findings on a regular basis as priorities shift and new issues emerge. Finally, be open about the methodologies used to build and maintain stakeholder trust.

Start your journey toward sustainability excellence with Aquent

Materiality assessments are a powerful tool for businesses looking to thrive in an era where sustainability is not just a buzzword but a strategic necessity. By identifying and prioritizing the ESG issues that matter most, companies can improve regulatory compliance and financial performance, manage risks, and engage stakeholders more effectively.

Taking the first step now will set your business on a path to long-term success. Many companies have trusted Aquent to help them build their teams in emerging areas of expertise, and sustainability is no different. Whether you are looking to expand your current ESG team or establish a new one, Aquent can help you with the right talent to meet your strategic goals. Sustainability is not just an Aquent core value and solution area; we truly believe that we need to do everything we can to move sustainability efforts forward.

Looking to bolster your sustainability efforts? Aquent Sustainability is here to help. Whether you're building an in-house Sustainability Team or need an expert to advise on best practices, our sustainability recruitment and consulting services help companies grow their impact. Get in touch.

This post originally appeared on our Aquent Talent blog.

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