This five-step guide clarifies the structure and actions that executives should take during the sustainability materiality assessment process.
Sustainability materiality assessments are not a new concept for organizations seeking to improve their sustainability practices. However, new EU regulations (specifically the Corporate Sustainability Reporting Directive) require companies to follow this rigorous process as part of their sustainability reporting. Materiality assessments help organizations identify areas where their policies and practices have a material impact and define what they should disclose in their sustainability statements. In addition to compliance, companies should also take advantage of this exercise to prepare, communicate and act on their sustainability strategy.
There are three different approaches to sustainability materiality, all of which are being adopted by different organizations:
Related: 5 Ways ITOps Teams Can Support Sustainability
1) Financial materiality, which focuses on sustainability issues that impact a company’s financial position and performance. For example, the SEC’s climate disclosure rules require companies to disclose climate-related risks that could materially impact their operations in the short and long term.
2) Impact materiality, which focuses on how a company’s operations and value chain impact society and the environment. The Global Reporting Initiative (GRI) definition of materiality is in line with this perspective.
3) Dual materiality, which integrates financial and impact materiality. The EU Corporate Social Responsibility Directive (CSRD) requires a dual materiality approach that integrates financial and impact materiality.
In our new report, How to Conduct a Sustainability Materiality Assessment, Forrester details these three approaches to sustainability materiality and provides a five-step guide to clarify the structure and actions executives should take during the sustainability materiality assessment process. Companies should not underestimate the workload and resources required to conduct a materiality assessment, as it should be a rigorous and iterative process. It will involve many different stakeholders and ideally should be done annually. To do this well, executives must:
Define the purpose and scope of the sustainability materiality assessment. Your approach to materiality assessment depends on whether it is used to meet regulatory requirements, to meet the needs of investors and value chain participants, or to inform strategic planning. Forrester can help you define and validate your approach to assessing sustainability materiality.
Identify relevant sustainability issues. Companies’ activities, business operations and value chains have a major impact on the outcome of the materiality assessment. You will need to identify sustainability trends, reporting standards and the issues and risks that are most relevant to your operations. Sustainability management software and ESG data and analytics providers can help your company gather this information.
Collect data and insights to assess the importance of sustainability issues. Take advantage of the risks and opportunities you have already identified and assessed in the financial statements. Companies, especially those that disclose dual materiality information, will also need to gather information from stakeholders. Forrester can help you identify stakeholder groups, design research programs, and gather information.
Analyze data and information and prioritize sustainability issues. It will be necessary to evaluate and weigh the input of stakeholders and create a final list of important sustainability issues. To better communicate the results of the materiality assessment and facilitate dialogue with stakeholders, we recommend creating a materiality matrix. Establish a scalable and repeatable process. Assessing the materiality of sustainability is an iterative and continuous process. You need to make it actionable and refine the process to make it scalable and repeatable. Use Forrester Supplier Assessment to find suitable software solutions that can help you automate the process and keep your materiality assessment up to date and relevant.
