Materiality refers to the principle of defining the issues that matter most to a company’s business model, operations and stakeholders.
Materiality is key to sustainability reporting because companies have a limited amount of resources and must identify and prioritise the topics that are of greatest importance to their business.
Materiality definitions vary slightly depending on the organisation. The table below shows the definitions used by some of the most well-known frameworks in the ESG space.
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The concept of materiality in the sustainability reporting landscape was popularised by the Global Reporting Initiative (GRI) in 2006.
GRI published the G3 Guidelines, a cornerstone of the GRI Sustainability Reporting Framework, which identified materiality as one of the four key components for defining sustainability report content.
Materiality has evolved in three clear phases since its introduction.
The first version of materiality emerged from financial environments (ie. the accounting and legal fields) and its purpose was to ensure that shareholders had access to important information about investment risk.
The second evolution of materiality came in concurrence with the newfound interest in CSR and sustainability in the late 1990s and early 2000s. This new take on materiality expanded beyond considering the interests of investors—other groups of stakeholders, such as local communities and consumers, were considered as well. However, during the second wave, materiality was still used primarily as a tool for disclosure and transparency.
Most recently, materiality assessments have come to be used for performance improvement and strategy setting. Stakeholders in search of more detailed information on issues identified as material have set an expectation for thorough materiality analyses in ESG impact assessment.
The definition of materiality (ie. financial, double, or dynamic) is evolving as organisations seek standardisation on sustainability data.
Many organisations and reporting frameworks, especially in the EU, have adopted a double materiality perspective, and the idea of dynamic materiality is becoming more widespread as well.
Overall, materiality assessments are becoming more commonplace, with a recent Datamaran study reporting that in 2018, 329 companies with a market capital above $20 billion were doing materiality assessments, compared to only 69 companies in 2011.
Additionally, the use of automated processing technologies in materiality assessments is gaining traction.
Such technologies enable companies to quickly generate a list of material issues through natural language processing. This advancement, along with the SASB’s sector-specific materiality lists, may also play a role in the development of materiality assessment processes.
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